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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2008

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

for the transition period from to

Commission File Number: 000-22752

PROGRESSIVE GAMING INTERNATIONAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Nevada		88-0218876
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification Number)

920 Pilot Road, Las Vegas, NV 89119

(Address of Principal Executive Office and Zip Code)

(702) 896-3890

(Registrant’s Telephone Number, Including Area Code)

(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 R No 

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

Large Accelerated Filer  Accelerated Filer R Non-Accelerated Filer (Do not check if a smaller reporting company)  Smaller Reporting Company 

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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


62,111,310	as of	August 8, 2008
(Amount Outstanding)		(Date)

PROGRESSIVE GAMING INTERNATIONAL CORPORATION

TABLE OF CONTENTS

	Page
Part I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements	3
Consolidated Balance Sheets at June 30, 2008 (Unaudited) and December 31, 2007	3
Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2008 and 2007	4
Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and Six Months Ended June 30, 2008 and 2007	5
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2008 and 2007	6
Notes to Consolidated Financial Statements (Unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	33
Item 4. Controls and Procedures	33
Part II OTHER INFORMATION	33
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 4. Submission of Matters to a Vote of Security Holders	46
Item 6. Exhibits	47
Signatures/Certifications	48

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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

PART I — FINANCIAL INFORMATION

Item 1. — Consolidated Financial Statements

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
(Amounts in thousands, except share data)	2008			2007
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	9,562		$	19,063
Restricted cash		475			—
Accounts receivable, net of allowance for doubtful accounts of $968 and $942		16,525			21,360
Current portion of contract sales receivable, net of allowance for doubtful accounts of $383 and $472		1,692			829
Inventories, net of reserves of $864 and $768		7,138			6,576
Prepaid expenses		2,397			1,643
Current assets of discontinued operations		—			680
Total current assets		37,789			50,151
Contract sales and notes receivable		1,959			—
Property and equipment, net		3,956			3,893
Intangible assets, net		23,203			25,646
Goodwill		42,637			42,373
Noncurrent assets of discontinued operations		—			2,131
Other assets		9,832			9,715
Total assets	$	119,376		$	133,909
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	5,656		$	6,234
Customer deposits		837			1,403
Current portion of long-term debt and other liabilities, net of unamortized discount of $21 and $148		29,979			29,852
Accrued liabilities		9,327			11,305
Deferred revenues and license fees		2,550			2,416
Current liabilities of discontinued operations		3,179			3,695
Total current liabilities		51,528			54,905
Noncurrent liabilities of discontinued operations		1,170			1,175
Other long-term liabilities		5,813			6,290
Deferred tax liability		—			588
Total liabilities		58,511			62,958
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 62,111,310 and 61,993,509 shares issued and outstanding		6,211			6,199
Additional paid-in capital		309,060			306,879
Other comprehensive income		5,147			4,734
Accumulated deficit		(257,718	)		(245,038	)
Subtotal		62,700			72,774
Less treasury stock, 322,792 and 317,174 shares, at cost		(1,835	)		(1,823	)
Total stockholders’ equity		60,865			70,951
Total liabilities and stockholders’ equity	$	119,376		$	133,909

See notes to unaudited consolidated financial statements.

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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Amounts in thousands, except per share amounts)	2008			2007			2008			2007
Revenues	$	18,062		$	18,841		$	33,278		$	33,550
Cost of revenues		8,004			7,989			15,893			15,651
Gross profit		10,058			10,852			17,385			17,899
Selling, general and administrative expense		8,190			7,606			16,891			15,162
Research and development		3,008			2,495			6,255			5,009
Depreciation and amortization		1,871			1,834			3,747			3,539
Total operating expenses		13,069			11,935			26,893			23,710
Operating loss		(3,011	)		(1,083	)		(9,508	)		(5,811	)
Interest expense, net		(1,067	)		(3,831	)		(2,031	)		(6,547	)
Loss from continuing operations before income taxes		(4,078	)		(4,914	)		(11,539	)		(12,358	)
Income tax (provision) benefit		(11	)		—			497			—
Loss from continuing operations		(4,089	)		(4,914	)		(11,042	)		(12,358	)
Loss from discontinued operations, net of tax of $0 for all periods presented		(192	)		(29,313	)		(1,638	)		(30,604	)
Net loss	$	(4,281	)	$	(34,227	)	$	(12,680	)	$	(42,962	)
Weighted average common shares:
Basic		62,054			34,847			62,026			34,810
Diluted		62,054			34,847			62,026			34,810
Basic and diluted loss per share:
Loss from continuing operations	$	(0.07	)	$	(0.14	)	$	(0.18	)	$	(0.36	)
Loss from discontinued operations		—			(0.84	)		(0.02	)		(0.87	)
Net loss	$	(0.07	)	$	(0.98	)	$	(0.20	)	$	(1.23	)

See notes to unaudited consolidated financial statements.

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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Amounts in thousands)	2008			2007			2008			2007
Net loss	$	(4,281	)	$	(34,227	)	$	(12,680	)	$	(42,962	)
Other comprehensive income, net of tax:
Foreign currency translation gains		149			828			413			1,025
Comprehensive loss	$	(4,132	)	$	(33,399	)	$	(12,267	)	$	(41,937	)

See notes to unaudited consolidated financial statements.

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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended
	June 30,
(Amounts in thousands)	2008			2007
Cash flows from operating activities:
Net loss	$	(12,680	)	$	(42,962	)
Adjustments to reconcile net loss to net cash used in continuing operating activities:
Loss from discontinued operations, net of tax		1,638			30,604
Depreciation		720			591
Amortization		3,027			2,948
Provision for bad debts		227			20
Provision for obsolete and excess inventory		122			37
Amortization of debt discount and debt issue costs		281			1,159
Net gain on disposition of property and equipment		(3	)		—
Stock-based compensation		1,904			1,743
Changes in operating assets and liabilities:
Accounts receivable		4,820			4,945
Contract sales and notes receivable		(18	)		287
Inventories		(584	)		(151	)
Prepaid expenses and other assets		(1,017	)		910
Trade accounts payable		(790	)		(1,269	)
Accrued expenses and other current liabilities		(1,652	)		(4,811	)
Customer deposits, deferred revenue and other liabilities		(971	)		(59	)
Deferred taxes		(581	)		—
Net cash used in continuing operating activities		(5,557	)		(6,008	)
Net cash (used in) provided by discontinued operating activities		(2,128	)		304
Net cash used in operating activities		(7,685	)		(5,704	)
Cash flows from investing activities:
Purchases of property and equipment		(815	)		(409	)
Proceeds from sales of property and equipment		4			9
Purchases of intangible assets		(526	)		(517	)
Net cash used in continuing investing activities		(1,337	)		(917	)
Net cash used in discontinued investing activities		—			(142	)
Net cash used in investing activities		(1,337	)		(1,059	)
Cash flows from financing activities:
Principal payments on notes payable and long-term debt		—			(114	)
Principal payments on capital leases		—			(3	)
Proceeds from long-term debt and notes payable		—			3,200
Increase in restricted cash		(475	)		—
Debt issuance costs		(101	)		—
Residual costs of equity offering		(13	)		—
Purchase of treasury stock		(11	)		(58	)
Proceeds from issuance of common stock		—			776
Net cash (used in) provided by continuing financing activities		(600	)		3,801
Effect of exchange rate changes on cash and cash equivalents		121			32
Decrease in cash and cash equivalents		(9,501	)		(2,930	)
Cash and cash equivalents, beginning of period		19,063			7,183
Cash and cash equivalents, end of period	$	9,562		$	4,253

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

	Six Months Ended
	June 30,
(Amounts in thousands)	2008		2007
Supplemental disclosure of cash flows information:
Cash paid for interest	$	2,171	$	3,303
Cash paid for state and federal taxes	$	12	$	14
Intellectual property acquired through financing	$	—	$	6,716

See notes to unaudited consolidated financial statements.

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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

1. GENERAL

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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 June 30, 2008, and the results of its operations for the three and six months ended June 30, 2008 and 2007, and cash flows for the six months ended June 30, 2008 and 2007. The results of operations for the three and six months ended June 30, 2008 are not necessarily indicative of the results to be expected for the entire year.

2. 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 generated net losses from operations of $12.7 million during the six months ended June 30, 2008, and the Company has an accumulated deficit of $257.7 million at June 30, 2008. The Company’s net cash and cash equivalents balance of $9.6 million at June 30, 2008 reflects a decrease of $9.5 million compared to December 31, 2007. This change resulted from net cash used in continuing operating activities of $5.6 million, including cash payments for legal, accounting and other advisors related to the Company's November 2007 follow-on equity offering, net cash used in continuing investing activities of $1.3 million related to ongoing investments in intellectual property and property and equipment used in operations, net cash used in financing activities of $0.6 million, and net cash used in discontinued operations of $2.1 million for payments of certain liabilities related to the disposed slot and table games divisions. These decreases in cash were partially offset by a $0.1 million increase in the effect of exchange rate changes on cash and cash equivalents.

