Form 10-Q

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by a 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. Yes þ No ¨

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 and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

Amounts disclosed in the accompanying footnote tables are shown in thousands while amounts included in text are disclosed in actual amounts.

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete audited financial statements. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2006 included in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2007. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal accruals and charges) necessary to present fairly the financial position of the Company at September 30, 2007, and the results of its operations for the three and nine months ended September 30, 2007 and 2006, and cash flows for the nine months ended September 30, 2007 and 2006. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the entire year.

Basis of Presentation, Liquidity and Capital Resources. The consolidated financial statements have been prepared on the basis of a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has generated net losses of $36.6 million, $6 million and net income of $0.3 million for the years ended December 31, 2006, 2005 and 2004, respectively, and has an accumulated deficit of $233.2 million at September 30, 2007. The Company has used cash from operating activities of $12.1 million, $21.3 million and generated cash from operations of $8.5 million for the years ended December 31, 2006, 2005, and 2004, respectively. The Company has generated cash from financing activities of $17.8 million, $59.6 million and $0.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. The Company has total cash and cash equivalents of $30.3 million at September 30, 2007. Based on the Company’s current operating plan, management believes existing cash, cash forecasted by management to be generated by operations, potential sales of assets including the proceeds from the sale of the table games division which occurred in September 2007, and proceeds from future financing will be sufficient to meet the Company’s working capital and capital requirements through at least December 31, 2007. However, if events or circumstances occur such that the Company does not meet its plans as expected, the Company may not be able to meet its obligations. The Company may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. There can be no assurance that any additional financing will be available on acceptable terms, or available at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

As more fully described in Note 12, the Company was a defendant in the matter Derek Webb et al vs. Mikohn Gaming Corporation. On February 21, 2007, the Company received an adverse jury verdict, and the Company subsequently filed post trial motions.

At the time post trial motions were filed, the Company believed, and outside counsel concurred, that it was remote that the post trial motion process would be concluded before December 31, 2007. On October 25, 2007 the Company’s post trial motions were denied by the United States District Court for the Southern District of Mississippi. The Company would have been required to post a $20 million bond by November 8, 2007, and grant a subordinated security interest for $23.7 million representing the remaining amount of the judgment including plaintiff legal fees within 30 days from the date of judgment in order to appeal this matter. In response to this development, on November 5, 2007, the Company executed a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with Webb. The Company paid $20 million from existing cash on hand one business day from execution of the Settlement Agreement and will pay $4.7 million for Webb’s previously claimed attorney fees 30 business days thereafter. No later than two business days after the payments are made, Webb shall file the necessary pleadings to dismiss the action with prejudice. After the fulfillment of all conditions of the Settlement Agreement and Mutual Release, the Company believes it will have no further obligation with respect to the Webb litigation.

The Company has been notified by the lender for its Senior Credit Facility that, among other things, the execution of the settlement agreement has caused the Company to be in default under its senior credit facility. If the Company is unable to obtain a waiver of or cure any existing event of default, the lender could seek acceleration of the $10 million of principal currently outstanding under the Senior Credit Facility, which could cause a cross-default under the Company’s 11.875% Senior Secured Notes due 2008 and allow its lenders and noteholders to control the Company’s assets which are pledged as collateral under its debt instruments. The Company intends to refinance the $10 million in principal currently outstanding under the Senior Credit Facility through one or more future financings, which may include the potential issuance of debt, equity or a combination thereof. As a result of this pending matter, the Company has classified the outstanding balance of $10 million under the Senior Credit Facility as current.

In addition to the matters referred to above, the Company has the following obligations that need to be repaid in the next 12 months:

The Company has approximately $45 million of 11.875% Senior Secured Notes due August 2008 (the “Notes”). The Company has issued an irrevocable notice to redeem $15 million of the Notes on November 19, 2007 and intends to refinance this payment through borrowings or other financing alternatives. The Company intends to refinance the remaining $30 million of the Notes in late 2007 or early 2008. The Company will evaluate potential financing alternatives including possible issuances of equity, debt or a combination of both. On October 22, 2007, the Company filed a Form S-3 Shelf Registration Statement pursuant to which the Company intends to register up to $50 million of common stock that can be later sold in one or more offerings on terms to be determined at the time of the offering.

The Company believes that if it is not successful in obtaining additional financing, then existing cash and cash forecasted by management to be generated by operations will not be sufficient to meet the Company’s debt repayment obligations and other obligations.

On September 28, 2007, the Company completed the sale of its table games division to Shuffle Master, Inc. Upon closing, the Company received approximately $19.8 million in cash. The Purchase Agreement also provides for earn-out payments based on the installed base growth of the table game division assets through 2016, subject to certain conditions, including $3.5 million in guaranteed minimum payments expected to be realized over the next four years. The table games division consisted of casino table games with proprietary intellectual property, including patents, trademarks, copyrights, etc. that had been developed, acquired or licensed from third parties.

During June 2007, the Company entered into two arrangements to sell its remaining slot route and slot inventory to Reel Games, Inc., and the disposal of the slot operations was completed during the third quarter of 2007.

The Company has no continuing involvement in the disposed businesses, and continuing direct cash flows from the slot and table businesses are expected to cease within one year.

As a result of the sales of the table game division sale and the slot route and inventory sales, the Company recorded a total charge of $65.6 million during the nine months ended September 30, 2007, which comprises impairment charges associated with the adjustment of the carrying values of the assets involved in the sales, including $25.0 million related to goodwill and intangible assets, losses from the table and slot operations of $2.6 million, an accrual for the Webb litigation settlement of $24.7 million, and other charges totaling $13.3 million. Revenues for the table games division and slot route were $1.2 million and $3.3 million, and $5.9 million and $11.0 million, for the three and nine months ended September 30, 2007 and 2006, respectively. Those revenues, which previously were included in the slot and table games segment revenues, are classified as discontinued operations in the accompanying Consolidated Statements of Operations and prior period amounts have been reclassified, as required by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Interest expense was not allocated to the slot and table businesses, and therefore, all of the Company’s interest expense is included within continuing operations.

The assets and liabilities associated with discontinued operations are presented in separate line items in the Consolidated Balance Sheets. The components of the assets and liabilities of discontinued operations at September 30, 2007 are presented below, along with comparable carrying values of the assets and liabilities at December 31, 2006.

The components of the loss from discontinued operations (unaudited) are presented below.

Principles of Consolidation. The consolidated financial statements include the accounts for the Company and all of its majority-owned subsidiaries and are maintained in accordance with accounting principles generally accepted in the United States of America. All significant intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents. Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with original maturities of less than ninety (90) days. The Company places its cash and temporary investments with financial institutions. At September 30, 2007, the Company had deposits with financial institutions in excess of FDIC insured limits by $30.5 million.

Receivables and Allowance for Doubtful Accounts. The Company regularly evaluates the collectibility of its trade receivable balances based on a combination of factors. When a customer’s account becomes past due, dialogue is initiated with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation to the Company, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting their business, a specific reserve is recorded for bad debt to reduce the related receivable to the amount the Company expects to recover given all information presently available. The Company also records reserves for bad debt for all other customers based on certain other factors including the length of time the receivables are past due and historical collection experience with individual customers. If circumstances related to specific customers change, the Company’s estimates of the recoverability of receivables could materially change.

Inventories. Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market.

Long-Lived Assets. Property and equipment are stated at cost and are depreciated by the straight-line method over the useful lives of the assets, which range from 3 to 15 years. Costs of major improvements are capitalized; costs of normal repairs and maintenance are charged to expense as incurred. Management requires long-lived assets that are held and used by the Company to be reviewed for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from related future undiscounted cash flows.

Assets Held for Sale. Assets classified as held for sale are stated at the lower of cost or fair value less cost to sell.

Patents and Trademarks. The Company capitalizes the cost of registering and successful defense of patents and trademarks. These costs are amortized over the useful life of the patent or trademark.

Intangible Assets. Intangible assets consist of patent and trademark rights, goodwill, intellectual property rights, covenants not to compete, software costs, license fees and a perpetual license. They are recorded at cost and are amortized, except goodwill and perpetual license, on a straight-line basis over the period of time the asset is expected to contribute directly or indirectly to future cash flows, which range from 5 to 40 years.

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002. Under SFAS No. 142, goodwill and indefinite life intangible assets, such as the Company’s perpetual license, are no longer amortized but are subject to periodic impairment tests. Other intangible assets with finite lives, such as patents, software development costs, trademark and proprietary property rights and license and non-compete agreements will continue to be amortized over their useful lives. Management performs impairment reviews annually or whenever events or circumstances occur that would indicate the assets may be impaired.

Deferred Revenues. Deferred revenues consist primarily of arrangements for which revenues will be recognized in future periods.

Customer Deposits. Customer deposit liabilities represent payments and payment obligations collected in advance from customers pursuant to agreements under which the related sale of inventory has not been completed.

Other Assets. Other long term assets represent primarily unamortized loan fees, minority investments, and security deposits for building and equipment leases and other services. The Company’s minority investments in non-public companies are accounted for using the cost method, and are regularly reviewed for impairment. When facts and circumstances indicate that an impairment has occurred that is other-than-temporary, the Company records an impairment charge and reduces the carrying value of the investment.

Litigation and Other Contingencies. The Company is involved in various legal matters, litigation and claims of various types in the ordinary course of its business operations. The Company has regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting recognition or disclosure of these contingencies. The status of significant claims is summarized in Note 12.

Generally accepted accounting principles require that liabilities for contingencies be recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Significant management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict. For contingencies where an unfavorable outcome is reasonably possible and which are significant, the Company discloses the nature of the contingency and, where feasible, an estimate of the possible loss.

Foreign Currency Translation. The Company accounts for currency translation in accordance with SFAS No. 52, “Foreign Currency Translation”. Balance sheet accounts are translated at the exchange rate in effect at each balance sheet date. Income statement accounts are translated at the average rate of exchange prevailing during the period. Translation adjustments resulting from this process are charged or credited to other comprehensive loss.

Nonmonetary Exchanges. The Company adopted SFAS No. 153 “Exchanges of Non-Monetary Assets” (“SFAS No. 153”) for the quarter ended September 30, 2005. SFAS No. 153 addresses the measurement for the exchange of non-monetary assets. SFAS No. 153 requires that exchanges be recorded at fair value provided that fair value is determinable and other qualifying criteria are met as described in the standard. If fair value is not determinable or if the other qualifying criteria are not met, the exchange is recorded at cost.

Revenue Recognition. The Company recognizes revenue depending on the line of business as described below. As documentation for a transaction commitment, the Company requires a properly authorized writing from the customer specifying transaction terms and conditions, including: a contract signed by the customer or an approved customer purchase order or another approved form. The Company may require additional documentation to support revenue recognition including receipt of shipment, a signed customer installation ticket or a signed customer acceptance ticket as more fully described below:

Slot and Table Games. Prior to the Company’s disposal of the slot and tables games divisions, the Company’s revenue recognition policies were as follows. The Company leased and sold proprietary slot and table games to casino customers. Table game lease contracts were typically for a 36-month period with a 30-day cancellation clause. The lease revenue was recognized on a monthly basis. Slot machine lease contracts were either on revenue participation or a fixed-rental basis. Slot machine lease contracts were typically for a month-to-month period with a 30-day cancellation clause. On a participation basis, the Company earned a share of the revenue that the casino earned from these slot machines. On a fixed-rental basis, the Company charged a fixed amount per slot machine per day. Revenues from both types of lease arrangements were recognized on the accrual basis. The sales agreements for proprietary table games and slot games consisted of the sale of hardware and a

perpetual license for the proprietary intellectual property. Slot and table game sales were executed by a signed contract or a customer purchase order. Revenues for these sales agreements were generally recognized when the hardware and intellectual property was delivered to the customer.

Systems. The Company’s systems segment offers a suite of products that when combined, supports every facet of a gaming operation, and consolidates the management of slot machines, table games, server-based gaming, account wagering, marketing and cage into one fully integrated system. There are proprietary hardware and software components to the systems. The Company accounts for system sales in accordance with Statement of Position 97- 2, “Software Revenue Recognition” (“SOP 97-2”). System sales are evidenced by a signed contract. Follow-up spare parts and hardware-only sales are evidenced by a purchase order or other approved form. Revenue for system sales is generally recognized when: (i) there is an arrangement with a fixed determinable price; (ii) collectibility of the sale is probable; and (iii) the hardware and software have been delivered, installed, training has been completed and acceptance has occurred.

Not all systems contracts require installation. Examples include sales of hardware only to (i) previous customers that are expanding their systems, (ii) customers that have multiple locations and do the installation themselves and require an additional software license and hardware and (iii) customers purchasing spare parts.

Postcontract Customer Support. Maintenance and support for substantially all of the Company’s products are sold under agreements with established vendor-specific objective evidence of fair value in accordance with the applicable accounting literature. These contracts are generally for a period of three years and revenue is recognized ratably over the contract service period. Further training is also sold under agreements with established vendor-specific objective evidence of price, which is based on daily rates and is recognized as the services are provided.

License Arrangements. A significant portion of the Company’s revenues are generated from the license of intellectual property, software and game content. These licenses are sold on a stand-alone basis or in multiple element arrangements. Revenue is recognized from these transactions in accordance with the applicable accounting literature. Revenues under perpetual license arrangements are generally recognized when the license is delivered. Revenues under fixed term arrangements are generally recognized over the term of the arrangement or in a manner consistent with the earnings process. For arrangements with multiple deliverables, revenue is generally recognized as the elements are delivered so long as the undelivered elements have established fair values as required in the applicable accounting literature.

Stock-Based Compensation. Beginning January 2006, the Company adopted the modified prospective application method contained in SFAS No. 123 (revised December 2004), “Share-Based Payment” (“SFAS No. 123(R)”), to account for share-based payments. As a result, the Company applies this pronouncement to new awards or modifications of existing awards in 2006 and thereafter. Prior to the adoption of SFAS No. 123(R), the Company accounted for share-based payments under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related Interpretations, as permitted by SFAS No. 123, “ Accounting for Stock-Based Compensation”. Under APB No. 25, no compensation cost was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.

Adoption of this pronouncement did not change the methodology the Company uses to determine the fair value of its share-based compensation arrangements. The Company uses the Black-Scholes-Merton option- pricing model for stock options and the grant date fair value of our common stock for restricted stock awards.

Equity Instruments Issued to Outside Parties. The Company’s accounting policy for equity instruments issued to outside parties in exchange for goods and services follows the provisions of Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,

Goods or Services” and EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees”. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized as a charge to the statement of operations over the term of the consulting agreement. The number of uncancelled options issued to consultants at September 30, 2007, was 45,000, with a range of exercise prices from $4.55 to $7.06 per share. The fair value of these option awards has been fully amortized.

During 2006, the Company issued warrants to Ableco Holding LLC representing a portion of the debt issue costs related to the Company’s long-term debt arrangements. Upon issuance, the fair value of these warrants was recorded as a prepaid loan fee, and is being recognized as a charge to the statement of operations on the straight-line method over the term of the debt facility. At September 30, 2007, the number of shares issuable under uncancelled warrants held by Ableco Holding LLC was 350,000, with a weighted average exercise price of $7.87, and a remaining term of approximately nine years.

From 1998 to 2000, the Company licensed rights to intellectual property, including rights to develop and market gaming devices and associated equipment under certain Ripley and Hasbro trademarks, in exchange for warrants to purchase shares of the Company’s common stock. During 2006, the Company licensed certain intellectual property rights from Harrah’s in exchange for 325,000 warrants to purchase shares of the Company’s common stock at an exercise price of $7.50 per share. At September 30, 2007, the number of uncancelled warrants issued in exchange for license agreements was 325,000, with a weighted average exercise price of $7.50 per share and a remaining term of approximately six years.

Software Development Capitalization. The Company capitalizes external direct costs related to the development of certain software products that meet the criteria under SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”.

