UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended: June 30, 2007

for the transition period from              to             

Commission File Number: 000-22752

PROGRESSIVE GAMING INTERNATIONAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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  x    NO  ¨

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

Large Accelerated Filer  ¨    Accelerated Filer  x    Non-Accelerated Filer  ¨

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

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:

PROGRESSIVE GAMING INTERNATIONAL CORPORATION

TABLE OF CONTENTS

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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

PART I — FINANCIAL INFORMATION

Item 1. — Consolidated Financial Statements

CONSOLIDATED BALANCE SHEETS

See notes to unaudited consolidated financial statements.

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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See notes to unaudited consolidated financial statements.

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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

See notes to unaudited consolidated financial statements.

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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to unaudited consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

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, 2006. 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, 2007, and the results of its operations for the three and six months ended June 30, 2007 and 2006, and cash flows for the six months ended June 30, 2007 and 2006. The results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the entire year.

2. DISCONTINUED OPERATIONS

On March 6, 2007, the Company announced its intent to dispose of its table games division, which consists of casino table games with proprietary intellectual property, including patents, trademarks, copyrights, etc. that have been developed, acquired or licensed from third parties. On July 11, 2007, the Company entered into a non-binding letter of intent (“LOI”) to sell the table games division to Shuffle Master, Inc. (“SMI”). The sale of the table games division to SMI is contingent on customary closing procedures and is expected to close on or before August 31, 2007.

During June 2007, the Company entered into two arrangements to sell its remaining slot route and slot inventory to Reel Games, Inc.

The Company expects the disposals to be completed within one year, and the Company expects to have no continuing involvement after completion of the disposal transactions. Continuing direct cash flows from the slot and table businesses are expected to cease within one year.

As a result of the proposed table game division sale and the slot route and inventory sales, the Company recorded a total charge, net of tax, of $29.3 million in the second quarter of 2007 which comprises impairment charges associated with the adjustment of the carrying values of the assets involved in the sales, including $25 million related to goodwill and intangible assets, and the loss from the table and slot operations of $0.7 million,. Revenues for the table games division and slot route were $1.8 million and $3.9 million, and $3.4 million and $6.2 million, for the three and six months ended June 30, 2007 and 2006, respectively. Those revenues, which previously were included in the slot and table games segment revenues, are classified as discontinued operations in the accompanying Consolidated Statements of Operations and prior period amounts have been reclassified, as required by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Interest expense was not allocated to the slot and table businesses, and therefore, all of the Company’s interest expense is included within continuing operations.

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

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

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, 2007, the Company had deposits with financial institutions in excess of FDIC insured limits by $4.2 million.

Receivables and Allowance for Doubtful Accounts. The Company regularly evaluates the collectibility of its trade receivable balances based on a combination of factors. When a customer’s account becomes past due, dialogue is initiated with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation

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to the Company, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting their business, a specific reserve is recorded for bad debt to reduce the related receivable to the amount the Company expects to recover given all information presently available. The Company also records reserves for bad debt for all other customers based on certain other factors including the length of time the receivables are past due and historical collection experience with individual customers. If circumstances related to specific customers change, the Company’s estimates of the recoverability of receivables could materially change.

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

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

Discontinued Operations. In determining whether a group of assets disposed (or to be disposed of) should be presented as a discontinued operation, the Company makes a determination of whether the group of assets being disposed of comprises a component of the entity; that is, it has historic operations and cash flows that can be clearly distinguished (both operationally and for financial reporting purposes). The Company also determines whether the cash flows associated with the group of assets have been significantly (or will be significantly) eliminated from the ongoing operations of the Company as a result of the disposal transaction and whether the Company has no significant continuing involvement in the operations of the group of assets after the disposal transaction. If these determinations can be made affirmatively, the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) are aggregated for separate presentation apart from continuing operating results of the Company in the consolidated financial statements.

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

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

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

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

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

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

Litigation and Other Contingencies. The Company is involved in various legal matters, litigation and claims of various types in the ordinary course of its business operations. The Company has regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting recognition or disclosure of these contingencies. The status of significant claims is summarized in Note 9.

        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.