At June 30, 2008, the Company had total cash and cash equivalents of $9.6 million and a net working capital deficit of $13.7 million. This net working capital deficit includes $30 million of outstanding 11.875% Senior Secured Notes due August 15, 2008. The Company intends to refinance its $30 million Senior Secured Notes through the completion of two financing transactions for which definitive agreements were entered into in early August. These transactions include (i) a senior secured credit facility of up to $27.5 million with Private Equity Management Group Financial Corporation (“PEM”), and (ii) a $15 million senior secured convertible note offering with International Game Technology (“IGT”). The credit facility with PEM is expected to consist of a revolving loan of up to $12.5 million and a term loan of $15 million. The Company expects to initially raise approximately $33 million from these financing transactions, which are expected to close by August 15, 2008, subject to certain closing condition. The Company believes that the proceeds from these two financing transactions will be sufficient to satisfy the $30 million Senior Secured Notes due August 15, 2008. Further, the Company believes any other obligations arising in the next 12 months can be satisfied through cash on hand, cash expected to be generated from operations during fiscal 2008, and expected cash availability under the PEM revolver. These financing arrangements include financial covenants including adjusted EBITDA, debt service coverage ratios, tangible net worth and liquidity requirements, as well as restrictions on additional indebtedness and the ability to issue dividends. Both refinancing transactions include specific conditions that the Company must satisfy prior to receiving the funds described in each respective loan and financing agreement. These conditions include entry into certain additional agreements and consents of third parties over which the Company has no control. If the Company is unable to satisfy each of the conditions to funding the loan and financing agreements or one or both of the other parties to those agreements refuses to deliver the funds described in their loan and financing agreements before the maturity date of its senior secured Notes, the Company will be unable to repay the outstanding principal and interest related to the Notes.

If the refinancing transactions fail to close on the maturity date of the outstanding secured Notes, the Company’s existing noteholders will have the right to foreclose upon the collateral securing that debt and any such actions may ultimately result in the Company’s inability to continue as a going concern.

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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 June 30, 2008, the Company had deposits with financial institutions in excess of FDIC insured limits by $10.1 million.

Restricted Cash. Restricted cash consists of cash and cash equivalents pledged to secure the Company’s revolving line of credit for employee travel and similar expenses.

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 using the straight-line method over the useful lives of the assets, which range from 3 to 10 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 annually 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 and license fees. Intangible assets 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 20 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 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 primarily represent advance royalty payments, minority investments, unamortized loan fees 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.

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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” 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 follows:

Systems. The Company’s systems segment offers a suite of products that when combined, supports many facets 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 “SOP” 97- 2, “Software Revenue Recognition”. 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 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 and 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 fair value, 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.

Slot and Table Games. Prior to the Company’s disposal of the slot and table games segment, the Company’s revenue recognition policies for these operations 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.

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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”, 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.

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 outstanding options issued to consultants at June 30, 2008 was 25,000, with a range of exercise prices from $4.55 to $6.88 per share. The fair value of these option awards has been fully amortized to expense.

During the year ended December 31, 2006, the Company issued warrants to purchase an aggregate of 350,000 shares of the Company’s common stock to Ableco Holding LLC (“Ableco”) representing a portion of the debt issue costs related to the Company’s long-term debt arrangements. At the date of issuance, these warrants had a term of seven years. The fair value of these warrants was recorded as a prepaid loan fee, and was being recognized as a charge to the statement of operations on the straight-line method over the term of the debt facility. As a result of the termination of this debt facility, the unamortized fair value of these warrants was written off during the fourth quarter of 2007. These warrants contain anti-dilution provisions requiring certain adjustments when dilutive equity transactions occur. At June 30, 2008, the number of shares issuable under outstanding warrants held by Ableco was 476,375, with exercise prices ranging from $4.56 to $6.10.

From time to time, the Company issues stock purchase warrants to third parties in consideration for intellectual property licensing arrangements. During the year ended December 31, 2006, the Company issued warrants to purchase 325,000 shares of the Company’s common stock at an exercise price of $7.50 per share in exchange for certain intellectual property rights licensed from Harrah’s, all of which are outstanding at June 30, 2008. The outstanding warrants issued have a weighted average 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.

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. Effective January 1, 2007, the Company adopted FIN No. 48,”Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.

The Company has assessed all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position's sustainability and is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit are subject to change as new information becomes available.

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.

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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 operating statement amounts reported in the prior period have been reclassified to conform to the current period presentation.

Recently Issued Accounting Standards. In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), "Business Combinations". SFAS No. 141(R) replaces SFAS No. 141, "Business Combinations", but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS No. 141(R) expands on the disclosures previously required by SFAS No. 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any noncontrolling interests in the acquired business. SFAS No. 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS No. 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. The Company will adopt this statement as of January 1, 2009. Management is currently evaluating the impact SFAS No. 141(R) will have on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51.” This statement establishes accounting and reporting standards for ownership interest in subsidiaries held by parties other than the parent and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amount attributable to both the parent and the noncontrolling interests. The statement also establishes reporting requirements that provide sufficient disclosure that clearly identify and distinguish between the interest of the parent and those of the noncontrolling owners. This statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”. SFAS No. 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. Statement 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 has been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows. Statement 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the impact SFAS No. 161 will have on its consolidated financial statements.

In May 2008, the FASB issued FSP No. APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)". This FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and will be applied retrospectively to all periods presented. The Company is evaluating the impact of adopting the provisions of this FSP on our consolidated financial statements.

In May 2008, FASB issued SFAS No.162, “The Hierarchy of Generally Accepted Accounting Principles”. The pronouncement mandates the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days following SEC approval. The Company does not believe this pronouncement will impact its financial statements.

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In May 2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60”. The scope of the statement is limited to financial guarantee insurance (and reinsurance) contracts. The pronouncement is effective for fiscal years beginning after December 31, 2008. The Company does not believe this pronouncement will impact its financial statements.

4. DISCONTINUED OPERATIONS

On September 28, 2007, the Company completed the sale of its table games division to Shuffle Master, Inc. Upon closing, the Company received $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 from the date of sale.

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 June 30, 2008 are presented below, along with comparable carrying values of the assets and liabilities at December 31, 2007.

	June 30,			December 31,
	2008			2007
(Amounts in thousands)	(Unaudited)
Current assets of discontinued operations (1)	$	—		$	680
Noncurrent assets of discontinued operations (present value of minimum future payments due from purchaser) (2)		—			2,131
Current liabilities of discontinued operations		3,179			3,695
Noncurrent liabilities of discontinued operations		1,170			1,175
Net liabilities of discontinued operations (3)	$	(4,349	)	$	(2,059	)

(1) Current assets of discontinued operations consisting of contracts receivable of $0.7 million were reclassified to contracts receivable of continuing operations.

(2) Noncurrent assets of discontinued operations consisting of long term contracts receivable of $2 million were reclassified to contracts receivable of continuing operations.

(3) Liabilities of discontinued operations consist of settlement charges payable of $1.9 million, future royalties payable of $1.9, and other payables of $0.5 million.

The changes in the liabilities of discontinued operations during the six months ended June 30, 2008, are identified below:

	June 30,
	2008
(Amounts in thousands)	(Unaudited)
Liabilities of discontinued operations as of December 31, 2007	$	4,870
Payment of accrued liabilities charged to expense		(1,372	)
Additional royalty liability accrual		794
Additional legal liability accrual		57
Liabilities of discontinued operations as of June 30, 2008	$	4,349

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Amounts in thousands)	2008			2007			2008			2007
Loss from discontinued operations before income tax benefit	$	(192	)	$	(692	)	$	(1,638	)	$	(1,983	)
Income tax benefit		—			—			—			—
Loss on disposal		—			(39,811	)		—			(39,811	)
Income tax benefit on disposal		—			11,190			—			11,190
Total	$	(192	)	$	(29,313	)	$	(1,638	)	$	(30,604	)

5. FAIR VALUE MEASUREMENTS

The Company adopted SFAS No. 157, “Fair Value Measurements” on January 1, 2008. SFAS No. 157, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or none recurring basis. SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1. Observable inputs such as quoted prices in active markets;

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets measured at fair value on a recurring and nonrecurring basis are as follows:

(Amounts in thousands)	Fair Value at June 30, 2008		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash, restricted cash and cash equivalents (level 1, recurring)	$	10,037	$	10,037	$	—	$	—
Investment in Magellan Technology Pty Ltd.(level 3, nonrecurring)		5,140		—		—		5,140
Total	$	15,177	$	10,037	$	—	$	5,140

The Company’s investment in Magellan Technology Pty Ltd. is measured at fair value on a nonrecurring basis, and was last measured at December 31, 2007. There were no gains or losses recorded for fair value instruments during the six months ended June 30, 2008.

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6. RECEIVABLES

Accounts receivable at June 30, 2008 and December 31, 2007 consist of the following:

	June 30,			December 31,
	2008			2007
(Amounts in thousands)	(Unaudited)
Trade accounts	$	16,978		$	21,566
Other		515			736
Subtotal		17,493			22,302
Less: allowance for doubtful accounts		(968	)		(942	)
Net	$	16,525		$	21,360

Contract sales and notes receivable at June 30, 2008 and December 31, 2007 consist of the following:

	June 30,			December 31,
	2008			2007
(Amounts in thousands)	(Unaudited)
Contract sales and notes receivable	$	4,034		$	1,301
Less: allowance for doubtful accounts		(383	)		(472	)
Net		3,651			829
Current portion	$	1,692		$	829

7. INVENTORIES

Inventories at June 30, 2008 and December 31, 2007 consist of the following:

	June 30,			December 31,
	2008			2007
(Amounts in thousands)	(Unaudited)
Raw materials	$	5,403		$	5,013
Finished goods		2,431			2,315
Work in progress		168			16
Subtotal		8,002			7,344
Less: reserve for obsolete inventory		(864	)		(768	)
Net	$	7,138		$	6,576

8. GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with SFAS No. 142 and SFAS No. 144, (“Accounting for the Impairment or Disposal of Long-Lived Assets”) the Company performs an impairment analysis on all of its long-lived and intangible assets on an annual basis 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. For indefinite lived assets including goodwill, management performs an annual valuation to determine if any impairment has occurred. The valuation test as of October 1, 2007 did not indicate any impairment.