Income Taxes. The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes,” pursuant to which the Company records deferred income taxes for temporary differences that are reported in different years for financial reporting and for income tax purposes. Such deferred tax liabilities and assets are classified into current and non-current amounts based on the classification of the related assets and liabilities.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. 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. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company adopted FIN 48 on January 1, 2007. The cumulative effect of adopting FIN 48 has resulted in a decrease of $1.0 million to the Company’s non current deferred tax asset associated with uncertain tax positions and a corresponding reduction in the valuation allowance related to the deferred tax asset. The entire amount of unrecognized tax benefits, if recognized would affect the effective tax rate. The Company’s policy is to accrue interest and or penalties related to potential underpayments of income taxes within the provision for income taxes. Currently, there are no interest or penalty amounts accrued for.

The Company and its domestic subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Tax years 1996 to 2006 remain subject to U.S. federal income tax and various state and local tax jurisdictions remain open to examination as well because of net operating loss (“NOL”) carryforwards. The Company’s international subsidiaries are subject to the governing tax authority of each location and are subject to various years of examination. There are no ongoing examinations of income tax returns by federal, state or international tax authorities.

At December 31, 2006 the Company had federal net operating loss carryforwards of $131.7 million, which will begin to expire after the year ended December 31, 2016. Utilization of the NOL carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future provided by Section 382 of the Internal Revenue Code of 1986, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income. At this time, the Company has not completed a study to assess whether a change of control has occurred due to the significant complexity and cost associated with such study. If the Company has experienced a change in control at any time since its formation, utilization of our NOL carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion if the NOL carryforward before utilization. Further, until a study is complete and any limitation is known, no amounts are being presented as an uncertain tax position in compliance with FIN 48.

Currently, the Company has initiated a transfer pricing study to determine if any exposure exists from the pricing of products and services between the parent and foreign subsidiaries and until such time that the study is complete and any liabilities are known, no amounts are being presented as uncertain tax positions under FIN 48 since there are substantial NOLs in the affected jurisdictions, any transfer pricing adjustments will likely result in the redistribution of net operating losses between the jurisdictions.

Guarantees. In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34”, which disclosures are effective for financial statements issued after December 15, 2002. While the Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, the Company believes these guarantees would only result in immaterial increases in future costs, and do not represent significant or contingent liabilities of the indebtedness of others.

Use of Estimates and Assumptions. The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Certain of the Company’s accounting policies require that management apply significant estimates, judgments and assumptions, that it believes are reasonable, in calculating the reported amounts of certain assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. By their nature, these estimates are subject to an inherent degree of uncertainty. Management’s judgments are based on historical experience, terms of existing contracts, observance of known industry trends, and information available from outside sources, as appropriate. On a regular basis, management evaluates its estimates including those related to lives assigned to the Company’s assets, the determination of bad debts, inventory valuation reserves, asset impairment and self-insurance reserves. There can be no assurance that actual results will not differ from those estimates.

Reclassifications. Certain balance sheet and income statement amounts reported in the prior year have been reclassified to conform to the 2007 presentation.

Recently Issued Accounting Standards. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). SFAS No. 159 permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent changes in fair value for designated items will be required to be reported in earnings in the current period. SFAS No. 159 also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the effect of implementing this guidance, which depends on the nature and extent of items elected to be measured at fair value, upon initial application of the standard on January 1, 2008.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS No. 157 on its financial position, cash flows, and results of operations.

On June 27, 2007, the FASB ratified the EITF consensus on EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities”, which calls for nonrefundable advance payments for goods or services that are to be used in future research and development activities to be deferred and capitalized until such time as the related goods are delivered or the related services are performed, at which point the amounts are to be recognized as an expense. EITF 07-3 is effective for fiscal periods beginning after December 15, 2007. The Company believes the effect of this consensus will not have a material impact on its financial statements.

Accounts receivable at September 30, 2007 and December 31, 2006 consist of the following:

Contract sales and notes receivable at September 30, 2007 and December 31, 2006 consist of the following:

Inventories at September 30, 2007 and December 31, 2006 consist of the following:

In accordance with SFAS No. 142 and SFAS No. 144, the Company performs an impairment analysis on all of its long-lived and intangible assets on an annual basis and in certain other circumstances. For indefinite lived assets including perpetual licenses and goodwill, management performs an annual valuation to determine if any impairment has occurred. The valuation test as of September 30, 2007 did not indicate any impairment.

The net carrying value of goodwill and other intangible assets at September 30, 2007 is comprised of the following (unaudited):

The net carrying value of goodwill as of September 30, 2007, is included in the Company’s geographic operations as follows (unaudited):

During the three months ended September 30, 2007, the net carrying value of goodwill increased by $0.6 million as a result of changes in the foreign currency rates used to translate the balance sheet of the Company’s international operations. During the nine months ended September 30, 2007, $15.2 million of goodwill was written off in connection with the disposal of the slot and table games segment, and goodwill increased by $1.4 million due to changes in the foreign currency rates used to translate the balance sheets of the Company’s international operations, resulting in a net decrease in goodwill of $13.8 million.

During September 2007, the indefinite life intangible asset (perpetual license) was disposed of in connection with the sale of the table games division.

Definite life intangible assets as of September 30, 2007, subject to amortization, are comprised of the following (unaudited):

Amortization expense for definite life intangible assets of $1.5 million and $4.4 million compared to $1.4 million and $4.2 million was included in loss from continuing operations for the three and nine months ended September 30, 2007 and 2006, respectively. Amortization expense for definite life intangible assets of $0 and $0.6 million compared to $0.5 million and $1.3 million was included in loss from discontinued operations for the three and nine months ended September 30, 2007 and 2006, respectively.

Other assets at September 30, 2007 and December 31, 2006 consist of the following:

Accrued liabilities at September 30, 2007 and December 31, 2006 consist of the following:

On April 20, 2006, the Company completed the first of two phases of securing a credit facility for completion of its minority investment in Magellan Technology Pty., Ltd., and for general working capital purposes. The first phase included an arrangement for a $10 million senior secured term loan due April 19, 2007. Outstanding principal under the facility bore interest at the prime rate of interest plus 2.25%. Underwriting fees related to the facility equaled 3.5% of the total principal and warrants to purchase 200,000 shares of the Company’s common stock. The warrants were valued using the Black-Scholes method using expected volatility of 60%, expected term of seven years, risk free rate of 4.97%, and expected dividends of zero. These warrants are classified in Other Assets in the accompanying balance sheet.

On August 4, 2006, the Company completed the final phase of its credit facility with an affiliate of Cerberus Capital Management, L.P., Ableco Finance LLC. The $22.5 million, three-year revolving credit facility is intended for general working capital purposes and to replace the existing $10 million facility completed in the first stage of the financing. This financing arrangement is herein referred to as the Senior Credit Facility.

Outstanding principal under the Senior Credit Facility bears interest at a reference rate of interest plus an applicable margin (currently 11.0%) or a LIBOR rate plus an applicable margin. Underwriting fees related to the facility equal 2.0% of the total principal and warrants to purchase 150,000 shares of the Company’s common stock. The warrants were valued using a binomial lattice model and a Monte Carlo model using volatility of 69.64%, derived service period of one year, risk free rate of 5.05%, and expected dividends of zero. These warrants are classified in Other Assets in the accompanying balance sheet. The terms of the new facility require the Company to comply with certain financial covenants covering senior debt leverage ratio, total debt leverage ration, minimum EBITDA, minimum cash plus availability, minimum interest coverage, and certain negative covenants.

On July 16, 2007, the Company entered into a Waiver Letter and Amendment (the “Amendment”) related to Senior Credit Facility to amend certain matters related to the pending sale of the table games division and related activities in connection therewith, and to amend the financial covenants for the second and third quarter of 2007. The waiver required a permanent repayment of the facility of $6.0 million resulting in a maximum availability of $16.5 million

On September 26, 2007, the Company entered into an Amendment, Consent, and Waiver related to the Senior Credit Facility to amend certain matters related to the completion of the sale of the table games division and related activities in connection therewith, and to amend the financial covenants for the third and fourth quarters of 2007.

During August 2007, the Company’s Senior Secured Notes (the “Notes”) became due and payable within one year. Accordingly, the net carrying value of the Notes is reflected in current liabilities in the accompanying balance sheet as of September 30, 2007.

During October 2007, the Company notified the trustee for its 11.875% Senior Secured Notes due 2008 (the “Notes”) that on November 19, 2007, the Company will redeem $15 million of principal amount of its outstanding Notes at a redemption price of 100.00% of the principal amount of the Notes, plus accrued and unpaid interest to the redemption date. The remaining aggregate outstanding principal amount of the Notes after the redemption will be $30 million.

As more fully described in Note 12, on November 5, 2007 the Company executed a Settlement Agreement and Mutual Release (the “Settlement Agreement”) in the matter Derek Webb et al vs. Mikohn Gaming Corporation. The Company paid

$20 million from existing cash on hand on November 6, 2007, and will pay $4.7 million for Webb’s previously claimed attorney fees 30 business days thereafter.

On August 13, 2007, the Company entered into a Securities Purchase Agreement for the sale of 6,943,333 shares of the Company’s common stock at a price of $4.50 per share (the “Private Placement”). The closing of the Private Placement occurred on August 16, 2007, resulting in aggregate gross proceeds to the Company of approximately $31.2 million. The Company incurred placement agent and other fees of approximately $2 million in connection with the offer and sale of the shares. The shares were sold to accredited investors.

On September 13, 2007, the Company filed a registration statement under the Securities Act of 1933 to register the shares of common stock sold in the Private Placement and certain other shares held by selling stockholders, and the registration became effective on November 6, 2007. Under the terms of a Registration Rights Agreement entered into in connection with the Securities Purchase Agreement, the Company is obligated to use its commercially reasonable efforts to keep the registration statement continuously effective until the earlier of (i) three years after the registration statement is declared effective by the SEC, (ii) such time as all of the securities covered by the registration statement have been publicly sold by the holders, or (iii) such time as all of the securities covered by the registration statement may be sold pursuant to Rule 144(k) of the Securities Act. If the Company fails to achieve any of these requirements, it is obligated to pay each purchaser of the common stock sold in the Private Placement partial liquidated damages equal to 1% per month of the aggregate amount invested by such purchaser, calculated on a daily pro-rata basis. As required under FASB Staff Position EITF 00-19-2, “Accounting for Registration Payment Arrangements,” the Company has evaluated the likelihood that a transfer of consideration will occur in connection with this registration payment arrangement, and has determined that as of the date of this filing, the payment of such liquidated damages is not probable, as that term is defined in FASB Statement No. 5, “Accounting for Contingencies.” As a result, the Company has not recorded a liability for this contingent obligation as of September 30, 2007. Any subsequent accruals of a liability or payments made under this registration rights agreement will be charged to earnings in the period they are recognized or paid.

The Company is involved in routine litigation, including bankruptcies, collection efforts, disputes with former employees and other matters in the ordinary course of its business operations. Management is not aware of any matter, pending or threatened, that in its judgment would reasonably be expected to have a material adverse effect on the Company or its operations.

In June 2005, the Company entered into a Memorandum of Understanding (“MOU”) with International Game Technology (“IGT”) to sell, market, distribute and integrate a table management system. In connection with the MOU, IGT incurred certain costs related to the purchase of intellectual property and the related maintenance and defense to be used in the joint product development. In accordance with the MOU, IGT would recover a portion of these costs through the joint product development. In September 2006, the Company and IGT entered into a Sales, Marketing, Distribution and Product Integration Agreement to further clarify the terms of the MOU. Among other clarifications, the parties agreed that the Company would make payments to IGT of $7.3 million over a three-year period, with no interest, commencing in the first quarter of 2007. The present value of these payments is classified as an intangible asset, and the remaining balance of the obligation is included in current and noncurrent liabilities in the accompanying balance sheet at September 30, 2007.

The Company was sued by Derek Webb and related plaintiffs (“Webb”) in the U.S. District Court, Southern District of Mississippi, Jackson Division, in a case filed on December 27, 2002. The plaintiffs alleged state law interference with business relations claims and federal antitrust violations and contended that the Company illegally restrained trade and attempted to monopolize the proprietary table game market in the United States. At trial, Plaintiffs sought monetary damages, penalties and attorneys’ fees in excess of tens of millions of dollars based on the only claims remaining at the time of trial,

which were the sham litigation and attempted monopolization claims. Trial on this case was held in January and February, 2007. In a jury verdict, the plaintiff was awarded the sum of $13 million for his claims, which amount was trebled in accordance with applicable antitrust law. As a result, on or about February 21, 2007, judgment was entered in favor of plaintiffs in the amount of $39 million, plus the costs of suit, including a reasonable attorney’s fee. Plaintiffs claim that costs of suit and attorney’s fees together exceed $4.7 million. The Company filed post-trial claims for relief (including a motion for a new trial and a motion for a judgment as a matter of law) and, if necessary, it intended to initiate the appeals process. The enforcement of the judgment was stayed during the pendency of the motion for a new trial. At the time post trial motions were filed, the Company believed, and outside counsel concurred, that it was remote that the post trial motion process would be concluded before December 31, 2007, however on October 25, 2007 the Company’s post trial motions were denied by the United States District Court for the Southern District of Mississippi. The Company would have been required to post a $20 million bond by November 8, 2007 and grant a subordinated security interest in its assets for $23.7 million representing the remaining amount of the judgment including plaintiff legal fees within 30 days from the date of judgment in order to appeal this matter. In response to this development, on November 5, 2007, the Company executed a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with Webb. The Company paid $20 million from existing cash on hand one business day from execution of the Settlement Agreement and will pay the sum of $4.7 million for Webb’s previously claimed attorney fees 30 business days thereafter. No later than two business days after the final payments are made, Webb shall file the necessary pleadings to dismiss the action with prejudice. After the fulfillment of all conditions of the Settlement Agreement and Mutual Release, the Company believes it will have no further obligation with respect to the Webb litigation.

The Company had a dispute with Hasbro, Inc. that was filed in the U.S. District Court in Rhode Island related to the calculation of royalty payments from 1999-2002 on the sale and license of certain of Progressive’s branded slot machines. Hasbro was seeking monetary damages in excess of $8 million. On October 25^th, 2007 the parties entered into a settlement agreement and mutual release of all claims whereby the parties agreed to release all claims between them and settle all disputes with no admission of wrongdoing, and for the Company to pay Hasbro the sum of $2.7 million, with payment as follows: $1.0 million within 5 days of the execution of the settlement agreement, $1.0 million no later than September 15, 2008, and $0.7 million no later than March 15, 2009; provided, however that such payment obligation may be reduced by $0.1 million if the last payment is made by December 15, 2008, and may be reduced by an additional $0.1 million in the event the final amount is paid no later than September 15, 2008.

On or about May 8, 2006, the Company was served with a First Amended Complaint by Gregory F. Mullally in regards to a case pending in the United States District Court for the District of Nevada. Mr. Mullally’s First Amended Complaint added the Company and over ten other defendants in a case that has been pending since 2005. The case makes various legal claims relating to an allegation that Mr. Mullally owns the Internet rights to the proprietary table games known as Caribbean Stud^® and 21 Superbucks. The Company believes this case is without merit and intends to defend this claim vigorously. The Company believes there is a remote chance of success by Mullally. The Company cannot currently estimate potential losses related to this claim as Mullally has not provided any assessment or estimation of damages. The Company is currently awaiting a ruling on its Motion for a Summary Judgment.

On or about August 1, 2006, the Company was served with a Complaint by DTK, LLC in regards to a case pending in the Circuit Court of Harrison County, Mississippi, First Judicial District. The Complaint makes various legal claims surrounding allegations that Progressive is responsible for damages caused by Hurricane Katrina to its former facility in Gulfport. Trial on this case was set to occur within a three week period starting in January, 2008. The Company intends to defend this claim vigorously. Plaintiffs are seeking losses of approximately $0.5 million. The Company believes there is a remote chance DTK will prevail on its claims and be awarded the full amount they seek and we believe any likely losses related to the damage to the facility are substantially less that the amount sought by DTK.