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

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

Slot and Table Games. The Company leases and sells proprietary slot and table games to casino customers. Table game lease contracts are typically for a 36-month period with a 30-day cancellation clause. The lease revenue is recognized on a monthly basis. Slot machine lease contracts are either on revenue participation or a fixed-rental basis. Slot machine lease contracts are typically for a month-to-month period with a 30-day cancellation clause. On a participation basis, the Company earns a share of the revenue that the casino earns from these slot machines. On a fixed-rental basis, the Company charges a fixed amount per slot machine per day. Revenues from both types of lease arrangements are recognized on the accrual basis. The sales agreements for proprietary table games and slot games consist of the sale of hardware and a perpetual license for the proprietary intellectual property. Slot and table game sales are executed by a signed contract or a customer purchase order. Revenues for these sales agreements are generally recognized when the hardware and intellectual property is delivered to the customer.

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

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

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

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

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

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The principal effects of adopting SFAS No. 123(R) are:

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

Equity Instruments Issued to Outside Parties. The Company’s accounting policy for equity instruments issued to outside parties in exchange for goods and services follows the provisions of Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees”. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized as a charge to the statement of operations over the term of the consulting agreement. The number of uncancelled options issued to consultants at June 30, 2007, was 55,000, with a range of exercise prices from $ 4.38 to $ 7.06 per share, and an unamortized fair value of less than $ 0.1 million.

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

From 1998 to 2000, the Company licensed rights to intellectual property, including rights to develop and market gaming devices and associated equipment under certain Ripley and Hasbro trademarks, in exchange for warrants to purchase shares of the Company’s common stock. During 2006, the Company licensed certain intellectual property rights from Harrah’s in exchange for 325,000 warrants to purchase shares of the Company’s common stock at an exercise price of $7.50 per share. At June 30, 2007, the number of uncancelled warrants issued in exchange for license agreements was 360,000, with a weighted average exercise price of $7.43 per share.

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

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

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company adopted Fin 48 on January 1, 2007. On adoption, the Company had $62.8 million in total unrecognized tax benefits, with a valuation allowance of $56.7 million. The cumulative effect of adopting FIN 48 has resulted in a decrease

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of $1 million to the Company’s non current deferred tax asset with a corresponding reduction in the valuation allowance related to the deferred tax asset. The Company does not anticipate any significant changes to the amount of unrecognized tax benefits in the next 12 months. The Company’s policy is to accrue interest and or penalties related to potential underpayments of income taxes within the provision for income taxes.

The Company and its domestic subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Tax years 2003 to 2006 remain subject to U.S. federal income tax and various state and local tax jurisdictions remain open to examination as well, although Management believes that any potential assessments would be immaterial. The Company’s international subsidiaries are subject to the governing tax authority of each location and are subject to various years of examination. There are no ongoing examinations of income tax returns by federal, state or international tax authorities.

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

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

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

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

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

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4. Receivables

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

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

At June 30, 2007, $0.3 million of accounts receivable was reclassified to current assets of discontinued operations in the accompanying Consolidated Balance Sheets.

5. INVENTORIES

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

At June 30, 2007, $1.6 million of inventory was reclassified to current assets of discontinued operations in the accompanying Consolidated Balance Sheets.

6. GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with SFAS No. 142 and SFAS No. 144, the Company performs an impairment analysis on all of its long-lived and intangible assets on an annual basis and in certain other circumstances. For indefinite lived assets including perpetual licenses and goodwill, an independent valuation is performed annually to determine if any impairment has occurred. Independent valuation tests as of September 30, 2006 did not indicate any impairment.

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

The net carrying value of goodwill ($43.6 million) as of June 30, 2007, is included in the geographic operations of North America ($14.7 million), Europe ($26 million), and Australia / Asia ($2.9 million).

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Definite life intangible assets as of June 30, 2007, subject to amortization, are comprised of the following:

Amortization expense for definite life intangible assets of $1.6 million and $3.1 million compared to $1.6 million and $3.1 million was included in loss from continuing operations for the three and six months ended June 30, 2007 and 2006, respectively. Amortization expense for definite life intangible assets of $0.4 million and $0.6 million compared to $0.4 million and $0.8 million was included in loss from discontinued operations for the three and six months ended June 30, 2007 and 2006, respectively.

At June 30, 2007, intangible assets totaling $20.5 million associated with the slot and table games operations were reclassified to Noncurrent assets of discontinued operations in the accompanying Consolidated Balance Sheets.