The net carrying value of goodwill and other intangible assets at June 30, 2008 is comprised of the following (unaudited):

(Amounts in thousands)
Goodwill	$	42,637
Definite life intangible assets (detail below)		23,203
Total	$	65,840

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Definite life intangible assets as of June 30, 2008, subject to amortization, are comprised of the following (unaudited):

								Weighted-Average
	Gross Carrying		Accumulated					Amortization
(Amounts in thousands)	Amount		Amortization			Net		Period
Patent and trademark rights	$	13,818	$	(5,130	)	$	8,688	9 years
Software development costs		836		(472	)		364	3 years
Licensed technology		4,064		(1,643	)		2,421	5 years
Core technology and other proprietary rights		23,184		(11,454	)		11,730	6 years
Total	$	41,902	$	(18,699	)	$	23,203	7 years

Amortization expense for definite life intangible assets of $1.5 million and $3.0 million compared to $1.6 million and $2.9 million was included in loss from continuing operations for the three and six months ended June 30, 2008 and 2007, respectively. Prior to the disposal of the slot and table games segment, amortization expense for definite life intangible assets of $0.4 million and $0.6 million was included in loss from discontinued operations for the three and six months ended June 30, 2007.

During the six months ended June 30, 2008 cash additions increased definite life intangible assets by $0.5 million.

The net carrying value of goodwill as of June 30, 2008, is included in the Company’s geographic operations as follows (unaudited):

(Amounts in thousands)
North America	$	14,722
Europe		24,655
Australia / Asia		3,260
Total goodwill	$	42,637

During the six months ended June 30, 2008, the net carrying value of goodwill increased by $0.3 million as a result of changes in the foreign currency rates used to translate the balance sheet of the Company’s international operations.

9. OTHER ASSETS

Other assets at June 30, 2008 and December 31, 2007 consist of the following:

	June 30,		December 31,
	2008		2007
(Amounts in thousands)	(Unaudited)
Deposits	$	377	$	241
Minority investments		5,178		5,178
Royalties		4,140		4,262
Prepaid loan fees and other		137		34
Total	$	9,832	$	9,715

10. ACCRUED LIABILITIES

Accrued liabilities at June 30, 2008 and December 31, 2007 consist of the following:

	June 30,		December 31,
	2008		2007
(Amounts in thousands)	(Unaudited)
Payroll and related costs	$	4,221	$	5,601
Interest		699		863
Restructuring and severance expense		396		197
Legal and tax		1,162		1,330
Patent liability		1,680		2,800
Marketing		465		—
Other		704		514
Total	$	9,327	$	11,305

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11. LONG-TERM DEBT AND SHORT-TERM BORROWINGS

During November 2007, the Company redeemed $15 million of its 11.875% Senior Secured Notes due 2008 (the “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 is $30 million.

At June 30, 2008, all of the Company’s debt had a maturity of less than one year.

At June 30, 2008, the Company is in compliance with all debt covenants.

The remaining $30 million of the Company’s 11.875% Senior Secured Notes is due August 15, 2008.

12. COMMITMENTS AND CONTINGENCIES

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.

The Company 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 through 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, 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 million within five days of the execution of the settlement agreement, $1 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, 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 intends to defend this claim vigorously. 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 the Company 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 trial was then postponed and the parties agreed to participate in mediation in April 2008. Plaintiffs were seeking losses of approximately $0.5 million. In April 2008, the parties agreed to settle the case for a sum of $0.3 million paid over three installments, with the final payment due in November 2008.

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 if any of 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.

13. INCOME TAXES

For the three months and six months ended June 30, 2008, the Company recognized a tax provision of $0.01 million and a tax benefit $0.5 million, respectively, related to its foreign operations. The Company will continue to review the tax losses and income generated in the future by the foreign subsidiaries to evaluate whether they should be reflected as a benefit or provision in the Company’s consolidated financial statements. For the three months and six months ended June 30, 2007, the Company did not recognize a tax benefit or provision due to its net operating loss position.

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14. LOSS PER SHARE

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

(Amounts in thousands except per share amounts)	Basic			Diluted
For the three months ended June 30, 2008:
Loss from continuing operations	$	(4,089	)	$	(4,089	)
Loss from discontinued operations		(192	)		(192	)
Net loss	$	(4,281	)	$	(4,281	)

Weighted average common shares		62,054			62,054
Per share amount
Loss from continuing operations	$	(0.07	)	$	(0.07	)
Loss from discontinued operations		—			—
Net loss	$	(0.07	)	$	(0.07	)

For the three months ended June 30, 2007:
Loss from continuing operations	$	(4,914	)	$	(4,914	)
Loss from discontinued operations		(29,313	)		(29,313	)
Net loss	$	(34,227	)	$	(34,227	)

Weighted average common shares		34,847			34,847
Per share amount
Loss from continuing operations	$	(0.14	)	$	(0.14	)
Loss from discontinued operations		(0.84	)		(0.84	)
Net loss	$	(0.98	)	$	(0.98	)

For the six months ended June 30, 2008:
Loss from continuing operations	$	(11,042	)	$	(11,042	)
Loss from discontinued operations		(1,638	)		(1,638	)
Net loss	$	(12,680	)	$	(12,680	)

Weighted average common shares		62,026			62,026
Per share amount
Loss from continuing operations	$	(0.18	)	$	(0.18	)
Loss from discontinued operations		(0.02	)		(0.02	)
Net loss	$	(0.20	)	$	(0.20	)

For the six months ended June 30, 2007:
Loss from continuing operations	$	(12,358	)	$	(12,358	)
Loss from discontinued operations		(30,604	)		(30,604	)
Net loss	$	(42,962	)	$	(42,962	)

Weighted average common shares		34,810			34,810
Per share amount
Loss from continuing operations	$	(0.36	)	$	(0.36	)
Loss from discontinued operations		(0.87	)		(0.87	)
Net loss	$	(1.23	)	$	(1.23	)

Dilutive stock options and warrants of 0.1 million and 0.4 million for the three and six months ended June 30, 2007, have not been included in the computation of diluted net loss per share as their effect would be antidilutive.

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15. RELATED PARTY TRANSACTIONS

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 six months ended June 30, 2008 and 2007, the Company had no sales transactions with MSG.

From time to time, the Company purchases signage and sign related products from MSG in conjunction with its progressive jackpot systems. During the six months ended June 30, 2008, the Company had no purchase transactions with MSG. During the six months ended June 30, 2007, the Company purchased $0.1 million in inventory 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. From time to time, the Company purchases inventory from Magellan in connection with the Company’s exclusive global master license to use Magellan’s RFID technology in gaming worldwide. The Company purchased inventory of $0.5 million and $0.1 million from Magellan during the six months ended June 30, 2008 and 2007 respectively.

16. SEGMENT REPORTING

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.

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 months and six months ended June 30, 2008 and 2007 consists of (unaudited):

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	Three Months Ended						Six Months Ended
(Amounts in thousands)	June 30,						June 30,
Geographic Operations	2008			2007			2008			2007
Revenues:
North America	$	8,291		$	11,449		$	17,927		$	21,360
Australia / Asia		4,856			2,922			6,740			4,945
Europe		4,915			4,470			8,611			7,245
Total	$	18,062		$	18,841		$	33,278		$	33,550
(Loss) income from continuing operations before income taxes:
North America	$	(6,739	)	$	(4,659	)	$	(12,649	)	$	(11,643	)
Australia / Asia		2,636			(312	)		2,487			119
Europe		25			57			(1,377	)		(834	)
Total	$	(4,078	)	$	(4,914	)	$	(11,539	)	$	(12,358	)
Depreciation and amortization:
North America	$	1,189		$	1,187		$	2,378		$	2,237
Australia / Asia		53			39			110			76
Europe		629			608			1,259			1,226
Total	$	1,871		$	1,834		$	3,747		$	3,539

17. GUARANTOR FINANCIAL STATEMENTS

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:

CONDENSED CONSOLIDATING BALANCE SHEETS

	June 30, 2008 (Unaudited)
							Non-
				Guarantor			Guarantor
(Amounts in thousands)	Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	5,296		$	—		$	4,266	$	—		$	9,562
Restricted cash		475			—			—		—			475
Accounts receivable, net		7,880			—			8,645		—			16,525
Contracts receivable, net		1,692			—			—		—			1,692
Inventories, net		5,472			—			1,666		—			7,138
Prepaid expenses		1,793			—			604		—			2,397
Total current assets		22,608			—			15,181		—			37,789
Contract sales and notes receivable		1,959			—			—		—			1,959
Property and equipment, net		3,026			131			799		—			3,956
Intangible assets, net		11,613			5,207			6,383		—			23,203
Goodwill		—			14,722			27,915		—			42,637
Investments in and loans to subsidiaries		44,787			—			—		(39,609	)		5,178
Other assets		4,654			—			—		—			4,654
Total assets	$	88,647		$	20,060		$	50,278	$	(36,609	)	$	119,376
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other current liabilities		42,082			—			6,267		—			48,349
Current liabilities of discontinued operations		3,179			—			—		—			3,179
Intercompany transactions		(24,226	)		(11,003	)		35,229		—			—
Total current liabilities		21,035			(11,003	)		41,496		—			51,528
Other liabilities, long term		5,577			—			236		—			5,813
Noncurrent liabilities of discontinued operations		1,170			—			—		—			1,170
Stockholders’ equity		60,865			31,063			8,546		(39,609	)		60,865
Total liabilities and stockholders’ equity	$	88,647		$	20,060		$	50,278	$	(39,609	)	$	119,376