The Company was sued by Paltronics, Inc. in the U.S. District Court District of Nevada in a case filed on August 26, 2006. Paltronics alleges patent infringement in regards to an embodiment of multi screen presentations that Progressive sells as an-add on module for slot machines. The Company believes it is well positioned to defend against this claim. This case is still in the early stages and the Company cannot currently make an assessment of the outcome, but intends to defend this case vigorously. The Company believes that the Plaintiffs are seeking damages in excess of $1 million, and that Paltronics’ chance of success is remote as we do not believe we infringe the patent at issue.

On or about February 14, 2007, the Company was served with a complaint by CEI Holding, Inc. in regards to a case pending in the Eighth Judicial District Court, Clark County Nevada (Case Number: A535019). CEI Holding claims that Progressive allegedly failed to pay the accounts payable obligations of Casino Excitement, Inc. pursuant to a 2002 stock purchase agreement wherein Casino Excitement, Inc. (the Company’s former exterior sign business) was sold by the Company to CEI Holdings, Inc. This case is still in the early stages and the Company cannot currently make an assessment of the outcome, but intends to defend this case vigorously. CEI Holdings, Inc. is claiming damages of approximately $0.5 million. The Company believes the likelihood of success by CEI Holdings, Inc. is remote.

In addition to the items listed above, from time to time the Company is also involved in other legal matters, litigation, claims and proceedings in the ordinary course of its business operations, including matters involving bankruptcies of debtors, collection efforts, disputes with former employees and other matters. The Company has established loss provisions only for

matters in which losses are probable and can be reasonably estimated. At this time management has not reached a determination that any of the matters listed above or the Company’s other litigation matters are expected to result in liabilities that will have a material adverse effect on the Company’s financial position or results of operations.

The following table provides a reconciliation of basic and diluted earnings (loss) per share (unaudited):

Dilutive stock options and warrants of 0.2 million and 0.3 million for the three and nine months ended September 30, 2007, and 0.8 million and 0.9 million for the three and nine months ended September 30, 2006, have not been included in the computation of diluted net loss per share as their effect would be antidilutive.

During 2005, the Company sold substantially all the assets of its sign and graphics manufacturing business to a third party, retaining less than 1% equity interest. The Company and Mikohn Signs and Graphics, LLC (“MSG”), signed a Transition Services Agreement and a Manufacturer’s Supply Agreement upon completion of the transaction. The Transition Services Agreement had a term of six months ending in November, 2005.

Both parties entered into a three year Manufacturer’s Supply Agreement at the close of the transaction, whereby MSG would purchase electronics from the Company at its standard OEM pricing. For the nine months ended September 30, 2007, MSG purchased $0.3 million in electronic displays and related products from the Company. In addition, under the Manufacturer’s Supply Agreement, MSG provided the Company assembly, testing, shipping and warehousing services at MSG’s warehouse at hours worked plus any overhead associated with providing these services, multiplied by 110%. On January 3, 2006, the Company terminated this portion of the agreement and is currently using a third party contract manufacturer in Las Vegas, Nevada to provide these same services.

From time to time, the Company purchases signage and sign related products from MSG in conjunction with its progressive jackpot systems. During the nine months ended September 30, 2007, the Company purchased $0.4 million from MSG.

In 2005, the Company entered into a worldwide exclusive license with Magellan Technology Pty Limited (“Magellan”). The Company licensed, on an exclusive basis, Magellan’s rights to its RFID reader, tag and related intellectual property for any gaming applications for $3.1 million. The Company also completed the purchase of a minority interest in Magellan in 2006. In connection with the Company’s exclusive global master license to use Magellan’s RFID technology in gaming worldwide, the Company purchased $0.1 million of inventory from Magellan during the nine months ended September 30, 2007.

The Company’s business historically consisted of two reportable segments: (i) slot and table games, and (ii) systems. The slot and table games business segment, which was reclassified to discontinued operations as of June 30, 2007, included the development, licensing and distribution of proprietary slot and table games. Revenues were derived from leases, revenue sharing arrangements, royalty and license fee arrangements with casinos and gaming suppliers. The Company’s systems segment offers a suite of products that when combined, supports every facet of a gaming operation, and consolidates the management of slot machines, table games, server-based gaming, account wagering, marketing and cage into one fully integrated system.

The accounting policies of the segments are the same as those described in Note 3 above.

The Company evaluates performance and allocates resources based upon profit or loss from operations before income taxes. Certain operating expenses, which are separately managed at the corporate level, are not allocated to the business segments. These unallocated costs include primarily the costs associated with executive administration, finance, human resources, legal, general marketing and information systems. The depreciation and amortization expense of identifiable assets not allocated to the business segments are also included in these costs.

As a result of the reclassification of the slot and table games segment to discontinued operations as of June 30, 2007, all of the Company’s continuing operations are now included in the systems segment.

The Company attributes revenue and expenses to a geographic area based on the location from which the product was shipped or the service was performed. Geographic segment information for the three and nine months ended September 30, 2007 and 2006 consists of (unaudited):

The Company’s domestic subsidiaries are 100% owned and have provided full and unconditional guarantees on a joint and several basis on the payment of the 11.875% Senior Secured Notes due 2008. The financial statements for the guarantor subsidiaries follow:

At September 30, 2007, the Company has stock-based employee and director compensation plans, which are described below. On January 1, 2006, PGIC adopted the fair value recognition provision of SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). The Company adopted SFAS No. 123(R) using the modified prospective method. Under this method, compensation cost recognized in future interim and annual reporting periods includes: a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).

SFAS No. 123(R) requires the cash flows from tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (“excess tax benefits”) to be classified as financing cash flows. The Company has not recognized, and does not expect to recognize in the near future, any tax benefit related to stock-based compensation cost as a result of the full valuation allowance on its net deferred tax assets and its net operating loss carryforwards.

The cost charged against operating loss for the three and nine months ended September 30, 2007 and 2006, respectively, for stock-based compensation was $0.8 million and $2.7 million compared to $0.7 million and $5.3 million, and no stock-based compensation cost was capitalized in inventory during those periods. The cost charged against discontinued

operations for the three and nine months ended September 30, 2007 and 2006, respectively, for stock-based compensation was $0.1 million and $0.1 million compared to $0.2 million and $0.4 million. The Company generally issues new shares to settle stock option exercises and vested stock awards.

The fair value of each stock-based award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. Option valuation models require the input of highly subjective assumptions, and changes in assumptions used can materially affect the fair value estimates. The Company estimates the expected life of the award by taking into consideration the vesting period, contractual term, historical exercise data, expected volatility, blackout periods and other relevant factors. Volatility is estimated by evaluating the volatility implied by market prices of the Company’s exchange-traded financial instruments along with historical volatility data. The risk-free interest rate at the date of grant is based on U.S. Treasury constant maturity rates for a period approximating the expected life of the award. The Company historically has not paid dividends, nor does it expect to pay dividends in the foreseeable future, therefore the expected dividend rate is zero.

The following table summarizes the range of assumptions utilized in the Black-Scholes-Merton option-pricing model for the valuation of stock options granted during the nine months ended September 30, 2007 and 2006:

The Company recognizes share-based compensation expense for all service-based awards with graded vesting schedules on a straight-line basis over the requisite service period for the entire award. Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change.

For awards with service and market conditions and graded vesting that were granted prior to the adoption of SFAS No. 123(R), the Company estimates the requisite service period and the number of shares expected to vest, and recognizes compensation expense for each tranche on a straight-line basis over the estimated requisite service period. Estimated requisite service periods for awards with market conditions are periodically reviewed, and are adjusted if the market conditions and other factors indicate that the award is likely to vest more quickly than previously estimated. Adjustments to compensation expense as a result of revising the estimated requisite service period are recognized prospectively. Upon forfeiture of awards with market conditions, previously recognized compensation cost is reversed only if the forfeiture is a result of the employee’s failure to render the requisite service. Compensation expense is not reversed for awards that are forfeited solely because a market condition is not satisfied.

The 2005 Equity Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, stock bonus awards, stock purchase awards, stock unit awards and other stock awards to the Company’s employees, directors and consultants. Options issued under the plan are generally granted with an exercise price equal to the fair market value on the date of grant, become exercisable at the rate of 1/48^th per month, and have a term of seven years. Restricted stock awards granted under the plan typically vest at the rate of one-third per year on each of the first through third anniversaries of the date of grant. The 2005 Equity Incentive Plan, which was adopted during 2005, is intended as the successor to the Company’s Stock Option Plan, Employee Stock Incentive Plan, and New Hire Equity Incentive Plan (the “predecessor plans”). As of September 30, 2007, the aggregate number of shares of the Company’s common stock that may be issued under the 2005 Equity Incentive Plan is 2,786,956, subject to certain increases from time to time as set forth in that plan.

At September 30, 2007, the Company had outstanding restricted stock awards which were granted under the 2005 Equity Incentive Plan and the predecessor plans. Restricted stock awards granted under the 2005 Equity Incentive Plan typically vest ratably over a service period of three years, and compensation expense is based upon the grant date fair value,

calculated as the quoted market price of the Company’s stock on the grant date times the number of shares expected to vest. Restricted stock awards granted under the predecessor plans generally vest ratably over a period of three years, subject to the achievement of target market prices for the Company’s stock, and have a term of ten years. Compensation cost for these awards is based upon the number of shares expected to vest, times the quoted market price of the Company’s stock on the accounting measurement date, which is typically the date on which both the service condition and target market price condition have been met.

A summary of activity under the 2005 Equity Incentive Plan and the predecessor plans as of September 30, 2007, and changes during the nine months then ended is presented below:

The Director Stock Option Plan provides for the grant of nonstatutory stock options to non-employee directors of the Company. Under this plan, each non-employee director receives each year, immediately following the Company’s annual meeting of stockholders, a ten year option (vesting as to 1/48 of the optioned shares, cumulatively, each month following the grant) to purchase at one hundred percent (100%) of the fair market value at the date of grant 15,000 shares of the Company’s common stock.

A summary of option activity under the Director Stock Option Plan as of September 30, 2007, and changes during the nine months then ended is presented below:

Cash received during the nine months ended September 30, 2007 and 2006 from option exercises under all share-based payment arrangements was $0.7 million and $0.5 million, respectively.

The total unrecognized compensation cost related to nonvested options and restricted stock awards under all share-based compensation plans at September 30, 2007 was $7.3 million. That cost is expected to be recognized over a weighted-average period of 1.4 years.

Along with the stock option plans discussed above, the Company may from time to time grant stock warrants to various licensors as well as other individuals with whom the Company does business. From 1998 to 2000, the Company entered into various licensing agreements with Hasbro, Inc. and Hasbro International, Inc. (together, “Hasbro”) which granted the Company rights to intellectual property, including rights to develop and market gaming devices and associated equipment under the trademark Clue^®. In exchange for these license agreements, the Company granted Hasbro warrants to purchase up to 125,000 shares of the Company’s common stock for each license at an average exercise price of $6.13 per share. At September 30, 2007, none of these warrants remain outstanding.

From 1998 to 2000, the Company entered into a licensing agreement with Ripley Entertainment which granted the Company rights to intellectual property, including rights to develop and market gaming devices and associated equipment under the trademark for Ripley’s Believe It^® or Not!^®, in exchange for which the Company granted Ripley’s Entertainment a warrant to purchase up to 35,000 shares of the Company’s common stock at an exercise price of $6.75 per share. This warrant has expired.

During 2006, the Company licensed certain intellectual property rights from Harrah’s License Company, LLC in exchange for 325,000 warrants to purchase shares of the Company’s common stock at an exercise price of $7.50 per share. These warrants were valued using the Black-Scholes-Merton option-pricing model using volatility of 60%, expected life of six years, risk free rate of 4.79%, and expected dividends of zero. These warrants remain outstanding and exercisable at September 30, 2007.

At September 30, 2007, the total number of uncancelled warrants issued in exchange for license agreements was 325,000, with a weighted average exercise price of $7.50 per share.

During 2006, the Company also issued stock purchase warrants for 350,000 shares of the Company’s common stock to Ableco Finance LLC in connection with financing arrangements. The weighted average exercise price for 275,000 of the shares covered under these warrants is $8.46 per share. The exercise price for 75,000 of the shares covered under these warrants was set at $5.74 on August 4, 2007, in accordance with the terms of the warrant agreement. The fair value of these warrants is classified in Other Assets in the accompanying balance sheet, and is being amortized to interest expense on the interest method.

No stock purchase warrants were issued during the three and nine months ended September 30, 2007.

A summary of the status of the Company’s warrants issued to vendors at September 30, 2007 and changes during the six months then ended is presented in the table below:

The costs charged to the statement of operations for the three and nine months ended September 30, 2007 related to warrants issued to vendors were $0.6 million and $1.1 million, respectively.

In connection with the Company’s acquisition of VirtGame, the Company assumed all outstanding options and warrants to purchase VirtGame common stock. In accordance with the merger agreement, the assumed options and warrants were subject to the same terms and conditions as set forth in the applicable plans and/or agreements under which they were issued. The number of shares and the per share exercise price for the shares of the Company’s common stock issuable upon exercise of the assumed options and warrants shown below were determined using the exchange ratio applicable to the VirtGame common stock, which was 0.028489 to 1. At the date of acquisition, all of the acquired options and warrants were fully vested and exercisable. These options and warrants expire at various dates through 2010.

Following is a summary of the status of these options and warrants at September 30, 2007 and changes during the nine months then ended:

Item 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements sometimes include the words “may,” “will,” “estimate,” “intend,” “continue,” “expect,” or “anticipate,” and other similar words. Statements expressing expectations regarding our future (including pending gaming and patent approvals) and projections relating to products, sales, revenues and earnings are typical of such statements.

All forward-looking statements, although reasonable and made in good faith, are subject to the risks and uncertainties inherent in predicting the future. Our actual results may differ materially from those projected, stated or implied in these forward-looking statements as a result of many factors, including, but not limited to, overall industry environment, customer acceptance of our new products, delay in the introduction of new products, the further approvals of regulatory authorities, adverse court rulings, production and/or quality control problems, the denial, suspension or revocation of privileged operating licenses by governmental authorities, competitive pressures and general economic conditions, our financial condition, our debt service obligations, and our ability to secure future financing. These and other factors that may affect our results are discussed more fully in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

Forward-looking statements speak only as of the date they are made. Readers are warned that we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, and are urged to review and consider disclosures we make in this and other reports that discuss factors germane to our business. See particularly our reports on Forms 10-K, 10-K/A, 10-Q, 10-Q/A, 8-K and 8-K/A filed from time to time with the Securities and Exchange Commission.

We are a global supplier of integrated casino and jackpot management solutions for the gaming industry. This technology is widely used to enhance casino operations and help drive greater revenues for existing products. Our products include multiple forms of regulated wagering solutions in wired, wireless and mobile formats.

We offer a suite of products that when combined, supports every facet of a gaming operation, and consolidates the management of slot machines, table games, server-based gaming, account wagering, marketing and cage into one fully integrated system. The system can support from one venue to several hundred venues in a multi-site configuration. Our current revenues are primarily comprised of software, hardware and support services, which comprise both upfront payments as well as recurring fees.

Previously, we developed, acquired and distributed table and slot game content as well as software products to meet the needs of gaming operators worldwide. In 2004, we began repositioning our business to focus solely on technology and game content and completed a series of acquisitions and divestitures to reposition our company. During the quarter ended June 30, 2007, we entered into an arrangement to divest our slot games division. We completed the sale of our table games division to Shuffle Master, Inc. on September 28, 2007.