6. OTHER ASSETS

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

7. ACCRUED LIABILITIES

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

8. LONG-TERM DEBT AND SHORT-TERM BORROWINGS

On April 20, 2006, the Company completed the first of two phases of securing a credit facility for completion of its minority investment in Magellan Technology Pty., Ltd., and for general working capital purposes. The first phase included an arrangement for a $10 million senior secured term loan due April 19, 2007. Outstanding principal under the facility bore

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interest at the prime rate of interest plus 2.25%. Underwriting fees related to the facility equaled 3.5% of the total principal and warrants to purchase 200,000 shares of the Company’s common stock. The warrants were valued using the Black-Scholes method using expected volatility of 60%, expected term of seven years, risk free rate of 4.97%, and expected dividends of zero. These warrants are classified in Other Assets in the accompanying balance sheet.

On August 4, 2006, the Company completed the final phase of its credit facility with an affiliate of Cerberus Capital Management, L.P., Ableco Finance LLC. The $22.5 million, three-year revolving credit facility is intended for general working capital purposes and to replace the existing $10 million facility completed in the first stage of the financing. The Company is continuing to evaluate other alternatives to retire the remainder of its Senior Secured Notes due 2008.

Outstanding principal under the $22.5 million facility bears interest at a reference rate of interest plus an applicable margin (currently 11.75%) or a LIBOR rate plus an applicable margin. Underwriting fees related to the facility equal 2.0% of the total principal and warrants to purchase 150,000 shares of the Company’s common stock. The warrants were valued using a binomial lattice model and a Monte Carlo model using volatility of 69.64%, derived service period of one year, risk free rate of 5.05%, and expected dividends of zero. These warrants are classified in Other Assets in the accompanying balance sheet. The terms of the new facility require the Company to comply with certain financial covenants covering senior debt leverage ratio, total debt leverage ration, minimum EBITDA, minimum cash plus availability, minimum interest coverage, and certain negative covenants.

The senior credit facility contains, among other covenants, certain financial covenants including adjusted pro forma EBITDA, interest coverage ratio, minimum cash balance requirements, and leverage ratios (as defined in the agreement). The agreement also contains certain restrictions on additional indebtedness and the ability to issue dividends.

The indentures governing the senior secured notes contain certain negative covenants including, among other provisions, a limitation on indebtedness and the ability to issue dividends.

On July 16, 2007, the Company entered into a Waiver Letter and Amendment (the “Amendment”) related to its $22.5 million senior credit facility that waived certain covenants and provided preliminary consent for the proposed sale of the table games division. After giving effect to the waiver, the Company remains in compliance with all debt covenants.

9. 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.

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

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

The Company received a complaint from Olaf Vancura, a former employee, on July 18, 2005, alleging various claims associated with allegations of breach of employment agreement. A claim for the return of patents assigned to the Company has also been made. Under our agreement with Mr. Vancura, the matter was required to be handled through binding arbitration. The parties have settled the matter and it has been dismissed. The terms of the settlement agreement call for, among other items, a complete release of all actions between the parties to any claims, and for PGIC to provide to Mr. Vancura, at PGIC’s discretion, payment in the amount of $435,000, or payment of $285,000 and issuance of 40,000 restricted shares. Additionally, the parties agreed to settle all outstanding royalty and patent license matters.

The Company is also involved in other legal matters, litigation and claims of various types in the ordinary course of its business operations, including matters involving bankruptcies of debtors, collection efforts, disputes with former employees and other matters.

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10. LOSS PER SHARE

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

Dilutive stock options and warrants of 0.1 million and 0.4 million for the three and six months ended June 30, 2007, and 1.2 million and 1.0 million for the three and six months ended June 30, 2006, have not been included in the computation of diluted net loss per share as their effect would be antidilutive.

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11. 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, 2007, MSG purchased $0.1 million in electronic displays and related products from the Company. In addition, under the Manufacturer’s Supply Agreement, MSG provided the Company assembly, testing, shipping and warehousing services at MSG’s warehouse at hours worked plus any overhead associated with providing these services, multiplied by 110%. On January 3, 2006, the Company terminated this portion of the agreement and is currently using a third party contract manufacturer in Las Vegas, Nevada to provide these same services.

From time to time, the Company purchases signage and sign related products from MSG in conjunction with its progressive jackpot systems. During the six months ended June 30, 2007, the Company purchased $0.1 million from MSG.

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

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

The accounting policies of the segments are the same as those described in Note 3 above. All inter-segment transactions have been eliminated.

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 the Company will no longer report segment information based upon lines of business.

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

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13. 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