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CONDENSED CONSOLIDATING BALANCE SHEETS

	December 31, 2007
							Non-
				Guarantor			Guarantor
(Amounts in thousands)	Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	16,200		$	—		$	2,863	$	—		$	19,063
Accounts receivable, net		12,436			—			8,924		—			21,360
Contracts receivable, net		829			—			—		—			829
Inventories, net		4,848			—			1,728		—			6,576
Prepaid expenses		1,195			—			448		—			1,643
Current assets of discontinued operations		680			—			—		—			680
Total current assets		36,188			—			13,963		—			50,151
Property and equipment, net		3,029			130			734		—			3,893
Intangible assets, net		12,047			6,020			7,579		—			25,646
Goodwill		—			14,723			27,650		—			42,373
Investments in and loans to subsidiaries		43,551			—			—		(38,373	)		5,178
Other assets		4,537			—			—		—			4,537
Noncurrent assets of discontinued operations		2,131			—			—		—			2,131
Total assets	$	101,483		$	20,873		$	49,926	$	(38,373	)	$	133,909
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other current liabilities	$	45,556		$	—		$	5,654	$	—		$	51,210
Current liabilities of discontinued operations		3,695			—			—		—			3,695
Intercompany transactions		(25,927	)		(11,003	)		36,930		—			—
Total current liabilities		23,324			(11,003	)		42,584		—			54,905
Other liabilities, long term		6,033			—			257		—			6,290
Noncurrent liabilities of discontinued operations		1,175			—			—		—			1,175
Deferred tax liability		—			—			588		—			588
Stockholders’ equity		70,951			31,876			6,497		(38,373	)		70,951
Total liabilities and stockholders’ equity	$	101,483		$	20,873		$	49,926	$	(38,373	)	$	133,909

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

	Three Months Ended June 30, 2008 (Unaudited)
							Non-
				Guarantor			Guarantor
(Amounts in thousands)	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	9,555		$	—		$	9,771		$	(1,264	)	$	18,062
Cost of revenues		6,212			—			3,056			(1,264	)		8,004
Other operating expenses		8,915			406			3,748			—			13,069
Operating income (loss)		(5,572	)		(406	)		2,967			—			(3,011	)
Equity in earnings of subsidiaries		2,255			—			—			(2,255	)		—
Interest expense, net		(761	)		—			(306	)		—			(1,067	)
Income (loss) from continuing operations before income tax benefit		(4,078	)		(406	)		2,661			(2,255	)		(4,078	)
Income tax provision		(11	)		—			(11	)		11			(11	)
Income (loss) from continuing operations		(4,089	)		(406	)		2,650			(2,244	)		(4,089	)
Loss from discontinued operations, net of taxes		(192	)		—			—			—			(192	)
Net income (loss)	$	(4,281	)	$	(406	)	$	2,650		$	(2,244	)	$	(4,281	)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

	Three Months Ended June 30, 2007 (Unaudited)
							Non-
				Guarantor			Guarantor
(Amounts in thousands)	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	14,159		$	—		$	7,392		$	(2,710	)	$	18,841
Cost of revenues		6,775			—			3,924			(2,710	)		7,989
Other operating expenses		8,518			—			3,417			—			11,935
Operating loss		(1,134	)		—			51			—			(1,083	)
Equity in loss of subsidiaries		(255	)		—			—			255			—
Interest expense, net		(3,525	)		—			(306	)		—			(3,831	)
Loss from continuing operations before income tax benefit		(4,914	)		—			(255	)		255			(4,914	)
Income tax benefit		—			—			—			—			—
Income (loss) from continuing operations		(4,914	)		—			(255	)		255			(4,914	)
Income (loss) from discontinued operations, net of taxes		(29,313	)		(7,588	)		62			7,526			(29,313	)
Net income (loss)	$	(34,227	)	$	(7,588	)	$	(193	)	$	7,781		$	(34,227	)

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

	Six Months Ended June 30, 2008 (Unaudited)
							Non-
				Guarantor			Guarantor
(Amounts in thousands)	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	20,006		$	—		$	15,351		$	(2,079	)	$	33,278
Cost of revenues		11,951			—			6,021			(2,079	)		15,893
Other operating expenses		18,478			813			7,602			—			26,893
Operating income (loss)		(10,423	)		(813	)		1,728			—			(9,508	)
Equity in earnings of subsidiaries		297			—			—			(297	)		—
Interest expense, net		(1,413	)		—			(618	)		—			(2,031	)
Income (loss) from continuing operations before income tax benefit		(11,539	)		(813	)		1,110			(297	)		(11,539	)
Income tax benefit		497			—			497			(497	)		497
Income (loss) from continuing operations		(11,042	)		(813	)		1,607			(794	)		(11,042	)
Loss from discontinued operations, net of taxes		(1,638	)		—			—			—			(1,638	)
Net income (loss)	$	(12,680	)	$	(813	)	$	1,607		$	(794	)	$	(12,680	)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

	Six Months Ended June 30, 2007 (Unaudited)
							Non-
				Guarantor			Guarantor
(Amounts in thousands)	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	20,789		$	3,281		$	12,190		$	(2,710	)	$	33,550
Cost of revenues		9,153			3,316			5,892			(2,710	)		15,651
Other operating expenses		17,008			285			6,417			—			23,710
Operating loss		(5,372	)		(320	)		(119	)		—			(5,811	)
Equity in loss of subsidiaries		(1,035	)		—			—			1,035			—
Interest expense, net		(5,951	)		—			(596	)		—			(6,547	)
Loss from continuing operations before income tax benefit		(12,358	)		(320	)		(715	)		1,035			(12,358	)
Income tax benefit		—			—			—			—			—
Income (loss) from continuing operations		(12,358	)		(320	)		(715	)		1,035			(12,358	)
Income (loss) from discontinued operations, net of taxes		(30,604	)		(7,708	)		(268	)		7,976			(30,604	)
Net income (loss)	$	(42,962	)	$	(8,028	)	$	(983	)	$	9,011		$	(42,962	)

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CONDENSED CONSOLIDATING CASH FLOW STATEMENTS

	Six Months Ended June 30, 2008 (Unaudited)
						Non-
				Guarantor		Guarantor
(Amounts in thousands)	Parent			Subsidiaries		Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) continuing operating activities	$	(7,087	)	$	—	$	1,530		$	—	$	(5,557	)
Net cash used in discontinued operating activities		(2,128	)		—		—			—		(2,128	)
Net cash provided by (used in) operating activities		(9,215	)		—		1,530			—		(7,685	)
Cash flows from investing activities:
Purchase of property and equipment		(564	)		—		(251	)		—		(815	)
Proceeds from sale of property and equipment		—			—		4			—		4
Purchases of intangible assets		(526	)		—		—			—		(526	)
Net cash used in continuing investing activities		(1,090	)		—		(247	)		—		(1,337	)
Net cash provided by (used in) discontinued investing activities		—			—		—			—		—
Net cash used in investing activities		(1,090	)		—		(247	)		—		(1,337	)
Cash flows from financing activities:
Increase in restricted cash		(475	)		—		—			—		(475	)
Debt issuance costs		(101	)		—		—			—		(101	)
Residual costs of equity offering		(13	)		—		—			—		(13	)
Purchase of treasury stock		(11	)		—		—			—		(11	)
Net cash used in financing activities		(600	)		—		—			—		(600	)
Effect of exchange rate changes on cash and cash equivalents		—			—		121			—		121
Increase (decrease) in cash and cash equivalents		(10,905	)		—		1,404			—		(9,501	)
Cash and cash equivalents, beginning of period		16,201			—		2,862			—		19,063
Cash and cash equivalents, end of period	$	5,296		$	—	$	4,266		$	—	$	9,562

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS

	Six Months Ended June 30, 2007 (Unaudited)
							Non-
				Guarantor			Guarantor
(Amounts in thousands)	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) continuing operating activities	$	(4,252	)	$	332		$	(2,088	)	$	—	$	(6,008	)
Net cash provided by (used in) discontinued operating activities		(133	)		(332	)		769			—		304
Net cash used in operating activities		(4,385	)		—			(1,319	)		—		(5,704	)
Cash flows from investing activities:
Purchase of property and equipment		(267	)		—			(142	)		—		(409	)
Proceeds from sale of property and equipment		9			—			—			—		9
Purchases of intangible assets		(517	)		—			—			—		(517	)
Net cash used in continuing investing activities		(775	)		—			(142	)		—		(917	)
Net cash used in discontinued investing activities		(142	)		—			—			—		(142	)
Net cash used in investing activities		(917	)		—			(142	)		—		(1,059	)
Cash flows from financing activities:
Principal payments on long-term debt and capital leases		(114	)		—			(3	)		—		(117	)
Proceeds from long-term debt and notes payable		3,200			—			—			—		3,200
Purchase of treasury stock		(58	)		—			—			—		(58	)
Proceeds from issuance of common stock		776			—			—			—		776
Net cash provided by (used in) financing activities		3,804			—			(3	)		—		3,801
Effect of exchange rate changes on cash and cash equivalents		—			—			32			—		32
Decrease in cash and cash equivalents		(1,498	)		—			(1,432	)		—		(2,930	)
Cash and cash equivalents, beginning of period		4,236			—			2,947			—		7,183
Cash and cash equivalents, end of period	$	2,738		$	—		$	1,515		$	—	$	4,253

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18. STOCK-BASED COMPENSATION

The Company adopted SFAS No. 123R, “Share Based Payment” effective January 1, 2006. The total compensation expense relating to stock-based compensation follows (amount in thousands):

	Three Months Ended				Six Months Ended
(Amounts in thousands)	June 30,				June 30,
	(Unaudited)				(Unaudited)
	2008		2007		2008		2007
Selling, general and administrative	$	645	$	616	$	1,300	$	1,253
Research and development		195		165		406		308
Cost of revenues		97		78		198		158
Stock-based compensation expense charged to continuing operations		937		859		1,904		1,719
Stock-based compensation expense charged to discontinued operations		—		37		—		154
Total stock-based compensation expense	$	937	$	896	$	1,904	$	1,873

19. SUBSEQUENT EVENT

On August 4, 2008, the Company announced that it entered into definitive agreements for two financing transactions (the “Financing Transactions”), which include (i) a new senior secured credit facility with Private Equity Management Group Financial Corporation (“PEM”), for up to $27.5 million, which consists of a revolving loan of up to $12.5 million (the “Revolving Loan”) and a term loan of $15 million (the “Term Loan”), and (ii) a $15 million senior secured convertible note (the “Convertible Notes”) offering with International Game Technology (“IGT”). The Company expects to initially raise approximately $33 million from the Financing Transactions, which are subject to closing conditions and are expected to close by August 15, 2008. The Company intends to use the net proceeds from the Financing Transactions to retire its remaining outstanding $30 million of 11.875% senior secured notes and accrued interest and transaction costs.