Prior to June 30, 2007, our company included both our systems segment and the table and slot games segment pursuant to which we developed, acquired, licensed and distributed proprietary and non-proprietary branded and non-branded table and slot games. As a result of the sale of our slot and table businesses, we have classified the slot and table games segment as a discontinued operation in accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets” — see Note 3 in the Notes to Consolidated Financial Statements.

With respect to our segments, we evaluate performance and allocate resources based upon profit or loss from operations before income taxes. The accounting policies of our reportable segments are the same as those described in the summary of critical accounting policies below.

Amounts disclosed in the accompanying tables are shown in thousands except per share amounts, while amounts included in text are disclosed in actual amounts. All percentages reported are based on those rounded numbers.

Systems revenues and gross profit. Our systems revenues for the three months ended September 30, 2007 increased by $4.2 million or 29% when compared to the three months ended September 30, 2006 primarily as a result of Casinolink^® Jackpot Systems^™ (“CJS”) and Casinolink^® Enterprise (“Casinolink”) installations. The company’s Casinolink installations were over 3,000 in the third quarter of 2007 and included further expansion of this technology in Canada, Europe and Asia. The Company expects further growth in Casinolink in these regions, particularly in Asia where gaming is experiencing significant growth. We reported a record 1,400 installations of table management systems in the third quarter of 2006, representing growth in the United States, Europe and Asia. CJS, which was introduced to the United States market in mid-2006, has experienced significant growth to just over 9,000 units under management as of September 30, 2007. Historically, this product was approved in all United States jurisdictions except for Nevada. In July 2007, the Company announced that Nevada Gaming Control Board’s Technology Division has approved the CJS for a 60-day field trial at multiple properties in Las Vegas. The Company expects to commercialize CJS in Nevada at the end of 2007 and expects this jurisdiction to be a significant growth driver for this product during 2008.

Gross profit margins decreased to 55.3% in the third quarter of 2007 compared to 59.3% in the third quarter of 2006. The third quarter 2006 profit margins reflected approximately $1.8 million of one-time license transactions with very high margins. Beginning in 2007, the Company has shifted its focus away from these types of transactions and as a result the third quarter of 2007 did not include any one-time license transactions.

Systems installed base. Our slot management installed base increased to 71,722 units as of September 30, 2007 from 54,300 units as of September 30, 2006 led by increases in CJS of approximately 2,500 units and Casinolink^® Enterprise of 3,000 units. Our table management installed base also increased to 4,874 units at September 30, 2007 from 2,530 units at September 30, 2006.

Selling, general and administrative expense (“SG&A”). SG&A expenses excluding non-cash stock compensation expense decreased approximately $0.1 million from the prior year quarter. SG&A reflect approximately $3 million of annualized cost reductions as a result of the Company’s refined business model. The cost reductions, which were completed during the first half of 2007 are reflected in the discontinued operations line in 2007 and in 2006 for comparative purposes.

Research and development expense (“R&D”). R&D consists primarily of personnel and related costs across all of our product lines. R&D expenses for third quarter of 2007 were consistent with the prior year quarter.

Depreciation and amortization. Depreciation and amortization increased slightly to $1.9 million in the third quarter of 2007 from $1.8 million in the third quarter of 2006 as a result of higher amortization expense from additions to our intellectual property portfolio.

Interest expense. Our interest expense primarily includes interest costs and amortization from our $45 million of 11.875% Senior Secured Notes due 2008 and our $10 million senior secured revolving credit facility. Interest expense increased in the third quarter of 2007 compared to the third quarter of 2006 as a result of slightly higher average borrowings under our credit facility.

Income taxes. During the three months ended September 30, 2007 and 2006, the tax benefit generated from our losses was fully reserved due to our net operating loss position.

Discontinued operations. Included in discontinued operations are the earnings and losses from our slot and table games segment for the quarter ended September 30, 2007 and 2006.

As a result of the completion of table game division sale, we recorded a charge of approximately $35 million in the third quarter of 2007. The charge represents additional costs related to the disposition of this division and includes a $24.7 million

charge related to the Webb vs. Mikohn legal settlement. This accrual consists of the $20 million settlement fee we paid from cash on hand on November 5, 2007 and legal fees of approximately $4.7 million which are due 30 business days from the execution of the agreement. The net gain from discontinued operations for the third quarter of 2006 was approximately $2.1 million and included a $3.5 million table games patent license agreement.

Earnings (loss) per share. During the third quarter of 2007, we incurred a loss per fully-diluted share from continuing operations of $0.12 compared to a loss of $0.15 in the prior year period based on weighted average shares of 38.3 million in 2007 and 34.6 million of weighted average diluted shares in 2006. The net loss per share narrowed from the third quarter of 2006 to the third quarter of 2007 as a result of the cost reductions made during 2007.

Systems revenues and gross profit. Our systems revenues increased during the first three quarters of 2007 as compared to the same period in 2006 as a result growth in our Casinolink^® Jackpot Systems^™ (“CJS”) to the North American markets and continued expansion of our Casinolink^® Enterprise installations and the acceleration of installations for our TableId systems through our partnership with IGT.

Gross profit margins increased to 54% in the nine months ended September 30, 2007 compared to 51% in the nine months ended September 30, 2006. The improvement is due to higher software license revenues, a larger recurring revenue installed base and better leverage on the Company’s fixed service costs.

Selling, general and administrative expense (“SG&A”). SG&A expenses excluding non-cash stock compensation expense decreased approximately $3.6 million from the prior year quarter primarily due to non-recurring charges recorded in the first half of 2006 for severance, restructuring and legal settlements. Non-cash stock compensation expense also decreased in the first three quarters of 2007 to $2.0 million from $5.1 million as a result of the additional charges for the initial adoption of SFAS No. 123(R) in the first quarter of 2006. The decrease in stock compensation expense is also attributable to a reduction in headcount.

Research and development expense (“R&D”). R&D consists primarily of personnel and related costs across all of our product lines. R&D expense decreased $0.4 million in the first nine months of 2007 compared to the first nine months of 2006 as a result of the cost reductions in connection with the sale of the slot and table games divisions.

Depreciation and amortization. Depreciation and amortization increased by $0.4 million in the first nine months of 2007 compared to the first nine months of 2006 as a result of higher amortization from additions to our intellectual property portfolio.

Interest expense. Our interest expense primarily includes interest costs and amortization from our $45 million of 11.875% Senior Secured Notes due 2008 and our $10 million senior secured term credit facility. Excluding the $0.8 million in costs for early retirement of debt incurred in the third quarter of 2007, interest expense increased by $3.4 million in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily as a result of higher outstanding borrowings under our credit facility and as a result of a $1.2 million waiver fee recorded in the second quarter of 2007 referred to above.

Income taxes. During the nine months ended September 30, 2007 and 2006, the tax benefit generated from our losses was fully reserved due to our net operating loss position.

Discontinued operations. Included in discontinued operations are the earnings and losses from our slot and table games segment for the nine months ended September 30, 2007 and 2006.

With the completion of the table game division sale and the slot route and inventory sales, we have recorded a charge of $65.6 million for the nine months ending September 30, 2007. The charge represents impairment charges associated with the adjustment of the carrying values of the assets involved in the sales, including a $24.7 million charge related to the Webb vs. Mikohn legal settlement. This accrual consists of the $20 million settlement fee we paid from cash on hand on November 5, 2007 and legal fees of approximately $4.7 million which are due 30 business days from the execution of the agreement. The net gain from discontinued operations for the nine months ending September 30, 2006 was approximately $0.8 million and included a $3.5 million table games patent license agreement.

Earnings (loss) per share. For the nine months ended September 30, 2007, we incurred a loss per fully-diluted share from continuing operations of $0.47 compared to a loss of $0.79 in the prior year period based on weighted average shares of 38.3 million in 2007 and 35.4 million of weighted average diluted shares in 2006. The net loss per share narrowed from the nine months ended September 30, 2006 to the same period in 2007 as a result of the cost reductions made during 2007.

Liquidity and Capital Resources. The consolidated financial statements have been prepared on the basis of a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Based on the Company’s current operating plan, management believes existing cash, cash forecasted by management to be generated by operations and proceeds from future financing will be sufficient to meet the Company’s working capital and capital requirements through at least December 31, 2007. However, if events or circumstances occur such that the Company does not meet its plans as expected, the Company may not be able to meet its obligations. The Company may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. There can be no assurance that any additional financing will be available on acceptable terms, or available at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

As more fully described in Part II “Item 1. Legal Proceedings” in this report, the Company is a defendant in the matter Derek Webb et al vs. Mikohn Gaming Corporation. On February 21, 2007, the Company received an adverse jury verdict, and the Company subsequently filed post trial motions. At the time post trial motions were filed, the Company believed, and outside counsel concurred, that it was remote that the post trial motion process would be concluded before December 31, 2007. On October 25, 2007 the Company’s post trial motions were denied by the United States District Court for the Southern District of Mississippi. The Company would have been required to post a $20 million bond by November 8, 2007, and grant a subordinated security interest for $23.7 million representing the remaining amount of the judgment including plaintiff legal fees within 30 days from the date of judgment in order to appeal this matter. In response to this development, on November 5, 2007, the Company executed a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with Webb. The Company paid $20 million from existing cash on hand one business day from execution of the Settlement Agreement and $4.7 million for Webb’s previously claimed attorney fees 30 business days thereafter. No later than two business days after the payments are made, Webb shall file the necessary pleadings to dismiss the action with prejudice. After the fulfillment of all conditions of the Settlement Agreement and Mutual Release, the Company believes it will have no further obligation with respect to the Webb litigation.

The Company has been notified by the lender for its Senior Credit Facility that, among other things, the execution of the settlement agreement has caused the Company to be in default under its senior credit facility. If the Company is unable to obtain a waiver of or cure any existing event of default, the lender could seek acceleration of the $10 million of principal currently outstanding under the Senior Credit Facility. The Company intends to refinance the $10 million in principal currently outstanding under the Senior Credit Facility through one or more future financings, which may include the potential issuance of debt, equity or a combination thereof. As a result of this pending matter, the Company has classified the outstanding balance of $10 million under the Senior Credit Facility as current.

In addition to the matters referred to above, the Company has the following obligations that need to be repaid in the next 12 months:

The Company has approximately $45 million of 11.875% Senior Secured Notes due August 2008 (the “Notes”). The Company has issued an irrevocable notice to redeem $15 million of the Notes on November 19, 2007 and intends to refinance this payment through borrowings or other financing alternatives. The Company intends to refinance the remaining $30 million of the Notes in late 2007 or early 2008. The Company will evaluate potential financing alternatives including possible issuances of equity, debt or a combination of both. On October 19, 2007, the Company filed a Form S-3 Shelf Registration Statement pursuant to which the Company registered $50 million of common stock that can be later sold in one or more offerings on terms to be determined at the time of the offering.

Net cash and cash equivalents at September 30, 2007 were $30.3 million, an increase of $23.1 million compared to December 31, 2006. This change resulted from cash used in operations of $16.6 million, cash provided by investing activities of $17.4 million, cash provided by financing activities of $22.2 million, and effect of foreign exchange rate changes of $0.1 million.

Significant cash flows from investing activities included proceeds from the disposal of the slot and table games segment of $19.8, purchases of fixed assets of $1.2 million and additions to intangible assets of $1 million, including discontinued operations.

Significant cash flows from financing activities during the nine months ended September 30, 2007 were $29.1 million net proceeds from our private equity placement, $1 million from the exercise of options and warrants, and $11 million in payments and $3.2 in borrowings under our senior debt facility.

The Company’s 11.875% senior secured notes and its senior secured revolving line of credit both contain a number of financial and non-financial covenants. Among the more restrictive of these covenants are a senior debt leverage ratio, total debt leverage ratio, minimum EBITDA, minimum cash plus availability and minimum interest coverage.

As of September 30, 2007, the Company had obtained a waiver for all the above referenced covenants except for the minimum cash plus availability of $6 million, which it was in compliance, reporting a cash plus availability balance of $34.2 million.

During the nine months ended September 30, 2007, we spent $1.2 million for purchases of property and equipment and $5.0 million related to the payment of license fees for the purchase of intellectual property.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). SFAS No. 159 permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent changes in fair value for designated items will be required to be reported in earnings in the current period. SFAS No. 159 also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the effect of implementing this guidance, which depends on the nature and extent of items elected to be measured at fair value, upon initial application of the standard on January 1, 2008.

Refer to Part I, Item 7A, of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2006. There have been no material changes in market risks since the fiscal year end.

The Company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. These disclosure controls and procedures are designed and maintained by or under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, as required by the rules of the SEC. The Company’s Chief Executive Officer and Chief Financial Officer are responsible for evaluating the effectiveness of the disclosure controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that the Company is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.

No changes in the Company’s internal control over financial reporting have occurred during the Company’s fiscal quarter ended September 30, 2007, the have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The legal proceedings described in Item 3 of the Company’s annual report on Form 10-K for the year ended December 31, 2006, including the litigation involving Derek Webb, should be read in conjunction with this disclosure. No material developments related to these various litigation matters have occurred, except as disclosed herein.

We were sued by Derek Webb and related plaintiffs (“Webb”) in the U.S. District Court, Southern District of Mississippi, Jackson Division, in a case filed on December 27, 2002. The plaintiffs alleged state law interference with business relations claims and federal antitrust violations and contended that the Company illegally restrained trade and attempted to monopolize the proprietary table game market in the United States. At trial, Plaintiffs sought monetary damages, penalties and attorneys’ fees in excess of tens of millions of dollars based on the only claims remaining at the time of trial, which were the sham litigation and attempted monopolization claims. Trial on this case was held in January and February, 2007. In a jury verdict, the plaintiff was awarded the sum of $13 million for his claims, which amount was trebled in accordance with applicable antitrust law. As a result, on or about February 21, 2007, judgment was entered in favor of plaintiffs in the amount of $39 million, plus the costs of suit, including a reasonable attorney’s fee. Plaintiffs claim that costs of suit and attorney’s fees together exceed $4.7 million. We filed post-trial claims for relief (including a motion for a new trial and a motion for a judgment as a matter of law) and, if necessary, intended to initiate the appeals process. The enforcement of the judgment was stayed during the pendency of the motion for a new trial. At the time post trial motions were filed, we believed, and outside counsel concurred, that it was remote that the post trial motion process would be concluded before December 31, 2007, however on October 25, 2007 our post trial motions were denied by the United States District Court for the Southern District of Mississippi. We would have been required to post a $20 million bond by November 8, 2007 and grant a subordinated security interest in our assets for $23.7 million representing the remaining amount of the judgment including plaintiff legal fees within 30 days from the date of judgment in order to appeal this matter. In response to this development, on November 5, 2007, we executed a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with Webb. We paid $20 million from existing cash on hand one business day from execution of the Settlement Agreement and will pay the sum of $4.7 million for Webb’s previously claimed attorney fees 30 business days thereafter. No later than two business days after the final payments are made, Webb shall file the necessary pleadings to dismiss the action with prejudice. After the fulfillment of all conditions of the Settlement Agreement and Mutual Release, the Company believes it will have no further obligation with respect to the Webb litigation.

We had a dispute with Hasbro, Inc. that was filed in the U.S. District Court in Rhode Island relating to the calculation of royalty payments from 1999-2002 on the sale and license of certain of Progressive’s branded slot machines. Hasbro was seeking monetary damages in excess of $8 million. On October 25^th, 2007 the parties entered into a settlement agreement and mutual release of all claims whereby the parties agreed to release all claims between them and settle all disputes with no admission of wrongdoing, and for the Company to pay Hasbro the sum of $2.7 million, with payment as follows: $1.0 million within 5 days of the execution of the settlement agreement, $1.0 million no later than September 15, 2008, and $0.7 million no later than March 15, 2009; provided, however that such payment obligation may be reduced by $0.1 million if the last payment is made December 15, 2008, and may be reduced by an additional $0.1 million in the event the final amount is paid no later than September 15, 2008.

On or about May 8, 2006, we were served with a First Amended Complaint by Gregory F. Mullally in regards to a case pending in the United States District Court for the District of Nevada. Mr. Mullally’s First Amended Complaint added the Company and over ten other defendants in a case that has been pending since 2005. The case makes various legal claims relating to an allegation that Mr. Mullally owns the Internet rights to the proprietary table games known as Caribbean Stud^® and 21 Superbucks. We believe this case is without merit and intend to defend this claim vigorously. The Company believes there is a remote chance of success by Mullally. We cannot currently estimate potential losses related to this claim as Mullally has not provided any assessment or estimation of damages. We are currently awaiting a ruling on our Motion for a Summary Judgment.

On or about August 1, 2006, we were served with a Complaint by DTK, LLC in regards to a case pending in the Circuit Court of Harrison County, Mississippi, First Judicial District. The Complaint makes various legal claims surrounding allegations that Progressive is responsible for damages caused by Hurricane Katrina to DTK’s former facility in Gulfport. Trial on this case was set to occur within a three week period starting in January, 2008. The Company intends to defend this claim vigorously. Plaintiffs are seeking losses of approximately $0.5 million. The Company believes there is a remote chance DTK will prevail on its claims and be awarded the full amount they seek and we believe any likely losses related to the damage to the facility are substantially less that the amount sought by DTK.

We were sued by Paltronics, Inc. in the U.S. District Court District of Nevada in a case filed on August 26, 2006. Paltronics alleges patent infringement in regards to an embodiment of multi screen presentations that we sell as a module for slot machines. We believe we are well positioned to defend against this claim. This case is still in the early stages and the Company cannot currently make an assessment of the outcome, but intends to defend this case

vigorously. The Plaintiffs are seeking damages in excess of $1 million. We believe that Paltronics’ chance of success is remote as we do not believe we infringe the patent at issue.

On or about February 14, 2007, the Company was served with a complaint by CEI Holding, Inc. in regards to a case pending in the Eighth Judicial District Court, Clark County Nevada (Case Number: A535019). CEI Holding claims that Progressive allegedly failed to pay the accounts payable obligations of Casino Excitement, Inc. pursuant to a 2002 stock purchase agreement wherein Casino Excitement, Inc. (the Company’s former exterior sign business) was sold by the Company to CEI Holdings, Inc. This case is still in the early stages and the Company cannot currently make an assessment of the outcome, but intends to defend this case vigorously. CEI Holdings, Inc. is claiming damages of approximately $0.5 million. We believe the likelihood of success by CEI Holdings, Inc. is remote.

From time to time we are also involved in other legal matters, litigation and claims of various types in the ordinary course of our business operations, including matters involving bankruptcies of debtors, collection efforts, disputes with former employees and other matters. We intend to defend all of these matters vigorously. However, we cannot assure you that we will be successful in defending any of the matters described above or any other legal matters, litigation or claims in which we may become involved from time to time. If we are not successful in defending these matters, we may be required to pay substantial license fees, royalties or damages, including statutory or other damages, post significant bonds and/or discontinue a portion of our operations. Furthermore, our insurance coverage and other capital resources may be inadequate to cover anticipated costs of these lawsuits or any possible settlements, damage awards, bonds or license fees. Even if unsuccessful, these claims still can harm our business severely by damaging our reputation, requiring us to incur legal costs, lowering our stock price and public demand for our stock, and diverting management’s attention away from our primary business activities in general.

You should consider carefully the following risk factors, together with all of the other information included in this Quarterly Report on Form 10-Q. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock.

We have marked with an asterisk those risk factors that reflect changes from the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2006.

*Our cash flow from operations and available credit may not be sufficient to meet our capital requirements and, as a result, we could be dependent upon future financing, which may not be available.

Historically, we have not generated sufficient cash flow from operations to satisfy our capital requirements and have relied upon debt and equity financing arrangements to satisfy such requirements. If our future cash flows and capital resources are insufficient to meet our debt obligations and commitments, we may be forced to reduce or delay activities and capital expenditures, obtain additional equity capital or restructure or refinance our debt. In the event that we are unable to do so, we may be left without sufficient liquidity and we may not be able to meet our debt service requirements. There can be no assurance that our existing credit facility or future financing arrangements will be available on acceptable terms, or at all. We recently obtained a waiver from our senior lender of certain borrowing base and qualified cash covenants, and in light of the recent default notice we received from our senior lender related to the execution of the settlement agreement in connection with the Webb litigation and other matters, we will require another waiver if we do not repay or refinance all amounts outstanding under our senior credit facility in the near future. If we are unable to maintain existing financing arrangements, including our credit facility, or obtain future financing, on terms acceptable to us, this may pose a significant risk to our liquidity and ability to meet operational and other cash requirements. Additionally, substantially all of our assets are pledged as security to the lenders under our senior secured credit facility and holders of our Notes. The ability of our stockholders to participate in the distribution of our assets upon our liquidation or recapitalization will be subject to the prior claims of our secured and unsecured creditors. Any foreclosure of our assets by such creditors will materially reduce the assets available for distribution to our stockholders.

*We have substantial debt and debt service requirements, which could have an adverse impact on our business and the value of our common stock.

On September 30, 2007, our total outstanding debt was approximately $54.7 million. On August 4, 2006, we entered into a three-year senior credit facility. Outstanding principal under the facility, which is currently $10 million, bears interest at a reference rate of interest plus an applicable margin (currently 11.00%) or a LIBOR rate plus an applicable margin. We have been notified by the lender for our senior credit facility that, among other things, the execution of the settlement agreement in connection with the Webb litigation has caused us to be in default under our senior credit facility. In connection with this default, the lender has elected to exercise control authority over certain of our bank accounts. If we are unable to obtain a waiver of or cure any existing event of default, the lender could seek acceleration of the $10 million of principal currently outstanding under the senior credit facility, which could cause a cross-default under our 11.875% Senior Secured Notes due 2008 and allow our lenders and noteholders to control our assets which are pledged as collateral under our debt instruments. In addition, we recently issued an irrevocable call notice to redeem, on November 19, 2007, $15 million of our 11.875% Senior Secured Notes due August 2008. We need to obtain additional financing to fund the pending $15 million redemption of our senior secured notes. In addition, we intend to refinance the remaining $30 million in senior secured notes in early 2008. If we fail to redeem the $15 million of senior secured notes on November 19, 2007, our noteholders will have the right to accelerate the maturity of that debt and foreclose upon the collateral securing that debt. In addition, if we fail to comply with the other terms of our debt obligations, including the terms of our senior secured credit facility and our 11.875% senior secured notes due in August 2008, our lenders and the noteholders will have the right to accelerate the maturity of that debt and foreclose upon the collateral securing that debt.

We may incur additional debt in the future. Substantial debt may make it more difficult for us to operate and effectively compete in the gaming industry. The degree to which we and/or one or more of our subsidiaries are leveraged could have important adverse consequences on our value as follows:

Realization of any of these factors could adversely affect our financial condition and results of operations.

*We have received a “going concern” opinion from our independent registered public accounting firm, which may negatively impact our business.

In light of certain prior disclosures in our consolidated financial statements for the year ended December 31, 2006, and the recent developments in the Webb litigation, our independent registered public accounting firm has provided an updated audit report on our consolidated financial statements for the year ended December 31, 2006. On November 6, 2007, we filed Audited Consolidated Financial Statements as of December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005, and 2004, along with the modified audit report of our independent registered public accounting firm related to the financial statements as of and for the year ended December 31, 2006. The audit report, as updated, indicates that the recent developments related to the Webb litigation, the possibility that we could be in default under our senior credit facility, and the pending redemption of $15 million of our senior secured notes raise substantial doubt about our ability to continue as a going concern.

We intend to obtain additional financing to fund the pending redemption of our senior secured notes, and to repay the entire $10 million principal amount currently outstanding under our senior credit facility. In addition, we intend to refinance the remaining $30 million in senior secured notes in early 2008. However, we cannot guarantee that we will be able to obtain additional financing sufficient to fund the pending redemption and allow us to repay our senior credit facility, or that we will be successful in refinancing the remaining senior secured notes in early 2008.

If we are unable to fund the pending redemption, repay our senior credit facility, or refinance the remaining senior secured notes, the audit report of our independent registered public accounting firm related to the financial statements as of and for the year ended December 31, 2007 may continue to indicate that there is substantial doubt about our ability to continue as a going concern. Any failure to dispel any continuing doubts about our ability to continue as a going concern could adversely affect our ability to enter into collaborative relationships with business partners, to raise additional capital and to sell our products, and could have a material adverse effect on our business, financial condition and results of operations.

*Our lenders have imposed numerous debt covenants that include financial and operating restrictions that may adversely affect how we conduct our business and potentially reduce our revenues and affect the value of our common stock.

We expect to continue to be subject to numerous covenants in our debt agreements that impose financial and operating restrictions on our business. These restrictions may affect our ability to operate our business, may limit our ability to take advantage of potential business opportunities as they arise, and may adversely affect the conduct and competitiveness of our current business, which could in turn reduce our revenues and thus affect the value of our common stock. Specifically, these covenants may place restrictions on our ability to, among other things:

The terms of our indebtedness require that we meet a number of financial ratios and tests on a quarterly and annual basis, including senior debt leverage ratio, total debt leverage ratio, a minimum EBITDA test, a minimum cash plus availability test and a minimum interest coverage test. Our ability to meet these ratios and tests and to comply with other provisions governing our indebtedness may be affected by changes in economic or business conditions or other events beyond our control.

Our failure to comply with our debt-related obligations could result in an event of default which, if not cured or waived, could result in an acceleration of our indebtedness, including without limitation, our senior secured credit facility and our senior secured notes. This in turn could have a material adverse effect on our operations, our revenues and thus our common stock value. For example, we have been notified by the lender for our senior credit facility that, among other things, the execution of the settlement agreement in connection with the Webb litigation has caused us to be in default under our senior credit facility. If we are unable to obtain a waiver of or cure any existing event of default, our senior lender could accelerate the $10 million in outstanding principal and interest under our senior secured credit facility. An acceleration of our indebtedness under our senior secured credit facility could result in a payment default under our senior secured notes, and the trustee of those notes could accelerate the $45 million (or, if we are able to complete the noticed $15 million redemption, $30 million) in outstanding principal and interest under those notes. In the event we were unable to restructure or refinance this debt or secure financing to repay this debt, our lenders could foreclose upon the collateral securing that debt.

Additionally, the covenants governing our indebtedness restrict the operations of our subsidiaries, including, in some cases, limiting the ability of our subsidiaries to make distributions to us, and these limitations could impair our ability to meet such financial ratios and tests.

Lastly, we are required by our senior secured notes to offer to repurchase or make certain payments on our debt at times when we may lack the financial resources to do so, such as upon a change of control. These expenditures may materially and adversely affect our liquidity and our ability to maintain or grow our business as payments to satisfy the debt will be diverted away from any investment in the growth of our business, thus potentially affecting the value of our common stock.

If we are unable to develop or introduce innovative products and technologies that gain market acceptance and satisfy consumer preferences, our current and future revenues will be adversely affected.

Our current and future performance is dependent upon the continued popularity of our existing products and technologies and our ability to develop and introduce new products and technologies that gain market acceptance and satisfy consumer preferences. The popularity of any of our gaming products and technologies may decline over time as consumer preferences change or as new, competing products or new technologies are introduced by our competitors. If we are unable to develop or market innovative products or technologies in the future, or if our current products or technologies become obsolete or otherwise noncompetitive, our ability to sustain current revenues from our existing customers or to generate additional revenues from existing or new customers would be adversely affected, which, in turn, could materially reduce our profitability and growth potential. In addition, the introduction of new and innovative products and technologies by our competitors that are successful in meeting consumer preferences also could materially reduce our competitiveness and adversely affect our revenues and our business.

The development of new products and technologies requires a significant investment by us prior to any of the products or technologies becoming available for the market. New products, such as new games and refresher versions of our existing games, may not gain popularity with gaming patrons, or may not maintain any popularity achieved. In the event any new products or technologies fail to gain market acceptance or appeal to consumer preferences, we may be unable to recover the cost of developing these products or technologies.

*We may not realize expected benefits from the sale of our table game assets to Shuffle Master.

In connection with the recent sale of our table game division, or TGD, assets to Shuffle Master Inc., or Shuffle Master, the purchase agreement for that sale and a related 5-year technology license to integrate our Casinolink Jackpot System, or CJS, progressive jackpot system module for use with Shuffle Master’s progressive specialty table games, we received $3.0 million for the initial integration of our CJS system with Shuffle Master’s tables, which we expect to be completed in the fourth quarter of 2007. The purchase agreement also provides for earn-out payments based on the installed base growth of the TGD assets through 2016 (subject to certain conditions), including $3.5 million in guaranteed minimum payments. We also expect to receive recurring monthly royalty payments for the placement of our CJS on Shuffle Master’s specialty table games. We do not have control over the timing of integration of our CJS progressive jackpot system module for use with certain versions of Shuffle Master’s specialty table games and that integration may be delayed for reasons outside of our control. Furthermore, the timing and amounts of any earn-out or royalty payments related to the sale of the TGD assets and the related license are subject to Shuffle Master’s ownership and operation of those assets, and our inability to manage those assets could result in payments that are substantially lower than we expect, which could adversely affect our revenues and our business.

If we are unable to rapidly develop new technologies, our products and technologies may become obsolete or noncompetitive.

The gaming sector is characterized by the rapid development of new technologies and continuous introduction of new products. In addition to requiring a strong pipeline of proprietary games, our success is dependent upon new product development and technological advancements, including the continued development and commercialization of the Table iD^™ system, our cashless technology, table player tracking technologies, central server-based products and technologies, progressive jackpot systems and integrated management systems. The markets in which we compete are subject to frequent technological changes, and one or more of our competitors may develop alternative technologies or products for bonusing, progressive jackpots, slot accounting, cashless technology, player tracking or game promotions, or a superior game platform which may not be made available to us. While we expend a significant amount of resources on research and development and product enhancement, we may not be able to continue to improve and market our existing products or technologies or develop and market new products at a rapid enough pace. Further technological developments may cause our products or technologies to become obsolete or noncompetitive.

*If our current or proposed products or technologies do not receive regulatory approval, our revenue and business prospects will be adversely affected.

Our products and technologies are in various stages of development. Our development efforts are dependent on factors such as obtaining requisite governmental approvals. Each of these products and technologies requires separate regulatory approval in each market in which we do business, and this regulatory approval may either not be granted at all or not be granted in a timely manner, for reasons primarily outside of our control. In addition, we cannot predict with any accuracy which jurisdictions or markets, if any, will accept and which authorities will approve the operation of our gaming products and technologies, or the timing of any such approvals. A lack of regulatory approval for our products and technologies, or delays in obtaining necessary regulatory approvals, will adversely affect our revenues and business prospects.

For example, RFID (radio frequency identification), CJS (Casino Jackpot Station) and central server-based gaming represent three of our key strategic initiatives over the next several years. While we are moving forward with the regulators in various jurisdictions to obtain required approvals, we are at various stages in the approval and development process for each initiative. We cannot assure you that we will receive the necessary approvals in all of the jurisdictions we have sought approval nor can we assure you that there will not be any production delays in developing and distributing these products and technologies. Any delay in production or in the regulatory process, or a denial of regulatory approval altogether, for any one of these initiatives will adversely impact our revenues and business.

If our products or technologies currently in development do not achieve commercial success, our revenue and business prospects will be adversely affected.

While we are pursuing and will continue to pursue product and technological development opportunities, there can be no assurance that such products or technologies will come to fruition or become successful. Furthermore, while a number of those products and technologies are being tested, we cannot provide any definite date by which they will be commercially viable and available, if at all. We may experience operational problems with such products after commercial introduction that could delay or prevent us from generating 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 or technologies currently in development will meet evolving industry standards and consumer demands. We cannot assure you that we will be able to adapt to technological changes or offer products on a timely basis or establish or maintain a competitive position.