The Term Loan will bear no amortization for one year after the closing. After the interest-only period the Term Loan will bear interest at a fixed rate per annum equal to 10.0%. The Term Loan will be amortized based on a four year period and can be extended, at the Company’s option for a period of one year provided that specific conditions outlined by PEM are achieved. There is no existing event of default and an extension fee equal to 1.0% of the unamortized principal balance of the Term Loan at the time of the extension is paid. The Revolving Loan will bear interest at the rate per annum equal to 4.5% above the greater of the “prime rate” and 5.0% adjusted on the 1st day of every calendar month. The Convertible Notes will bear interest at 7.0% per annum, payable semi-annually in arrears, and will mature 6 years after the closing.

Additionally, upon the anticipated closing of the refinancing transactions on August 15, 2008, the $15 million in principal amount of the IGT convertible promissory note will initially be convertible into approximately 16,853,932 shares of the Company’s common stock. The Company will also issue 1,000,000 new shares of common stock to PEM and warrants to PEM to purchase 1,000,000 shares of common stock. The Company will also issue warrants to IGT to purchase 1,441,892 shares of common stock. The Company may subsequently be required to issue an additional 900,000 shares of common stock to PEM and warrants for an additional 1.8 million shares of the Company’s common stock to IGT in certain circumstances. Based upon the approximately 62,000,000 shares of common stock outstanding on June 30, 2008, if the maximum amount of the IGT convertible promissory note is converted, the maximum amount of the Company’s common stock issuable pursuant to the refinancing transactions is issued and the maximum amount of all the warrants to be issued pursuant to the refinancing transactions are exercised (subject to the assumptions indicated above), the Company will have up to approximately 85,107,134 shares outstanding, representing a potential increase of approximately 37% in the number of shares outstanding on June 30, 2008.

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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

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

CAUTIONARY NOTICE

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.

General Information

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, installation 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 technologies to meet the needs of gaming operators worldwide. In 2004, we began repositioning our business to focus solely on technology and completed a series of acquisitions and divestitures to reposition our company. During 2005 and 2006 we completed a number of strategic transactions. We strengthened our portfolio of intellectual property through the acquisitions of EndX, VirtGame and PitTrak, and through a technology licensing agreement and minority investment in Magellan. We also entered into strategic agreements with IGT and Shuffle Master for the table management business, Cantor Gaming for the sports and poker business and Elixir Gaming for the growing Asian casino management business, and disposed of our interior signage division.

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. During the third quarter of 2007, we disposed of our slot and table businesses, and 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.

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.

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2008 and 2007

Revenues and cost of revenues:

(Amounts in thousands, except installation base amounts)	2008			2007
Systems revenues and gross profit
Revenues	$	18,062		$	18,841
Cost of revenues		8,004			7,989
Gross profit	$	10,058		$	10,852
Gross profit percentage		55.7	%		57.6	%

Systems installation base
Slot management
Beginning of period		80,573			62,275
Increase during the period		4,224			3,943
End of period		84,797			66,218
Percentage increase		5.2	%		6.3	%
Table management
Beginning of period		6,533			3,155
Increase during the period		346			271
End of period		6,879			3,426
Percentage increase		5.3	%		8.6	%

Overview. In December 2004, we announced our intent to focus our business on systems and technology, and we have completed a number of strategic transactions, acquisitions and divestitures since this decision. With the completion of the table and slot games divestitures during 2007, we have now completed this repositioning of our business. The operations of the disposed slot and table games businesses have been accounted for as discontinued operations for all period presented, in accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets” (“SFAS No. 144”). The sole component of our revenues from continuing operations is now systems revenue, which is generated primarily from the sale and maintenance of modular and integrated casino management systems.

The key business metrics used by management are slot and table management system installed base, representing the number of slot machines or table games that are connected to our systems, and daily fees which represent the recurring payments made by the customer for software maintenance or other ongoing services and products.

Systems revenues and gross profit. Our systems revenues for the quarter ended June 30, 2008 were $18.1 million, or $0.8 million lower than the prior year quarter. The 4.1% decline in systems revenues was primarily due to lower hardware sales. Our gross profit margin for the second quarter of 2008 of 55.7% reflects a slight decrease compared to our gross profit margin of 57.6% during the second quarter of 2007, primarily as a result of a $3.8 million slot management licensing arrangement during the second quater of 2007.

For the quarter ended June 30, 2008, our slot management revenues were $15.4 million compared to $17.6 million for the second quarter of 2007. The decrease in slot management revenues is primarily the result of a $3.8 million licensing arrangement during the second quarter of 2007. Our installed base of slot management systems grew by 4,224 during the second quarter of 2008, compared to growth of 3,943 during the second quarter of 2007. During the second quarter of 2008, we received final approval for commercialization of CJS in Nevada. Potential placements of CJS in Nevada are expected to offer significant opportunities through the remainder of 2008.

Table management systems revenues more than doubled year over year, increasing from $1.2 million for the quarter ended June 30, 2007 to $2.5 million for the quarter ended June 20, 2008. Our installed base of table management systems grew by 346 during the quarter ended June 30, 2008, compared to growth of 271 for the quarter ended June 30, 2007. Our table management growth was driven primarily by installations of systems with large corporate customers in the United States and Australia.

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Three Months Ended June 30, 2008 and 2007

Condensed Statement of Operations

(Amounts in thousands, except per share amounts)	2008			2007
Revenues	$	18,062		$	18,841
Cost of revenues		8,004			7,989
Gross profit		10,058			10,852
Selling, general and administrative expense		8,190			7,606
Research and development expense		3,008			2,495
Depreciation and amortization		1,871			1,834
Total operating expenses		13,069			11,935
Operating loss		(3,011	)		(1,083	)
Interest expense, net		(1,067	)		(3,831	)
Loss from continuing operations before income tax provision		(4,078	)		(4,914	)
Income tax provision		(11	)		—
Loss from continuing operations		(4,089	)		(4,914	)
Loss from discontinued operations, net of taxes		(192	)		(29,313	)
Net loss	$	(4,281	)	$	(34,227	)

Basic and diluted weighted average common shares		62,054			34,847
Basic and diluted loss per share:
Loss from continuing operations	$	(0.07	)	$	(0.14	)
Loss from discontinued operations		—			(0.84	)
Net loss	$	(0.07	)	$	(0.98	)

Selling, general and administrative expense (“SG&A”). SG&A expenses increased by $0.6 million during the quarter ended June 30, 2008 compared to the same period in 2007, primarily as a result of to one-time restructuring charges. Included in selling, general and administrative expense is non-cash stock-based compensation expense of $0.6 million and $0.6 million for the second quarter of 2008 and 2007, respectively.

Research and development expense (“R&D”). R&D expense consists primarily of personnel and related costs for design and development of our product lines. During the second quarter of 2008, research and development expenses increased by $0.5 million to $3 million compared to $2.5 million for the same period in 2007. The increase is due to certain prototypes used for development, and transfers to the department. Included in research and development expense is non-cash stock-based compensation expense of $0.2 and $0.2 for the second quarter of 2008 and 2007, respectively.

Depreciation and amortization. Depreciation and amortization expense for the second quarter of 2008 was $1.9 million compared to $1.8 million during the second quarter of 2007. The increase resulted from higher amortization expense related to additions to our intellectual property portfolio, partially offset by lower depreciation expense resulting from fixed assets becoming fully depreciated.

Interest expense, net. Our interest expense primarily includes interest costs and amortization of debt issuance costs from our 11.875% Senior Secured Notes due 2008 and our former senior secured term credit facility. Net interest expense for the second quarter of 2008 was $1.1 million, representing a decrease of 72% compared to net interest expense of $3.8 million for the same period in 2007. The decrease is attributable primarily to decreases of $20.8 million in outstanding borrowings under our former credit facility and $15 million in principal outstanding on our Senior Secured Notes due 2008, compared to June 30, 2007 balances. Additional factors contributing to the decrease in net interest expense year over year were a $1.2 million waiver fee recorded in the second quarter of 2007, and an increase in interest income of $0.2 million during the 2008 quarter as a result of higher cash balances held in interest-bearing accounts.

Income taxes. For the quarter ended June 30, 2008, we recorded a small net income tax provision related to our European and UK operations. For the quarter ended June 30, 2007, we did not recognize a tax benefit or provision due to our net operating loss position.