We may not be successful in forming or maintaining strategic alliances with other companies, which could negatively affect our product offerings and sales.

Our business is becoming increasingly dependent on forming or maintaining strategic alliances with other companies, and we may not be able to form or maintain alliances that are important to ensure that our products and technologies are compatible with third-party products and technologies, to enable us to license our products and technologies to potential new customers and into potential new markets, and to enable us to continue to enter into new agreements with our existing customers. There can be no assurance that we will identify the best alliances for our business or that we will be able to maintain existing relationships with other companies or enter into new alliances with other companies on acceptable terms or at all. The failure to maintain or establish successful strategic alliances could have a material adverse effect on our business or financial results. If we cannot form and maintain significant strategic alliances with other companies as our target markets and technology evolve, the sales opportunities for our products and technologies could deteriorate.

If any conflicts arise between us and any of our alliance partners, our reputation, revenues and cash position could be significantly harmed.

Conflicts may arise between us and our alliance partners, such as conflicts concerning licensing and royalty fees, development or distribution obligations, the achievement of milestones or the ownership or protection of intellectual property

developed by the alliance or otherwise. Any such disagreement between us and an alliance partner could result in one or more of the following, each of which could harm our reputation, result in a loss of revenues and a reduction in our cash position:

In addition, certain of our current or future alliance partners may have the right to terminate the strategic alliance on short notice. Accordingly, in the event of any conflict between the parties, our alliance partners may elect to terminate the agreement or alliance prior to completion of its original term. If a strategic alliance is terminated prematurely, we would not realize the anticipated benefits of the strategic alliance, our reputation in the industry and in the investment community may be harmed and our stock price may decline.

In addition, in certain of our current or future strategic alliances, we may agree not to develop products independently, or with any third party, directly competitive with the subject matter of our strategic alliances. Our strategic alliances may have the effect of limiting the areas of research, development and/or commercialization that we may pursue, either alone or with others. Under certain circumstances, however, our alliance partners may research, develop, or commercialize, either alone or with others, products in related fields that are competitive with the products or potential products that are the subject of these strategic alliances. For example, as part of our joint development arrangement with IGT and Shuffle Master, we agreed not to manufacture or sell our intelligent shoe products for a three-year period.

Our failure to protect, maintain and enforce our existing intellectual property or secure, maintain and enforce such rights for new proprietary technology could adversely affect our future growth and success.

Our ability to successfully protect our intellectual property is essential to our success. We protect our intellectual property through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Certain of our existing and proposed products are covered by patents issued in the United States, which may differ from patent protection in foreign jurisdictions, where our intellectual property may not receive the same degree of protection as it would in the United States. In addition, in many countries intellectual property rights are conditioned upon obtaining registrations for trademarks, patents and other rights, and we have not obtained such registrations in all relevant jurisdictions. Failure to effectively protect our intellectual property could significantly impair our competitive advantage and adversely affect our revenues and the value of our common stock.

Our future success is also dependent upon our ability to secure our rights in any new proprietary technology that we develop. We file trademark, copyright and patent applications to protect intellectual property rights for many of our trademarks, proprietary games, gaming products and improvements to these products. Our failure to obtain federal protection for our patents and trademarks could cause us to become subject to additional competition and could have a material adverse effect on our future revenues and operations. In addition, any of the patents that we own, acquire or license may be determined to be invalid or otherwise unenforceable and would, in such case, not provide any protection with respect to the associated intellectual property rights.

If we are unable to effectively promote our trademarks, our revenues and results of operations may be materially adversely affected.

We intend to promote the trademarks that we own and license from third parties to differentiate ourselves from our competitors and to build goodwill with our customers. These promotion efforts will require certain expenditures on our part. However, our efforts may be unsuccessful and these trademarks may not result in the competitive advantage that we anticipate. In such event, our revenues and results of operations may be materially adversely affected by the costs and expenses related to the promotion of such trademarks.

Our competitors may develop non-infringing products or technologies that adversely affect our future growth and revenues.

It is possible that our competitors will produce proprietary games or gaming products similar to ours without infringing on our intellectual property rights. We also rely on unpatented proprietary technologies. It is possible that others will

independently develop the same or similar technologies or otherwise obtain access to the unpatented technologies upon which we rely for future growth and revenues. In addition, to protect our trade secrets and other proprietary information, we generally require employees, consultants, advisors and strategic partners to enter into confidentiality agreements or agreements containing confidentiality provisions. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Failure to meaningfully protect our trade secrets, know-how or other proprietary information could adversely affect our future growth and revenues.

*We may incur significant litigation expenses protecting our intellectual property or defending our use of intellectual property, which may have a material adverse effect on our cash flow.

Significant litigation regarding intellectual property exists in our industry. Competitors and other third parties may infringe our intellectual property rights. Alternatively, competitors may allege that we have infringed their intellectual property rights. Any claims, even those made by third parties which are without merit, could:

See “Item 1. Legal Proceedings” in Part II of this Quarterly Report on Form 10-Q and “Item 3. Legal Proceedings” in our Annual Report on Form 10-K filed with the SEC on March 23, 2007 for a description of various legal proceedings in which we are involved and developments related to those proceedings.

If we are found to be infringing on a third-party’s intellectual property rights, we may be forced to discontinue certain products or technologies, pay damages or obtain a license to use the intellectual property, any of which may adversely affect our future growth and revenues.

If we are found to be infringing on a third party’s intellectual property rights, we may be forced to discontinue certain products or the use of certain competitive technologies or features, which may have a material adverse effect on our future growth and revenues. Alternatively, if the company holding the applicable patent is willing to give us a license that allows us to develop, manufacture or market our products or technologies, we may be required to obtain a license from them. Such a license may require the payment of a license, royalty or similar fee or payment and may limit our ability to market new products or technologies, which would adversely affect our future growth and revenues. In addition, if we are found to have committed patent infringement we may be obligated to pay damages or be subject to other remedies, which could adversely affect the value of our common stock.

Some of our products may contain open source software which may be subject to restrictive open source licenses requiring us to make our source code available to third parties and potentially granting third parties certain rights to the software.

Some of our products may contain open source software which may be subject to restrictive open source licenses. Some of these licenses may require that we make our source code related to the licensed open source software available to third parties and/or license such software under the terms of a particular open source license potentially granting third parties certain rights to the software. We may incur legal expenses in defending against claims that we did not abide by such licenses. If our defenses are unsuccessful we may be enjoined from distributing products containing such open source software, be required to make the relevant source code available to third parties, be required to grant third parties certain rights to the software, be subject to potential damages or be required to remove the open source software from our products. Any of these outcomes could disrupt our distribution and sale of related products and adversely affect our revenues and the value of our common stock.

*We operate in a highly competitive market and may be unable to successfully compete which may harm our operating results.

We compete with a number of developers, manufacturers and distributors of similar products and technologies. Many of our competitors are large companies that have greater access to capital, marketing and development resources than we have. Larger competitors may have more resources to devote to research and development and may be able to more efficiently and effectively obtain regulatory approval. Pricing, product features and functionality, accuracy and reliability are key factors in determining a provider’s success in selling its system. Because of the high initial costs of installing a computerized monitoring system, customers for such systems generally do not change suppliers once they have installed a system. This may make it difficult for us to attract customers who have existing computerized monitoring systems.

Our business and revenues will be negatively affected if we are unable to compete effectively in the markets for our products and technologies. New competitors also may enter our key markets. Numerous factors may affect our ability to successfully compete and thus affect our future performance, including:

*The gaming industry is highly regulated, and we must adhere to various regulations and maintain our licenses to continue our operations.

The distribution of gaming products and conduct of gaming operations are extensively regulated by various domestic and foreign gaming authorities. Although the laws of different jurisdictions vary in their technical requirements and are amended from time-to-time, virtually all jurisdictions in which we operate require registrations, licenses, findings of suitability, permits and other approvals, as well as documentation of qualifications, including evidence of the integrity, financial stability and responsibility of our officers, directors, major stockholders and key personnel. If we fail to comply with the laws and regulations to which we are subject, the applicable domestic or foreign gaming authority may impose significant penalties and restrictions on our operations, resulting in a material adverse effect on our revenues and future business. See our Annual Report on Form 10-K for the year ended December 31, 2006 for a description of the regulations that apply to our business.

Future authorizations or regulatory approvals may not be granted in a timely manner or at all which would adversely affect our results of operations.

We will be subject to regulation in any other jurisdiction where our customers may operate in the future. Future authorizations or approvals required by domestic and foreign gaming authorities may not be granted at all or as timely as we would like, and current or future authorizations may not be renewed. In addition, we may be unable to obtain the authorizations necessary to operate new products or new technologies or to operate our current products or technologies in new markets. In either case, our results of operations would likely be adversely affected. Gaming authorities can also place burdensome conditions and limits on future authorizations and approvals. If we fail to maintain or obtain a necessary registration, license, approval or finding of suitability, we may be prohibited from selling our products or technologies for use in the jurisdiction, or we may be required to sell them through other licensed entities at a reduced profit. The continued growth of markets for our products and technologies is contingent upon regulatory approvals by various federal, state, local and foreign gaming authorities. We cannot predict which new jurisdictions or markets, if any, will accept and which authorities will approve the operation of our gaming products and technologies, the timing of any such approvals or the level of our penetration in any such markets.

Enforcement of remedies or contracts against Native American tribes could be difficult.

Many of our contracts with Native American tribes are subject to sovereign immunity and tribal jurisdiction. If a dispute arises with respect to any of those agreements, it could be difficult for us to protect our rights. Native American tribes generally enjoy sovereign immunity from suit similar to that enjoyed by individual states and the United States. In order to sue a Native American tribe (or an agency or instrumentality of a Native American tribe), the tribe must have effectively waived its sovereign immunity with respect to the matter in dispute. Moreover, even if a Native American tribe were to waive sovereign immunity, such waiver may not be valid and in the absence of an effective waiver of sovereign immunity by a Native American tribe, we could be precluded from judicially enforcing any rights or remedies against that tribe.

*Our business is closely tied to the casino industry and factors that negatively impact the casino industry may also negatively affect our ability to generate revenues.

Casinos and other gaming operators represent a significant portion of our customers. Therefore, factors that may negatively impact the casino industry may also negatively impact our future revenues. If casinos experience reduced patronage, revenues may be reduced as our games may not perform well and may be taken off of the casino floor altogether.

The level of casino patronage, and therefore our revenues, are affected by a number of factors beyond our control, including:

These factors significantly impact the demand for our products and technologies.

In the event that there is a decline in public acceptance of gaming, this may affect our ability to do business in some markets, either through unfavorable legislation affecting the introduction of gaming into emerging markets, or through resulting reduced casino patronage. We cannot assure you that the level of support for legalized gaming or the public use of leisure money in gaming activities will not decline.

*Economic, political and other risks associated with our international sales and operations could adversely affect our operating results.

Since we sell our products worldwide, our business is subject to risks associated with doing business internationally. Our sales to customers outside the United States, primarily the United Kingdom and Australia, accounted for approximately 40% of our consolidated revenue for the quarter ended September 30, 2007. We expect the percentage of our international sales to continue to increase during the remainder of 2007. Accordingly, our future results could be harmed by a variety of factors, including:

Holders of our common stock are subject to the requirements of the gaming laws of all jurisdictions in which we are licensed.

Pursuant to applicable laws, gaming regulatory authorities in any jurisdiction in which we are subject to regulation may, in their discretion, require a holder of any of our securities to provide information, respond to questions, make filings, be investigated, licensed, qualified or found suitable to own our securities. Moreover, the holder of the securities making any such required application is generally required to pay all costs of the investigation, licensure, qualification or finding of suitability.

If any holder of our securities fails to comply with the requirements of any gaming authority, we have the right, at our option, to require such holder to dispose of such holder’s securities within the period specified by the applicable gaming law or to redeem the securities to the extent required to comply with the requirements of the applicable gaming law.

Additionally, if a gaming authority determines that a holder is unsuitable to own our securities, such holder will have no further right to exercise any voting or other rights conferred by the securities, to receive any dividends, distributions or other economic benefit or payments with respect to the securities or to continue its ownership or economic interest in our securities. We can be sanctioned if we permit any of the foregoing to occur, which may include the loss of our licenses.

We may not realize the benefits we expect from the acquisitions of VirtGame and EndX.

We will need to overcome significant challenges to realize any benefits or synergies from our acquisitions of VirtGame and EndX. These challenges include the timely, efficient and successful execution of a number of post-transaction integration activities, including:

The process of integrating operations and technology could cause an interruption of, or loss of momentum in, the activities of one or more of our businesses and the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with the integration of VirtGame and EndX technologies could have an adverse effect on our business, results of operations or financial condition. We may not succeed in addressing these risks or any other problems encountered in connection with these transactions. The inability to successfully integrate the technology and personnel of VirtGame and EndX, or any significant delay in achieving integration, including regulatory approval delays, could have a material adverse effect on us and, as a result, on the market price of our common stock.

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

As part of our business strategy, we intend to continue to 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 complete, our business, operating results, financial condition and prospects may be impaired. Acquisitions and investments involve numerous risks, including:

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. 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 business will be seriously jeopardized if we are unable to attract and retain key employees.

Our success depends on the continued contributions of our principal management, development and scientific personnel, and the ability to hire and retain key personnel, particularly in the technology area and continue to grow our existing businesses. We face intense competition for such personnel. The loss of services of any principal member of our management team could adversely impact our operations and ability to raise additional capital.

If our products or technologies contain defects, our reputation could be harmed and our results of operations adversely affected.

Some of our products and technologies are complex and may contain undetected defects. The occurrence of defects or malfunctions could result in financial losses for our customers and in turn termination of leases, licenses, cancellation of orders, product returns and diversion of our resources. Any of these occurrences could also result in the loss of or delay in market acceptance of our products or technologies and loss of sales.

*As our business is subject to quarterly fluctuation, our operating results and stock price could be volatile, particularly on a quarterly basis.

Our quarterly revenue and net income may vary based on the timing of the opening of new gaming jurisdictions, the opening or closing of casinos or the expansion or contraction of existing casinos, gaming regulatory approval or denial of our products and corporate licenses, the introduction of new products or the seasonality of customer capital budgets, and our operating results have historically been lower in quarters with lower sales. In addition, historically, up to approximately 40% of our revenues have been based on cash-based licensing transactions, the majority of which are generated from intellectual property, content and technology licensing activities. Most of these non-recurring transactional revenues are from gaming supplier original equipment manufacturers, or OEMs, and service providers. Each such transaction has been unique, depending on the nature, size, scope and breadth of the intellectual property, content, or technology that was being licensed and/or the rights the licensee or the buyer wishes to obtain. Also, these licensing transactions often take several months, and in some cases, several quarters, to negotiate and consummate. As a result, our quarterly revenues and net income may vary based on how and when we record these cash-based transactions, and our operating results and stock price could be volatile, particularly on a quarterly basis.

The share price of our common stock may be volatile and could decline substantially.

The trading price of our common stock has been volatile and is likely to continue to be volatile. Our stock price could be subject to wide fluctuations in response to a variety of issues including broad market factors that may have a material adverse impact on our stock price, regardless of actual performance. These factors include:

If our quarterly results are below the expectations of securities market analysts and investors, the price of our common stock may decline.

Many factors, including those described in this “Risk Factors” section, can affect our business, financial condition and results of operations, which makes the prediction of our financial results difficult. These factors include:

If our quarterly operating results fall below the expectations of securities market analysts and investors due to these or other risks, securities analysts may downgrade our common stock and some of our stockholders may sell their shares, which could adversely affect the trading prices of our common stock. Additionally, in the past, companies that have experienced declines in the trading price of their shares due to events of this nature have been the subject of securities class action litigation. If we become involved in a securities class action litigation in the future, it could result in substantial costs and diversion of our management’s attention and resources, thus harming our business.