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Discontinued operations, net of taxes. Discontinued operations includes the earnings and losses, net of taxes, of the slot and table games operations, which were disposed of during the second half of 2007. For the quarter ended June 30, 2008, we recorded residual charges totaling $0.2 million representing additional provision for obsolete slot and table inventory, settlements of outstanding table games related matters, and related legal fees. During the quarter ended June 30, 2007, we recorded a charge of $29.3 million representing impairment charges associated adjusting to fair market value the carrying values of the disposed slot and table assets, $2.7 million in restructuring charges and $1 million in transaction costs associated with the disposal of the slot and table operations. Revenues from slot and table operations of $1.8 million for the three months ended June 30, 2007 were also included in discontinued operations.

Loss per share. For the quarter ended June 30, 2008, we incurred a loss from continuing operations per fully-diluted share of $0.07 compared to a loss of $0.14 from continuing operations per fully diluted share for the second quarter of 2007, based on weighted average shares of 62.1 million and 34.8 million, respectively. The improvement in loss per share from continuing operations resulted primarily from an increase in the number of weighted average shares outstanding.

Six Months Ended June 30, 2008 and 2007

Revenues and cost of revenues:

(Amounts in thousands, except installation base amounts)	2008			2007
Systems revenues and gross profit
Revenues	$	33,278		$	33,550
Cost of revenues		15,893			15,651
Gross profit	$	17,385		$	17,899
Gross profit percentage		52.2	%		53.4	%

Systems installation base
Slot management
Beginning of period		76,339			59,000
Increase during the period		8,458			7,218
End of period		84,797			66,218
Percentage increase		11.1	%		12.2	%
Table management
Beginning of period		5,740			2,947
Increase during the period		1,139			479
End of period		6,879			3,426
Percentage increase		19.8	%		16.3	%

Systems revenues and gross profit. Our systems revenues for the six months ended June 30, 2008 were $33.3 million, or $0.3 million lower than the prior year quarter, representing less than a 1% decline in systems revenues year over year. Our gross profit margin for the six months ended June 30, 2008 of 52.2% reflects a slight decrease of 1.2% compared to our gross profit margin of 53.4% during the same period in 2007, primarily due to a $3.8 million liscensing arrangement in the first half of 2007.

For the six months ended June 30, 2008, our slot management revenues were $28.8 million compared to $31.4 million for the six months ended June 30, 2007. The decrease is primarily a result of a $3.8 million licensing arrangement during the first half of 2007. Our installed base of slot management systems grew by 8,458 during the first six months of 2008, compared to growth of 7,218 during the same period in 2007.

Table management systems revenues more than doubled year over year, growing from $2 million for the six months ended June 30, 2007 to $4.3 million for the six months ended June 20, 2008. Our installed base of table management systems grew by 1,139 during the first six months of 2008, compared to growth of 479 for the comparable period in 2007. Our table management growth was driven primarily by installations of systems with large corporate customers in the United States and Australia.

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Six Months Ended June 30, 2008 and 2007

Condensed Statement of Operations

(Amounts in thousands, except per share amounts)	2008			2007
Revenues	$	33,278		$	33,550
Cost of revenues		15,893			15,651
Gross profit		17,385			17,899
Selling, general and administrative expense		16,891			15,162
Research and development expense		6,255			5,009
Depreciation and amortization		3,747			3,539
Total operating expenses		26,893			23,710
Operating loss		(9,508	)		(5,811	)
Interest expense, net		(2,031	)		(6,547	)
Loss from continuing operations before income tax benefit		(11,539	)		(12,358	)
Income tax benefit		497			—
Loss from continuing operations		(11,042	)		(12,358	)
Loss from discontinued operations, net of taxes		(1,638	)		(30,604	)
Net loss	$	(12,680	)	$	(42,962	)

Basic and diluted weighted average common shares		62,026			34,810
Basic and diluted loss per share:
Loss from continuing operations	$	(0.18	)	$	(0.36	)
Loss from discontinued operations		(0.02	)		(0.87	)
Net loss	$	(0.20	)	$	(1.23	)

Selling, general and administrative expense (“SG&A”). SG&A expenses increased by $1.7 million during the six months ended June 30, 2008 compared to the same period in 2007. This increase was primarily attributable to higher seasonal trade show activity, increased operating expenses of our foreign operations, increased bad debt reserves and restructuring charges. Included in selling, general and administrative expense is non-cash stock-based compensation expense of $1.3 million and $1.3 million for the six months ended June 30, 2008 and 2007, respectively.

Research and development expense (“R&D”). During the first six months of 2008, research and development expenses increased by $1.3 million to $6.3 million compared to $5 million for the same period in 2007. The increase is due primarily to certain prototypes used for development, and transfers to the department. Included in research and development expense is non-cash stock-based compensation expense of $0.4 million and $0.3 million for the six months ended June 30, 2008 and 2007, respectively.

Depreciation and amortization. Depreciation and amortization expense for the six months ended June 30, 2008 was $3.7 million compared to $3.5 million during the first quarter of 2007. The increase resulted from higher amortization expense related to additions to our intellectual property portfolio, partially offset by a decrease in depreciation expense as a result of certain fixed assets becoming fully depreciated.

Interest expense, net. Our interest expense primarily includes interest costs and amortization of debt issuance costs from our 11.875% Senior Secured Notes due 2008 and our former senior secured term credit facility. Net interest expense for the six months ended June 30, 2008 was $2 million, compared to $6.5 million for the same period in 2007. The decrease is attributable primarily to decreases of $20.8 million in outstanding borrowings under our former credit facility and $15 million in principal outstanding on our Senior Secured Notes due 2008, compared to June 30, 2007 balances. Additional factors contributing to the decrease in net interest expense year over year were a $1.2 million waiver fee recorded in the second quarter of 2007, and an increase in interest income during the 2008 period of $0.2 million as a result of higher cash balances held in interest-bearing accounts.

Income taxes. For the six months ended June 30, 2008, we recognized a net tax benefit of $0.5 million related to our foreign operations. For the six months ended June 30, 2007, we did not recognize a tax benefit or provision due to our net operating loss position.

Discontinued operations, net of taxes. For the six months ended June 30, 2008, we recorded residual charges totaling $1.6 million related to the disposed slot and table operations. These residual charges represent additional provisions for doubtful receivables of the disposed units, additional accruals for table-games related royalties, settlements and legal fees. During the six months ended June 30, 2007, we recorded charges totaling $30.6 million representing impairment charges associated adjusting to fair market value the carrying values of the disposed slot and table assets, including $2.7 million in restructuring charges and $1 million in transaction costs associated with the disposal of the slot and table operations. Revenues for the slot and table operations of $3.9 million for the six months ended June 30, 2007 were also included in discontinued operations.

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Loss per share. For the six months ended June 30, 2008, we incurred a loss from continuing operations per fully-diluted share of $0.18 compared to a loss from continuing operations per fully-diluted share of $0.36 for the six months ended June 30, 2007, based on weighted average shares of 62.1 million and 34.8 million, respectively. The improvement in loss per share from continuing operations resulted primarily from an increase in the number of weighted average shares outstanding.

Liquidity and Capital Resources

At June 30, 2008, we had total cash and cash equivalents of $9.6 million and a net working capital deficit of $13.7 million. This net working capital deficit includes $30 million of outstanding 11.875% Senior Secured Notes due August 15, 2008. We intend to refinance our $30 million Senior Secured Notes through the completion of two financing transactions, for which definitive agreements were entered into in early August. These transactions include (i) a senior secured credit facility of up to $27.5 million with Private Equity Management Group Financial Corporation (“PEM”), and (ii) a $15 million senior secured convertible note offering with International Game Technology (“IGT”). The credit facility with PEM is expected to consist of a revolving loan of up to $12.5 million and a term loan of $15 million. The Company expects to initially raise approximately $33.0 million from these financing transactions, which are expected to close by August 15, 2008, subject to certain closing condition. We believe that the proceeds from these two financing transactions will be sufficient to satisfy the $30 million Senior Secured Notes due August 15, 2008. Further, we believe any other obligations arising in the next 12 months can be satisfied through cash on hand, cash expected to be generated from operations during fiscal 2008, and expected cash availability under the PEM revolver. These financing arrangements include financial covenants including adjusted EBITDA, debt service coverage ratios, tangible net worth and liquidity requirements, as well as restrictions on additional indebtedness and the ability to issue dividends. Both refinancing transactions include specific conditions that we must satisfy prior to receiving the funds described in each respective loan and financing agreement. These conditions include entry into certain additional agreements and consents of third parties over which we have no control. If we are unable to satisfy each of the conditions to funding the loan and financing agreements or one or both of the other parties to those agreements refuses to deliver the funds described in their loan and financing agreements before the maturity date of our senior secured Notes, we will be unable to repay the outstanding principal and interest related to the Notes.

We generated net losses from operations of $12.7 million during the six months ended June 30, 2008, and we have an accumulated deficit of $257.7 million at June 30, 2008. Our net cash and cash equivalents balance of $9.6 million at June 30, 2008 reflects a decrease of $9.5 million compared to December 31, 2007. This change resulted from net cash used in continuing operating activities of $5.6 million, including cash payments for legal, accounting and other advisors related to our November 2007 follow-on equity offering, net cash used in continuing investing activities of $1.3 million related to ongoing investments in intellectual property and property and equipment used in operations, net cash used in continuing financing activities of $0.6 million, and net cash used in discontinued operations of $2.1 million for payments of certain liabilities related to the disposed slot and table games divisions. These decreases in cash were partially offset by a $0.1 million increase in the effect of exchange rate changes on cash and cash equivalents.

Significant components of cash flows from continuing operating activities for the six months ended June 30, 2008 are as follows:

(Amounts in millions)
Net loss	$	(12.7	)
Loss from discontinued operations, net of tax		1.6
Net loss from continuing operations		(11.1	)
Depreciation and amortization		3.7
Stock based compensation		1.9
Provision for bad debts		0.2
Amortization of debt discount and issue costs		0.3
Other, primarily changes in assets and liabilities		(0.6	)
Net cash used in continuing operating activities	$	(5.6	)

Other significant uses of cash during the six months ended June 30, 2008 were $0.8 million invested in property and equipment, $0.5 million invested in intangible assets, and $0.5 million in cash used to secure the company’s corporate credit card account.

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Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements with unconsolidated entities or other persons.

Capital Expenditures and Other

During the six months ended June 30, 2008, we invested approximately $0.8 million in property and equipment, primarily for additions to office and computer equipment used in our domestic operations, and expansion of our facilities in Macau.

Critical Accounting Policies

A description of our critical accounting policies can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2007.

Recently Issued Accounting Standards

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141(R), "Business Combinations". SFAS No. 141(R) replaces SFAS No. 141, "Business Combinations", but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS No. 141(R) expands on the disclosures previously required by SFAS No. 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any noncontrolling interests in the acquired business. SFAS No. 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS No. 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. We will adopt this statement as of January 1, 2009. We are currently evaluating the impact SFAS No. 141(R) will have on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51.” This statement establishes accounting and reporting standards for ownership interest in subsidiaries held by parties other than the parent and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amount attributable to both the parent and the noncontrolling interests. The statement also establishes reporting requirements that provide sufficient disclosure that clearly identify and distinguish between the interest of the parent and those of the noncontrolling owners. This statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 160 is not expected to have a material impact on our financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”. SFAS No. 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. Statement 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 has been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows. Statement 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are currently evaluating the impact of SFAS No. 161 will have on our financial position, results of operations and cash flows.

In May 2008, the FASB issued FSP No. APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)". This FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and will be applied retrospectively to all periods presented. We are evaluating the impact of adopting the provisions of this FSP on our consolidated financial statements.

In May 2008, FASB issued SFAS No.162, “The Hierarchy of Generally Accepted Accounting Principles”. The pronouncement mandates the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days following SEC approval. We do not believe this pronouncement will impact our financial statements.

In May 2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60”. The scope of the statement is limited to financial guarantee insurance (and reinsurance) contracts. The pronouncement is effective for fiscal years beginning after December 31, 2008. We do not believe this pronouncement will impact our financial statements.

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Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Part I, Item 7A, of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2007. There have been no material changes in market risks since the fiscal year end.

Item 4.

CONTROLS AND PROCEDURES

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 record the information it is required to disclose in the reports it files with the SEC, and to process, summarize and report this information within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. 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 the Company’s disclosure controls and procedures were effective.

No changes in the Company’s internal control over financial reporting have occurred during the Company’s fiscal quarter ended June 30, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PROGRESSIVE GAMING INTERNATIONAL CORPORATION

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

The legal proceedings described in Item 3 of the Company’s annual report on Form 10-K for the year ended December 31, 2007, should be read in conjunction with this disclosure. No material developments related to these various litigation matters have occurred, except as disclosed herein.

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 trial was then postponed and the parties agreed to participate in mediation in April 2008. Plaintiffs were seeking losses of approximately $0.5 million. In April 2008, the parties agreed to settle the case for a sum of $0.3 million paid over three installments, with the final payment due in November 2008.

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.

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Item 1A. Risk Factors

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. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment in our securities. An investment in our securities is speculative and involves a high degree of risk. You should not invest in our securities if you cannot bear the economic risk of your investment for an indefinite period of time and cannot afford to lose your entire investment.

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, 2007, filed with the SEC on March 17, 2008.

Risks Relating to Our Business

*We have substantial short-term debt and related debt service obligations, and the failure to satisfy these obligations could materially and adversely impact our financial viability or ultimately result in our inability to continue as a going concern.

On June 30, 2008, our total outstanding debt was approximately $30 million which consisted primarily of the outstanding $30 million of our 11.875% senior secured notes due August 15, 2008, or the Notes. We currently do not have sufficient cash to completely redeem our outstanding Notes. We have entered into definitive agreements for a senior secured credit facility and a convertible note and warrant financing, each dated August 4, 2008, which we refer to as the refinancing transactions. We intend to use the proceeds of the refinancing transactions to repay the outstanding principal and interest related to the Notes.

Both the refinancing transactions include specific conditions that we must satisfy prior to receiving the funds described in each respective loan and financing agreement. These conditions include entry into certain additional agreements and consents of third parties over which we have no control. The negotiation of the additional agreements could result in undesirable terms to which we cannot agree. In addition, third parties whose consent is required may refuse to consent. If we are unable to satisfy each of the conditions to funding the loan and financing agreements or one or both of the other parties to those agreements refuses to deliver the funds described in their loan and financing agreements before the maturity date of our senior secured Notes, we will be unable to repay the outstanding principal and interest related to the Notes.

If the refinancing transactions fail to close on the maturity date of the outstanding secured Notes, our existing noteholders will have the right to foreclose upon the collateral securing that debt. If our existing noteholders foreclose upon the collateral securing the Notes, our financial viability may be materially and adversely impacted, and we may be forced to negotiate with our noteholders regarding a restructuring of the Notes, sell some or all of our assets to satisfy our obligations under the Notes or pursue other alternatives available through formal proceedings, any of which would cause our business to suffer, may force us to curtail our operations and may ultimately result in our inability to continue as a going concern.

*Our cash flow from operations and available credit are not sufficient to meet our short-term capital requirements and, as a result, we are 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. Our current cash flows and capital resources are insufficient to meet our short-term debt obligations and commitments, and we may be forced to reduce or delay activities and capital expenditures if we are unable to obtain additional equity capital or restructure or refinance our debt. In the event that we are unable to obtain additional equity capital or restructure or refinance our debt, we will be left without sufficient liquidity and we will not be able to meet our debt service requirements and repayment obligations. There can be no assurance that future financing arrangements will be available on acceptable terms, or at all. If we are unable to obtain future financing on terms acceptable to us, this will pose a significant risk to our liquidity and our ability to meet operational and other cash requirements.

Additionally, substantially all of our assets are pledged as security to the holders of our outstanding senior secured Notes, and will also be pledged as security pursuant to the refinancing transactions if and when they are closed. 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.

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

Assuming that we are able to complete the refinancing transactions and repay the Notes, we will have a $15 million outstanding term loan and $15 million in outstanding convertibles notes. Additionally, we will have a $12.5 million revolving facility, a portion of which we expect to draw down in connection with the closing of the refinancing transactions. We may also 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:

•

it may be difficult for us to make payments on our outstanding indebtedness;

•

a significant portion of our cash flows from operations must be dedicated to debt service and will not be available for other purposes that would otherwise be operationally value-enhancing uses of such funds;

•

our ability to borrow additional amounts for working capital, capital expenditures, potential acquisition opportunities and other purposes may be limited;

•

we may be limited in our ability to withstand competitive pressures and may have reduced financial flexibility in responding to changing business, regulatory and economic conditions in the gaming industry;

•

we may be at a competitive disadvantage because we may be more highly leveraged than our competitors and, as a result, more restricted in our ability to invest in our growth and expansion;

•

it may cause us to fail to comply with applicable debt covenants and could result in an event of default that could result in all of our indebtedness being immediately due and payable; and

•

if new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.

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.

Our Audited Consolidated Financial Statements as of December 31, 2006 and 2007 and for the years ended December 31, 2005, 2006, and 2007, contain an audit report of our independent registered public accounting firm related to the financial statements as of and for the years ended December 31, 2006 and 2007. The audit report indicates that the upcoming maturity of our senior secured Notes raises substantial doubt about our ability to continue as a going concern. We intend to obtain additional financing from the refinancing transactions to fund the repayment of our senior secured Notes. However, we cannot guarantee that we will be successful in refinancing the senior secured Notes.

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, including the agreements related to the scheduled refinancing transactions, 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:

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•

incur more debt;

•

pay dividends, redeem or repurchase our stock or make other distributions;

•

make acquisitions or investments;

•

use assets as security in other transactions;

•

enter into transactions with affiliates;

•

merge or consolidate with others;

•

dispose of assets or use asset sale proceeds;

•

create liens on our assets;

•

extend credit;

•

amend agreements related to existing indebtedness; or

•

amend our material contracts.

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 Notes, our senior secured credit facility and our convertible note (assuming the refinancing transactions are closed). This in turn could have a material adverse effect on our operations, our revenues and thus our common stock value.

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 or adversely affect the conduct and competitiveness of our current business.

Lastly, we will be required by our senior secured credit facility and the convertible note (assuming the refinancing transactions are closed) 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 gaming technologies, may not gain popularity with gaming patrons and casinos, 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.

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

In connection with the 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 million for the initial integration of our CJS system with Shuffle Master’s tables, which was 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. 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 the actual earn-out and royalty payments could be substantially lower than we expect, which could adversely affect our anticipated revenues and our business.

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

The gaming sector is characterized by the 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, integrated management systems and sports and poker 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, new features for RFID (Radio Frequency Identification) and table management systems, central server based gaming and sports and poker management systems represent key strategic initiatives for the Company. We are at various stages in the approval and development process for each initiative and are moving forward with the regulators in various jurisdictions to obtain required approvals. 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 future revenue and business prospects could 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.