The market price for our common stock could decline as a result of sales by existing stockholders of large numbers of shares of our common stock or the perception that such sales may occur. Such sales of our common stock also might make it more difficult for us to sell equity or equity-related securities in the future at a time and at the prices that we deem appropriate. Of the approximately 42.0 million shares that that are outstanding as of September 30, 2007, approximately 41.4 million shares generally are freely tradable in the public market.

Additionally, as of September 30, 2007, there were outstanding options, restricted share grants, and warrants to purchase an aggregate of approximately 5.9 million of our shares and we may grant options to purchase up to approximately 1.6 million additional shares under our stock option plans. Shares issued on exercise of those instruments would be freely tradable in the public market, except for any that might be acquired by our officers or directors.

We have the ability to issue additional equity securities, which would lead to dilution of our issued and outstanding common stock.

The issuance of additional equity securities or securities convertible into equity securities would result in dilution of then-existing stockholders’ equity interests in us. Our board of directors has the authority to issue, without vote or action of stockholders, up to 5,000,000 shares of preferred stock in one or more series, and has the ability to fix the rights, preferences, privileges and restrictions of any such series. Any such series of preferred stock could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the rights of holders of our common stock. If we issue convertible preferred stock, a subsequent conversion may dilute the current common stockholders’ interest. Our board of directors has no present intention of issuing any such preferred stock, but reserves the right to do so in the future.

We do not intend to pay cash dividends. As a result, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We do not plan to pay any cash dividends on our common stock in the foreseeable future, since we currently intend to retain any future earnings to finance our operations and further expansion and growth of our business, including acquisitions. Moreover, the covenants governing our indebtedness restrict our ability to pay and declare dividends without the consent of the applicable lenders. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. We cannot guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

Anti-takeover provisions in our organizational documents, our stockholder rights plan and Nevada law could make a third-party acquisition of us difficult and therefore could affect the price investors may be willing to pay for our common stock.

The anti-takeover provisions in our articles of incorporation, our bylaws, our stockholder rights plan and Nevada law could make it more difficult for a third party to acquire us without the approval of our board of directors. Under these provisions, we could delay, deter or prevent a takeover attempt or third-party acquisition that certain of our stockholders may consider to be in their best interests, including a takeover attempt that may result in a premium over the market price of our common stock. In addition, these provisions may prevent the market price of our common stock from increasing substantially in response to actual or rumored takeover attempts and also may prevent changes in our management. Because these anti-takeover provisions may result in our being perceived as a potentially more difficult takeover target, this may affect the price investors are willing to pay for shares of our common stock.

On August 13, 2007, the Company entered into a Securities Purchase Agreement for the sale of 6,943,333 shares of the Company’s common stock at a price of $4.50 per share (the “Private Placement”). The closing of the Private Placement occurred on August 16, 2007, resulting in aggregate gross proceeds to the Company of approximately $31,245,000. The Company incurred placement agent and other fees of approximately $2,031,000 in connection with the offer and sale of the shares. The shares were sold to accredited investors.

On September 13, 2007, the Company filed a registration statement under the Securities Act of 1933 to register the shares of common stock sold in the Private Placement and certain other shares held by selling stockholders. Under the terms of a Registration Rights Agreement entered into in connection with the Securities Purchase Agreement, the Company was obligated to cause this registration statement to become effective no later than November 5, 2007. The Company is also obligated to use its commercially reasonable efforts to keep the registration statement continuously effective until the earlier of (i) three years after the registration statement is declared effective by the SEC, (ii) such time as all of the securities covered by the registration statement have been publicly sold by the holders, or (iii) such time as all of the securities covered by the registration statement may be sold pursuant to Rule 144(k) of the Securities Act. If the Company fails to achieve any of these requirements, it is obligated to pay each purchaser of the common stock sold in the Private Placement partial liquidated damages equal to 1% of the aggregate amount invested by such purchaser, and an additional 1% for each subsequent month this requirement is not met. As required under FASB Staff Position EITF 00-19-2, “Accounting for Registration Payment Arrangements,” the Company has evaluated the likelihood that a transfer of consideration will occur in connection with the registration payment arrangement, and has determined that as of the date of this filing, the payment of such liquidated damages is not probable, as that term is defined in FASB Statement No. 5, “Accounting for Contingencies.” As a result, the Company has not recorded a liability for this contingent obligation as of September 30, 2007. Any subsequent accruals of a liability or payments made under this registration rights agreement will be charged to earnings in the period they are recognized or paid.

The following table summarizes purchases of equity securities by the issuer and affiliated purchasers for the three months ended September 30, 2007:

The unaudited financial statements included in this interim report on Form 10-Q contain updated information from that which the Company furnished on October 31, 2007, including a reduction in the loss from discontinued operations of $19.0 million and the reclassification to current portion of the Company’s $10.0 million outstanding principal balance of its senior revolving credit facility.

The reduction in loss from discontinued operations resulted from the Company’s agreement to settle all outstanding litigation in the Derek Webb, et al (“Webb”) v. Mikohn Gaming Corporation matter. The Company had previously recorded

a charge related to this case of $43.7 million, consisting of the total judgment and legal fees. The reduction in loss reduces this charge to reflect the agreed upon $20.0 million settlement and reimbursement of $4.7 million in legal fees.

The Company’s outstanding principal balance of $10.0 million under its Senior Credit Facility was previously classified as long-term debt. The settlement of the Webb matter referred to above may have resulted in an Event of Default (as defined) under the Senior Credit Facility. The Company intends to refinance the $10 million in principal currently outstanding and has classified this balance as current in the accompanying financial statements for September 30, 2007.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized.


PROGRESSIVE GAMING INTERNATIONAL CORPORATION, Registrant

By:		/s/ HEATHER A. ROLLO
		Heather A. Rollo Executive Vice President, Chief Financial Officer and Treasurer (on behalf of the Registrant and as principal financial officer) November 9, 2007


41,993,588	as of	November 5, 2007
(Amount Outstanding)		(Date)


		Page
Part I FINANCIAL INFORMATION		3

Item 1. Consolidated Financial Statements		3

Consolidated Balance Sheets at September 30, 2007 (Unaudited) and December 31, 2006		3

Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2007 and 2006		4

Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and Nine Months Ended September 30, 2007 and 2006		5

Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2007 and 2006		6

Notes to Consolidated Financial Statements (Unaudited)		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		33

Item 3. Quantitative and Qualitative Disclosures About Market Risk		40

Item 4. Controls and Procedures		40

Part II OTHER INFORMATION		41

Item 1. Legal Proceedings		41

Item 1A. Risk Factors		43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		54

Item 5. Other Information		54

Item 6. Exhibits		56

Signatures/Certifications		58


	September 30,			December 31,
(Amounts in thousands, except share and per share data)	2007			2006
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	30,278		$	7,183
Accounts receivable, net of allowance for doubtful accounts of $957 and $943		20,135			17,818
Contract sales receivable, net of allowance for doubtful accounts of $3,174 and $1,529		743			6,407
Inventories, net of reserves of $695 and $1,040		5,935			11,486
Prepaid expenses		3,129			4,447

Total current assets		60,220			47,341
Contract sales and notes receivable, net		—			164
Property and equipment, net		4,296			5,456
Intangible assets, net		26,327			58,885
Goodwill		44,231			58,014
Noncurrent assets of discontinued operations		2,811			—
Other assets		12,430			16,326

Total assets	$	150,315		$	186,186

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	6,754		$	11,047
Customer deposits		1,622			2,113
Current portion of long-term debt and other liabilities, net of unamortized discount of $308 and $0		54,704			128
Accrued liabilities		11,702			10,038
Deferred revenues and license fees		3,239			4,332
Accrued charge for settlement of litigation		24,677			—
Current liabilities of discontinued operations		6,303			—

Total current liabilities		109,001			27,658
Long-term debt and notes payable, net of unamortized discount of $0 and $585		—			62,051
Noncurrent liabilities of discontinued operations		1,309			—
Other long-term liabilities		3,114			694
Deferred tax liability		698			11,856

Total liabilities		114,122			102,259


Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.10 par value, 5,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.10 par value, 100,000,000 shares authorized and 41,993,509 and 34,774,154 shares issued and outstanding		4,199			3,477
Additional paid-in capital		261,506			229,048
Other comprehensive income		5,520			3,601
Accumulated deficit		(233,209	)		(150,510	)

Subtotal		38,016			85,616
Less treasury stock, 317,174 and 293,692 shares, at cost		(1,823	)		(1,689	)

Total stockholders’ equity		36,193			83,927

Total liabilities and stockholders’ equity	$	150,315		$	186,186


(Amounts in thousands, except per share amounts)	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Revenues	$	18,324		$	14,159		$	51,874		$	40,164
Cost of revenues		8,190			5,769			23,841			19,685

Gross profit		10,134			8,390			28,033			20,479

Selling, general and administrative expense		6,935			7,111			22,097			28,831
Research and development		2,782			2,790			7,791			8,174
Depreciation and amortization		1,942			1,754			5,481			5,070

Total operating expenses		11,659			11,655			35,369			42,075

Operating loss		(1,525	)		(3,265	)		(7,336	)		(21,596	)
Interest expense, net		(2,431	)		(2,110	)		(8,978	)		(5,614	)
Loss on early retirement of debt		(783	)		—			(783	)		—

Loss from continuing operations before income tax benefit		(4,739	)		(5,375	)		(17,097	)		(27,210	)
Income tax benefit		—			—			—			—

Loss from continuing operations		(4,739	)		(5,375	)		(17,097	)		(27,210	)
(Loss) income from discontinued operations, net of tax of $11.2 million		(34,998	)		2,124			(65,602	)		751

Net loss	$	(39,737	)	$	(3,251	)	$	(82,699	)	$	(26,459	)

Weighted average common shares:
Basic		38,335			34,590			36,010			34,473

Diluted		38,335			35,389			36,010			35,343

Income (loss) per share:
Basic and diluted income (loss) per share
Loss from continuing operations	$	(0.12	)	$	(0.15	)	$	(0.47	)	$	(0.79	)
(Loss) income from discontinued operations		(0.92	)		0.06			(1.83	)		0.02

Net loss	$	(1.04	)	$	(0.09	)	$	(2.30	)	$	(0.77	)


	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2007			2006			2007			2006
Net loss	$	(39,737	)	$	(3,251	)	$	(82,699	)	$	(26,459	)
Other comprehensive income net of tax:
Foreign currency translation gain		894			953			1,919			2,559

Comprehensive loss	$	(38,843	)	$	(2,298	)	$	(80,780	)	$	(23,900	)


	Nine Months Ended September 30,
(Amounts in thousands)	2007			2006
Cash flows from operating activities:
Net loss	$	(82,699	)	$	(26,459	)
Adjustments to reconcile net loss to net cash used in continuing operating activities:
Loss (income) from discontinued operations, net of tax		65,602			(751	)
Depreciation		1,147			969
Amortization		4,335			4,101
Provision for bad debts		4			131
Provision for obsolete and excess inventory		—			839
Amortization of debt discount and debt issue costs		2,344			1,153
Net loss on disposition of property and equipment		—			23
Stock-based compensation		2,658			5,298
Changes in assets and liabilities:
Accounts receivable		(2,818	)		(6,029	)
Contract sales and notes receivable		3,824			5,877
Inventories		457			(1,095	)
Prepaid expenses and other assets		(556	)		4,445
Trade accounts payable		(4,149	)		1,194
Accrued expenses and other current liabilities		565			2,843
Customer deposits, deferred revenue and other liabilities		(5,880	)		(1,850	)

Net cash used in continuing operating activities		(15,166	)		(9,311	)
Net cash (used in) provided by discontinued operating activities		(1,491	)		1,929

Net cash used in operating activities		(16,657	)		(7,382	)

Cash flows from investing activities:
Purchase of property and equipment		(1,177	)		(1,655	)
Purchase of minority investments		—			(6,000	)
Purchases of business operations, net of cash acquired		—			(599	)
Proceeds from sales of property and equipment		9			6
Purchases of intangible assets		(1,032	)		(4,201	)

Net cash used in continuing investing activities		(2,200	)		(12,449	)
Proceeds from sale of slot and table games segment		19,756			—
Net cash used in other discontinued investing activities		(142	)		(1,065	)

Net cash provided by (used in) discontinued investing activities		19,614			(1,065	)

Net cash provided by (used in) investing activities		17,414			(13,514	)

Cash flows from financing activities:
Principal payments on notes payable and long-term debt		(10,950	)		(114	)
Principal payments on capital leases		(5	)		(9	)
Proceeds from long-term debt and notes payable		3,200			15,136
Residual costs of equity offering		—			(151	)
Debt issuance costs		—			(2,039	)
Purchase of treasury stock		(134	)		(329	)
Proceeds from issuance of common stock		30,127			1,429

Net cash provided by continuing financing activities		22,238			13,923

Effect of exchange rate changes on cash and cash equivalents		100			(366	)
Increase (decrease) in cash and cash equivalents		23,095			(7,339	)
Cash and cash equivalents, beginning of period		7,183			14,081

Cash and cash equivalents, end of period	$	30,278		$	6,742


(Amounts in thousands)	September 30, 2007			December 31, 2006
	(Unaudited)
Current assets of discontinued operations	$	—		$	2,428
Noncurrent assets of discontinued operations:
Present value of minimum future payments due from purchaser		2,811			—
Intangible assets		—			32,721
Goodwill		—			12,762
Property and equipment		—			616

Total noncurrent assets of discontinued operations		2,811			46,099
Accrued charge for settlement of litigation		24,677			—
Current liabilities of discontinued operations		6,303			805
Noncurrent liabilities of discontinued operations		1,309			11,190

Net (liabilities) assets of discontinued operations	$	(29,478	)	$	36,532


(Amounts in thousands)
North America	$	14,722
Europe		26,560
Australia / Asia		2,949

Total goodwill	$	44,231


(Amounts in thousands)	Gross Carrying Amount		Accumulated Amortization			Net		Weighted-Average Amortization Period
Patent and trademark rights	$	6,016	$	(3,945	)	$	2,071	5 years
Software development costs		587		(110	)		477	5 years
Licensed technology		10,732		(1,696	)		9,036	10 years
Core technology and other proprietary rights		23,196		(8,453	)		14,743	6 years

Total	$	40,531	$	(14,204	)	$	26,327	7 years


(Amounts in thousands except per share amounts)	Basic			Diluted
For the three months ended September 30, 2007:
Loss from continuing operations	$	(4,739	)	$	(4,739	)
Loss from discontinued operations		(34,998	)		(34,998	)

Net loss	$	(39,737	)	$	(39,737	)

Weighted average common shares		38,335			38,335
Per share amount
Loss from continuing operations	$	(0.12	)	$	(0.12	)
Loss from discontinued operations		(0.92	)		(0.92	)

Net loss	$	(1.04	)	$	(1.04	)


For the three months ended September 30, 2006:
Loss from continuing operations	$	(5,375	)	$	(5,375	)
Income from discontinued operations		2,124			2,124

Net loss	$	(3,251	)	$	(3,251	)

Weighted average common shares		34,590			35,389
Per share amount
Loss from continuing operations	$	(0.15	)	$	(0.15	)
Income from discontinued operations		0.06			0.06

Net loss	$	(0.09	)	$	(0.09	)

For the nine months ended September 30, 2007:
Loss from continuing operations	$	(17,097	)	$	(17,097	)
Loss from discontinued operations		(65,602	)		(65,602	)

Net loss	$	(82,699	)	$	(82,699	)

Weighted average common shares		36,010			36,010
Per share amount
Loss from continuing operations	$	(0.47	)	$	(0.47	)
Loss from discontinued operations		(1.83	)		(1.83	)

Net loss	$	(2.30	)	$	(2.30	)

For the nine months ended September 30, 2006:
Loss from continuing operations	$	(27,210	)	$	(27,210	)
Income from discontinued operations		751			751

Net loss	$	(26,459	)	$	(26,459	)

Weighted average common shares		34,473			35,343
Per share amount
Loss from continuing operations	$	(0.79	)	$	(0.79	)
Income from discontinued operations		0.02			0.02

Net loss	$	(0.77	)	$	(0.77	)


	September 30, 2007 (Unaudited)
(Amounts in thousands)	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	28,042		$	—		$	2,236	$	—		$	30,278
Accounts receivable, net		13,327			9			6,799		—			20,135
Contracts receivable, net		399			—			344		—			743
Inventories, net		4,564			—			1,371		—			5,935
Prepaid expenses		2,622			—			507		—			3,129

Total current assets		48,954			9			11,257		—			60,220
Property and equipment, net		3,156			131			1,009		—			4,296
Intangible assets, net		11,502			6,426			8,399		—			26,327
Goodwill		—			14,722			29,509		—			44,231
Investments in and loans to subsidiaries		45,479			—			—		(39,441	)		6,038
Other assets		6,392			—			—		—			6,392
Noncurrent assets of discontinued operations		2,811			—			—		—			2,811

Total assets	$	118,294		$	21,288		$	50,174	$	(39,441	)	$	150,315

LIABILITIES AND STOCKHOLDERS’ EQUITY
Other current liabilities	$	72,660		$	—		$	5,361	$	—		$	78,021
Accrued litigation charge		24,677			—			—		—			24,677
Current liabilities of discontinued operations		6,303			—			—		—			6,303
Intercompany transactions		(22,742	)		(10,588	)		33,330		—			—

Total current liabilities		80,898			(10,588	)		38,691		—			109,001
Long-term debt, net		—			—			—		—			—
Other liabilities, long term		2,847			—			267		—			3,114
Noncurrent liabilities of discontinued operations		1,309			—			—		—			1,309
Deferred tax liability		(2,953	)		—			3,651		—			698
Stockholders’ equity		36,193			31,876			7,565		(39,441	)		36,193

Total liabilities and stockholders’ equity	$	118,294		$	21,288		$	50,174	$	(39,441	)	$	150,315


	December 31, 2006
(Amounts in thousands)	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	4,236		$	—		$	2,947	$	—		$	7,183
Accounts receivable, net		13,398			101			4,319		—			17,818
Contracts receivable, net		4			5,505			898		—			6,407
Inventories, net		9,550			—			1,936		—			11,486
Other current assets		4,032			—			415		—			4,447

Total current assets		31,220			5,606			10,515		—			47,341
Contract sales and notes receivable, net		—			164			—		—			164
Property and equipment, net		4,560			131			765		—			5,456
Goodwill and intangible assets, net		40,916			37,696			38,287		—			116,899
Investments in and loans to subsidiaries		61,182			—			—		(55,145	)		6,037
Other assets		10,233			53			3		—			10,289

Total assets	$	148,111		$	43,650		$	49,570	$	(55,145	)	$	186,186

LIABILITIES AND STOCKHOLDERS’ EQUITY
Other current liabilities	$	23,136		$	73		$	4,449	$	—		$	27,658
Intercompany transactions		(29,860	)		(3,595	)		33,455		—			—

Total current liabilities		(6,724	)		(3,522	)		37,904		—			27,658
Long-term debt, net		62,051			—			—		—			62,051
Other liabilities, long term		621			—			73		—			694
Deferred tax liability		8,236			—			3,620		—			11,856
Stockholders’ equity		83,927			47,172			7,973		(55,145	)		83,927

Total liabilities and stockholders’ equity	$	148,111		$	43,650		$	49,570	$	(55,145	)	$	186,186


	Three Months Ended September 30, 2007 (Unaudited)
(Amounts in thousands)	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Elim- inations			Consolidated
Revenues	$	13,397		$	—			6,445		$	(1,518	)	$	18,324
Cost of sales		6,983			—			2,725			(1,518	)		8,190
Other operating expenses		8,406			(1	)		3,254			—			11,659

Operating income (loss)		(1,992	)		1			466			—			(1,525	)
Equity in earnings of subsidiaries		159			—			—			(159	)		—
Interest expense, net		(2,123	)		—			(308	)		—			(2,431	)
Loss on early retirement of debt		(783	)		—			—			—			(783	)

Income (loss) from continuing operations before income tax benefit		(4,739	)		1			158			(159	)		(4,739	)
Income tax benefit		—			—			—			—			—

Income (loss) from continuing operations		(4,739	)		1			158			(159	)		(4,739	)
Loss from discontinued operations, net of taxes		(34,998	)		(7,020	)		(192	)		7,212			(34,998	)

Net loss	$	(39,737	)	$	(7,019	)	$	(34	)	$	7,053		$	(39,737	)


	Three Months Ended September 30, 2006 (Unaudited)
(Amounts in thousands)	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Elim- Inations			Consolidated
Revenues	$	10,306		$	—		$	3,978		$	(125	)	$	14,159
Cost of sales		4,205			264			1,425			(125	)		5,769
Other operating expenses		7,133			1,494			3,028			—			11,655

Operating loss		(1,032	)		(1,758	)		(475	)		—			(3,265	)
Equity in loss of subsidiaries		(2,431	)		—			—			2,431			—
Interest expense, net		(1,912	)		78			(276	)		—			(2,110	)

Loss from continuing operations before income tax benefit		(5,375	)		(1,680	)		(751	)		2,431			(5,375	)
Income tax benefit		—			—			—			—			—

Loss from continuing operations		(5,375	)		(1,680	)		(751	)		2,431			(5,375	)
Income from discontinued operations, net of taxes		2,124			6,933			(12	)		(6,921	)		2,124

Net income (loss)	$	(3,251	)	$	5,253		$	(763	)	$	(4,490	)	$	(3,251	)


	Nine Months Ended September 30, 2007 (Unaudited)
(Amounts in thousands)	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Elim- inations			Consolidated
Revenues	$	34,186		$	3,281		$	18,635		$	(4,228	)	$	51,874
Cost of sales		16,136			3,316			8,617			(4,228	)		23,841
Other operating expenses		25,414			284			9,671			—			35,369

Operating (loss) income		(7,364	)		(319	)		347			—			(7,336	)
Equity in earnings of subsidiaries		(876	)		—			—			876			—
Interest expense, net		(8,074	)		—			(904	)		—			(8,978	)
Loss on early retirement of debt		(783	)		—			—			—			(783	)

Loss from continuing operations before income tax benefit		(17,097	)		(319	)		(557	)		876			(17,097	)
Income tax benefit		—			—			—			—			—

Loss from continuing operations		(17,097	)		(319	)		(557	)		876			(17,097	)
Loss from discontinued operations, net of taxes		(65,602	)		(14,728	)		(460	)		15,188			(65,602	)

Net loss	$	(82,699	)	$	(15,047	)	$	(1,017	)	$	16,064		$	(82,699	)


	Nine Months Ended September 30,
	2007				2006
Range of values:	Low		High		Low		High
Expected volatility	54.3	%	68.0	%	60.0	%	60.0	%
Expected dividends	—		—		—		—
Expected term (in years)	4.3		6.9		4.5		4.5
Risk free rate	4.47	%	5.16	%	4.68	%	5.21	%


(Share amounts in thousands)	Number of Shares		Weighted Average Exercise Price		Wtd. Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value ($000)
Options:
Outstanding at December 31, 2006	2,539		$	7.67
Granted	778			5.85
Exercised	(124	)		5.50
Forfeited or expired	(371	)		8.50

Outstanding at September 30, 2007	2,822		$	7.15	5.6	$	391

Exercisable at September 30, 2007	1,449		$	7.11	4.8	$	236


(Share amounts in thousands)	Number of Shares		Weighted Average Grant Date Fair Value
Restricted Stock Awards:
Outstanding at December 31, 2006	344		$	9.10
Granted	40			7.44
Vested	(66	)		9.21
Forfeited or cancelled	(33	)		10.90

Outstanding at September 30, 2007	285		$	8.63


(Share amounts in thousands)	Number of Shares		Weighted Average Exercise Price		Wtd. Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value ($000)
Outstanding at December 31, 2006	452		$	7.06
Granted	75			5.52
Exercised	(10	)		4.38
Forfeited or expired	(10	)		4.38

Outstanding at September 30, 2007	507		$	6.94	6.5	$	128

Exercisable at September 30, 2007	354		$	6.50	5.5	$	128


(Share amounts in thousands)	Number of Shares	Weighted Average Exercise Price		Wtd. Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value ($000)
Options and warrants assumed:
Outstanding at December 31, 2006	427	$	16.10
Granted	—		—
Exercised	—		—
Forfeited or expired	125		17.91

Outstanding and exercisable at September 30, 2007	302	$	15.39	1.2	$	—


	Nine Months Ended September 30, 2006 (Unaudited)
(Amounts in thousands)	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Elim- inations			Consolidated
Revenues	$	29,460		$	—		$	10,829		$	(125	)	$	40,164
Cost of sales		12,066			3,272			4,472			(125	)		19,685
Other operating expenses		30,383			2,463			9,229			—			42,075

Operating loss		(12,989	)		(5,735	)		(2,872	)		—			(21,596	)
Equity in loss of subsidiaries		(9,331	)		—			—			9,331			—
Interest expense, net		(4,890	)		78			(802	)		—			(5,614	)

Loss from continuing operations before income tax benefit		(27,210	)		(5,657	)		(3,674	)		9,331			(27,210	)
Income tax benefit		—			—			—			—			—

Loss from continuing operations		(27,210	)		(5,657	)		(3,674	)		9,331			(27,210	)
Income from discontinued operations, net of taxes		751			6,665			951			(7,616	)		751

Net loss	$	(26,459	)	$	1,008		$	(2,723	)	$	1,715		$	(26,459	)


	Nine Months Ended September 30,
(Amounts in thousands, except per share amounts)	2007		2006
2005 Equity Incentive Plan and predecessor plans:
Weighted average grant date fair value per share of options granted during the period	$	3.12	$	4.12
Total fair value of options that vested during the period		2,100		3,245
Total intrinsic value of options exercised during the period		154		332
Director Stock Option Plan:
Weighted average grant date fair value per share of options granted during the period	$	4.39	$	4.54
Total fair value of options that vested during the period		397		252
Total intrinsic value of options exercised during the period		47		—


(Amounts in thousands, except per share amounts)	Number of Shares		Wtd. Average Exercise Price
Warrants outstanding at December 31, 2006	898		$	7.95	⁽¹⁾
Granted	—			—
Exercised	—			—
Cancelled	(223	)		8.00

Warrants outstanding at September 30, 2007	675		$	7.69

Warrants exercisable at September 30, 2007	675		$	7.69


(in thousands)	2007		2006
Systems revenues and gross profit
Revenues	$	18,324	$	14,159
Cost of revenues		8,190		5,769

Gross profit	$	10,134	$	8,390

Systems installation base
Slot management		71,722		54,300
Table management		4,874		2,530


(Amounts in millions)
Net loss	$	(82.7	)
Loss on discontinued operations		65.6
Depreciation and amortization		5.5
Stock based compensation		2.7
Amortization of debt discount and issue costs		2.3
Other changes in assets and liabilities		(8.6	)
Net cash provided used in discontinued operations		(1.5	)

Net cash used in operations	$	(16.7	)


Period	(a) Total Number of Shares (or Units Purchased)(1)	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(2)	(d) Maximum Number (or approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans for Programs
August 2007	14,014	$	5.14	175,800		$	2,000,000
September 2007	882		5.11


Exhibit		Document Description
3.1		Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (No. 33-69076).

3.2		Amendment to Amended and Restated Articles of Incorporation incorporated by reference to Exhibit 3.1 to the Company’s Current Report on 8-K filed on March 28, 2006.

3.3		Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (No. 33-69076).

3.4		Certificate of Designation, Rights, Preferences, and Rights of Series A Junior Participating Preferred Stock of the Company, incorporated by reference to Exhibit A of Exhibit 3 to the Registration Statement on Form 8-A filed on August 2, 2000.

4.1		Specimen Certificate of common stock of the Company, incorporated by reference to the Company’s Registration Statement on Form S-8 filed on June 11, 2007.

4.2		Rights Agreement, dated June 14, 1999, by and between the Company and U.S. Stock Transfer Corporation, as the Rights Agent, incorporated by reference to Exhibit 3 to the Company’s Registration Statement on Form 8-A filed on August 2, 2000.

4.3		Form of Warrant, dated October 22, 2003, incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 dated January 9, 2004.

4.4		Warrant Agreement, dated August 22, 2001, by and among the Company and Firstar Bank, N.A., incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-3 filed on September 14, 2001.

4.5		Indenture, dated August 22, 2001, by and among the Company, Firstar Bank, N.A. and the Guarantors, incorporated by reference to Exhibit 4.8 of the Company’s Registration Statement on Form S-3 filed on September 14, 2001.

4.6		Guarantee, dated August 22, 2001, by and among the Guarantors named therein, incorporated by reference to Exhibit 4.9 of the Company’s Registration Statement on Form S-3 filed on September 14, 2001.

4.7		Pledge and Security Agreement, dated August 22, 2001, by and among the Company, Firstar Bank, N.A. and the Guarantors named therein, incorporated by reference to Exhibit 4.10 of the Company’s Registration Statement on Form S-3 filed on September 14, 2001.

4.8		Deed of Trust, Security Agreement and Fixture Filing with Assignment of Rents, dated August 22, 2001, by and among the Company, Stewart Title of Nevada and Firstar Bank, N.A., incorporated by reference to Exhibit 4.11 of the Company’s Registration Statement on Form S-3 filed on September 14, 2001.

4.9		Trademark Security Agreement, dated August 22, 2001, by and between the Company and Firstar Bank, N.A., incorporated by reference to Exhibit 4.12 of the Company’s Registration Statement on Form S-3 filed on September 14, 2001.

4.10		Patent Security Agreement, dated August 22, 2001, by and between the Company and Firstar Bank, N.A., incorporated by reference to Exhibit 4.13 of the Company’s Registration Statement on Form S-3 filed on September 14, 2001.

4.11		Copyright Security Agreement, dated August 22, 2001, by and between the Company and Firstar Bank, N.A., incorporated by reference to Exhibit 4.14 of the Company’s Registration Statement on Form S-3 filed on September 14, 2001.

4.12		Securities Purchase Agreement, dated as of August 13, 2007, by and among the Company and the Investors listed on the signature pages thereto, incorporated by reference to Exhibit 4.12 of the Company’s Registration Statement on Form S-3 filed on September 13, 2007.

4.13		Registration Rights Agreement, dated as of August 13, 2007, by and among the Company and the Investors listed on the signature pages to the Securities Purchase Agreement, incorporated by reference to Exhibit 4.13 of the Company’s Registration Statement on Form S-3 filed on September 13, 2007.


10.1		Waiver Letter and Amendment to Amended and Restated Financing Agreement, dated as of July 16, 2007, by Ableco Finance LLC, as Collateral Agent, and Ableco Finance LLC, as Administrative Agent, the Company and the Guarantors party thereto, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 9, 2007.

10.2		Amendment, Consent, and Waiver to Amended and Restated Financing Agreement, dated as of July 16, 2007, by Ableco Finance LLC, as Collateral Agent, and Ableco Finance LLC, as Administrative Agent, the Company and the Guarantors party thereto, incorporated by reference to Exhibit 10.3 to the Company’s Company’s Current Report on Form 8-K filed on October 4, 2007.

10.3		Purchase Agreement, dated as of September 26, 2007, by and between the Company and Shuffle Master, Inc., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on October 1, 2007.

10.4		Software Distribution License Agreement, dated as of September 26, 2007, by and between the Company and Shuffle Master, Inc., incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed on October 1, 2007.

10.5		Settlement Agreement and Mutual Release, dated November 5, 2007, by and among Derek Webb, Prime Table Games, Prime Table Games LLC, Hannah O’Donnell and the Company.

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.