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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:

•

unwillingness on the part of an alliance partner to pay us license fees or royalties we believe are due to us under the strategic alliance;

•

uncertainty regarding ownership of intellectual property rights arising from our strategic alliance activities, which could result in litigation, permit third parties to use certain of our intellectual property or prevent us from utilizing such intellectual property rights and from entering into additional strategic alliances;

•

unwillingness on the part of an alliance partner to keep us informed regarding the progress of its development and commercialization activities, or to permit public disclosure of the results of those activities;

•

slowing or cessation of an alliance partner’s development or commercialization efforts with respect to our products or technologies;

•

delays in the introduction or commercialization of products or technologies; or

•

termination or non-renewal of the strategic alliance.

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, which, in turn, may cause us to forego potentially profitable business opportunities. 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. 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 such strategic alliances.

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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.

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:

•

be expensive and time consuming to defend resulting in the diversion of management’s attention and resources;

•

cause one or more of our patents to be ruled or rendered unenforceable or invalid, or require us to cease making, licensing or using products or systems that incorporate the challenged intellectual property; or

•

require us to spend significant time and money to redesign, reengineer or rebrand our products or systems if feasible.

See “Part I, Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 17, 2008, “Part II, Item 1. Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 and “Part II, Item 1. Legal Proceedings” in this Quarterly Report on Form 10-Q for a description of various legal proceedings in which we are or have been involved and developments related to those proceedings.

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*If we are found to have infringed or 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 have infringed or 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, put us at a competitive disadvantage relative to third parties 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 relative popularity of our existing products and our ability to develop and introduce appealing new products;

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our ability to maintain existing regulatory approvals and to obtain further regulatory approvals as needed; and

•

our ability to enforce our existing intellectual property rights and to adequately secure, maintain and protect rights for new products.

*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 “Item 1. Business—Government Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 17, 2008, for a description of the regulations that apply to our business.

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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 systems 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:

•

general economic conditions;

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levels of disposable income of casino patrons;

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downturn or loss in popularity of the gaming industry;

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the relative popularity of entertainment alternatives to casino gaming;

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the growth and number of legalized gaming jurisdictions;

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local conditions in key gaming markets, including seasonal and weather-related factors;

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increased transportation costs;

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acts of terrorism and anti-terrorism efforts;

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changes or proposed changes to tax laws;

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increases in gaming taxes or fees;

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legal and regulatory issues affecting the development, operation and licensing of casinos;

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the availability and cost of capital to construct, expand or renovate new and existing casinos;

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the level of new casino construction and renovation schedules of existing casinos; and

•

competitive conditions in the gaming industry and in particular gaming markets, including the effect of such conditions on the pricing of our games and products.

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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 Europe, Canada and Asia, accounted for approximately 54% of our consolidated revenue for the quarter ended June 30, 2008. We expect the percentage of our international sales to continue to increase during the remainder of 2008. Accordingly, our future results could be harmed by a variety of factors, including:

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changes in foreign currency exchange rates;

•

exchange controls;

•

changes in regulatory requirements;

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costs to comply with applicable laws;

•

changes in a specific country’s or region’s political or economic conditions;

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tariffs and other trade protection measures;

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import or export licensing requirements;

•

potentially negative consequences from changes in tax laws;

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different regimes controlling the protection of our intellectual property;

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difficulty in staffing and managing widespread operations;

•

changing labor regulations;

•

requirements relating to withholding taxes on remittances and other payments by subsidiaries;

•

restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions;

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restrictions on our ability to repatriate dividends from our subsidiaries; and

•

violations under the Foreign Corrupt Practices Act.

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.

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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:

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integrating the technologies of the companies;

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entering markets in which we have limited or no prior experience;

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obtaining regulatory approval for the central server-based technology;

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successfully completing the development of VirtGame and EndX technologies;

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developing commercial products based on those technologies;

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retaining and assimilating the key personnel of each company;

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attracting additional customers for products based on VirtGame or EndX technologies;

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implementing and maintaining uniform standards, controls, processes, procedures, policies and information systems; and

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managing expenses of any undisclosed or potential legal liability of VirtGame or EndX.

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:

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difficulties in integrating operations, technologies, services, accounting and personnel;

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difficulties in supporting and transitioning customers of our acquired companies to our technology platforms and business processes;

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diversion of financial and management resources from existing operations;

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difficulties in obtaining regulatory approval for technologies and products of acquired companies;

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potential loss of key employees;

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dilution of our existing stockholders if we finance acquisitions by issuing convertible debt or equity securities, which dilution could adversely affect the market price of our stock;

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inability to generate sufficient revenues to offset acquisition or investment costs; and

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potential write-offs of acquired assets.

Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could harm our operating results. 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.

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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, prior to the year ended December 31, 2007, up to approximately 40% of our revenues were based on cash-based licensing transactions, the majority of which were generated from intellectual property, content and technology licensing activities. Most of these non-recurring transactional revenues were 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.

Risks Relating to Our Securities

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:

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periodic variations in the actual or anticipated financial results of our business or of our competitors;

•

downward revisions in securities analysts’ estimates of our future operating results or of the future operating results of our competitors;

•

material announcements by us or our competitors;

•

quarterly fluctuations in non-recurring revenues from cash-based licensing transactions;

•

public sales of a substantial number of shares of our common stock; and

•

adverse changes in general market conditions or economic trends or in conditions or trends in the markets in which we operate.

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If our quarterly or annual 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:

•

changes in market conditions that can affect the demand for the products we sell;

•

quarterly fluctuations in non-recurring revenues from cash-based licensing transactions;

•

general economic conditions that affect the availability of disposable income among consumers; and

•

the actions of our competitors.

If our quarterly or annual 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.

*Future sales of our common stock may depress our stock price.

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 estimated approximately 62 million shares outstanding on June 30, 2008:

•

approximately 61.5 million shares generally are freely tradable in the public market; and

•

approximately 0.6 million additional shares may be sold by our executive officers and directors subject to compliance with the volume limitations and other restrictions of rule 144.

Additionally, as of June 30, 2008, there were outstanding options, restricted share grants, and warrants to purchase an aggregate of approximately 7 million of our shares and we may grant options to purchase up to approximately 2.4 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. However, any of those shares that might be acquired by any of our officers and directors could be sold, subject to compliance with the volume limitations and other restrictions of Rule 144.

On August 4, 2008, we entered into definitive agreements for refinancing transactions with PEM and IGT described elsewhere in this quarterly report on Form 10-Q. Upon the anticipated closing of the refinancing transactions on August 15, 2008, the $15 million in principal amount of the IGT convertible promissory note will initially be convertible into approximately 16,853,932 shares of our common stock. We will also issue 1,000,000 new shares of common stock to PEM and warrants to PEM to purchase 1,000,000 shares of common stock. We will also issue warrants to IGT to purchase 1,441,892 shares of common stock. We may subsequently be required to issue an additional 900,000 shares of common stock to PEM and warrants for an additional 1.8 million shares of our common stock to IGT in certain circumstances . Based upon the approximately 62,000,000 shares of common stock outstanding on June 30, 2008, if the maximum amount of the IGT convertible promissory note is converted, the maximum amount of our common stock issuable pursuant to the refinancing transactions is issued and the maximum amount of all the warrants to be issued pursuant to the refinancing transactions are exercised (subject to the assumptions indicated above), we will have up to approximately 85,107,134 shares outstanding, representing a potential increase of approximately 37.0% in the number of shares outstanding on June 30, 2008.

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 million 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.

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

None.

Issuer Repurchases of Equity Securities

The following table summarizes purchases of equity securities by the issuer and affiliated purchasers for the three months ended June 30, 2008:

							(d) Maximum Number (or
					(c) Total Number of		approximate Dollar
					Shares (or Units)		Value) of Shares (or
					Purchased as Part of		Units) that May Yet
	(a) Total Number		(b) Average Price		Publicly Announced		Be Purchased Under
	of Shares (or Units		Paid per Share		Plans or		the Plans for
Period	Purchased)(1)		(or Unit)		Programs(2)		Programs
Beginning balance						175,800	$	2,000,000
April 2008		—		—		—
May 2008		109	$	1.68		—
June 2008		2,864	$	1.45		—
Ending balance						175,800	$	2,000,000

(1)	Represents shares withheld for income tax purposes at the time of issuance of vested restricted stock awards.

(2)	On August 13, 2002 our Board of Directors authorized the purchase of up to $2 million of our common stock. Since the authorization of the plan, we have purchased approximately 175,800 shares of our common stock for an approximate aggregate of $484,000. All of these purchases occurred during 2002.

Item 4. Submission of Matters to a Vote of Security Holders

The Company held its Annual Stockholders Meeting on June 20, 2008, and two matters were voted upon. A description of each matter and tabulation of votes are as follows:

1 The following two Class 1 directors were elected to hold office until the 2011 Annual Meeting of Stockholders or until their successors are elected and qualified:

Director	Votes For	Votes Withheld
Peter G. Boynton	48,912,292	4,549,158
Russel H. McMeekin	48,914,788	4,546,662

The following individuals’ term of office as a director continued after the meeting: Terrance W. Oliver Rick L. Smith, Douglas M. Todoroff, Major Gen. Paul. A. Harvey (Retired).

2. Ratification of the selection of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2008. The voting for the proposal was as follows:

Votes For		Votes Against		Abstentions
52,704,237		496,129		261,084

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Item 6.	Exhibits.


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 3.1 to the Company’s Current Report on Form 8-K filed on November 20, 2007.

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 filed on November 20, 2003.

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.

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.

Table of Contents

SIGNATURE

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)
	August 11, 2008