Edgar Filing: Fortunet, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

Form 10-Q

_____________________

(Mark One)

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

For the quarterly period ended June 30, 2009

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

For the transition period from:___________ to ___________

Commission file number: 000-51703

______________________

FortuNet, Inc.

(Exact name of Registrant as specified in its charter)

______________________

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

______________________

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

þ Yes No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ 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,” ” large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Yes þ No

As of August 10, 2009, there were 11,054,011 shares of the Registrant’s common stock, $0.001 par value, issued and outstanding.

FORTUNET, INC.

FORM 10-Q

QUARTER ENDED June 30, 2009

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION		Page

Item 1:	Condensed Consolidated Financial Statements	3
	Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008	3
	Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2009 and 2008	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4:	Controls and Procedures	21

PART II: OTHER INFORMATION

Item 1:	Legal Proceedings	23
Item 1A:	Risk Factors	23
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3:	Defaults Upon Senior Securities	37
Item 4	Submission on Matters to a Vote of Security Holders.	37
Item 6:	Exhibits	38
Signatures		39

PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FORTUNET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	June 30,			December 31,
	2009			2008
Assets:
Current assets:
Cash and cash equivalents	$	6,148,169		$	19,898,214
Investment securities and related Put Rights Agreement (short term)		-			6,550,000
Accounts receivable, net of allowance for doubtful accounts		1,408,273			1,509,583
Refundable income taxes		125,461			160,649
Inventories		2,214,704			2,363,430
Prepaid expenses		216,657			155,617
Deferred tax asset		303,403			294,957
Total current assets		10,416,667			30,932,450
Property and equipment, net of
accumulated depreciation		5,008,230			5,866,847
Investment securities (long term)		3,125,000			3,200,000
Canadian certificates of deposit - guaranteed investment contract		-			1,829,249
Other assets, net of accumulated amortization		1,815,370			2,054,619
Deferred tax asset		561,208			574,425
Total assets	$	20,926,475		$	44,457,590

Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable	$	149,190		$	221,557
Commissions payable		326,432			109,049
Accrued expenses (including $3,666,250 dividend payable at June 30, 2009)		3,883,811			233,456
Treasury stock payable		-			568,644
Total current liabilities		4,359,433			1,132,706

Stockholders’ equity:
Common stock
$.001 par value, 150,000,000 shares authorized, 11,054,011 shares
issued and outstanding at June 30, 2009 and 11,042,011
shares issued and outstanding at December 31, 2008		11,375			11,363
Treasury stock, at cost; 321,268 shares		(568,644	)		(568,644	)
Additional paid in capital		16,540,122			30,086,162
Retained earnings		584,189			13,796,003
Total stockholders’ equity		16,567,042			43,324,884
Total liabilities and stockholders’ equity	$	20,926,475		$	44,457,590

See notes to condensed consolidated financial statements.

FORTUNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ending June 30,				Six Months Ending June 30,
	2009		2008		2009		2008

Sales revenue	$	3,964,655	$	3,974,999	$	8,107,980	$	8,096,632
Cost of revenue		774,993		584,295		1,700,429		1,265,276
Gross profit		3,189,662		3,390,704		6,407,551		6,831,356
Operating costs and expenses
General and administrative		1,115,714		1,259,547		2,425,120		2,441,223
Sales and marketing		1,115,006		1,083,818		2,319,780		2,214,736
Research and development		407,364		292,839		790,385		466,475
Total operating expenses		2,638,084		2,636,204		5,535,285		5,122,434

Income from operations		551,578		754,500		872,266		1,708,922

Other income		245,326		5,033		164,371		10,309
Interest income, net		50,241		282,070		108,452		577,528
Income before taxes		847,145		1,041,603		1,145,089		2,296,759

Provision for income taxes		262,956		175,267		341,357		486,872
Net income	$	584,189	$	866,336	$	803,732	$	1,809,887

Weighted average shares - basic		11,045,011		11,349,812		11,043,511		11,349,812
Earnings per share - basic	$	0.05	$	0.08	$	0.07	$	0.16
Weighted average shares – diluted		11,054,011		11,358,664		11,054,011		11,358,664
Earnings per share - diluted	$	0.05	$	0.08	$	0.07	$	0.16

See notes to condensed consolidated financial statements.

FORTUNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six months ended June 30,
	2009			2008

Cash flows from operating activities:
Net income	$	803,732		$	1,809,887
Adjustments to reconcile net income to net provided by operating activities:
Depreciation		1,040,863			979,929
Amortization		210,675			8,000
Stock issued for services		50,954			98,832
Deferred taxes		4,771			5,711
Change in operating assets and liabilities:
Accounts receivable		101,310			12,705
Inventories		148,726			(64,441	)
Prepaid expenses		(61,040	)		(99,662	)
Income tax receivable		35,188			24,758
Other assets		28,574			-
Accounts payable		(72,368	)		(340,754	)
Accrued expenses		(15,895	)		(111,461	)
Commissions payable		217,383			(69,810	)
Income tax payable		-			(50,000	)
Net cash provided by operating activities		2,492,873			2,203,694

Cash flows from investing activities:
Purchase of equipment and property		(182,246	)		(638,858	)
Purchase of marketable securities		(2,987,165	)		(3,300,000	)
Sale of marketable securities		11,441,414			14,250,000
Net cash provided by investing activities		8,272,003			10,311,142

Cash flows from financing activities: Dividends paid		(23,946,277	)		-
Purchase of treasury stock		(568,644	)		-
Net cash used in financing activities		(24,514,921	)		-

Net (decrease) increase in cash and cash equivalents		(13,750,045	)		12,514,836

Cash and cash equivalents, beginning		19,898,214			4,513,935
Cash and cash equivalents, ending	$	6,148,169		$	17,028,771

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	301,500		$	622,450
Non-cash investing and financing activities:
Stock options capitalized	$	-		$	16,416

See notes to condensed consolidated financial statements.

FORTUNET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Nature of Business and Interim Basis of Presentation:

Nature of business:

FortuNet, Inc. incorporated in 1989 in Nevada (FortuNet) together with its wholly-owned subsidiaries, Millennium Games (Millennium), Star Bingo Holdings, LLC and Star Bingo Supply, LLC (collectively the Company) is engaged primarily in the business of designing, manufacturing, field maintenance and leasing electronic gaming and entertainment systems throughout North America.

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

Interim Basis of Presentation:

The accounting policies followed in the preparation of the financial information herein are the same as those summarized in the Company’s 2008 Annual Report on Form 10-K filed with SEC on March 12, 2009. The condensed consolidated balance sheet at December 31, 2008 was derived from audited consolidated financial statements at that date. The interim condensed consolidated financial information is unaudited and should be read in conjunction with the Company’s 2008 Annual Report on Form 10-K and amended Form 10-K. In the opinion of Company’s management, all adjustments, consisting of normal and recurring adjustments that are necessary to fairly present the financial condition of the Company as of June 30, 2009, and the results of its operations and its cash flows for the three and six months ended June 30, 2009 and 2008, have been included in the present quarterly report. Interim results of operations are not necessarily indicative of the results of operations for the full year due to seasonality and other factors.

2.	Recently Issued Accounting Pronouncements:

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. SFAS 157 was originally effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In November 2007, the FASB placed a one year deferral for the implementation of SFAS 157 for nonfinancial assets and liabilities; however, SFAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities. We adopted all requirements of SFAS 157 on January 1, 2008, except as they relate to nonfinancial assets and liabilities, which will be adopted on January 1, 2009, as allowed under SFAS 157. See Note 4 for further information on the impact of this standard to financial assets and liabilities. We have not yet determined the impact, if any, on our consolidated condensed financial statements for nonfinancial assets and liabilities.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure eligible financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 on January 1, 2008, and there was no impact on our consolidated condensed financial statements as we did not choose to measure any eligible financial assets or liabilities at fair value.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (“FSP 157-2”). FSP 157-2 delays the implementation of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. This statement defers the effective date to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.

FORTUNET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

In April 2009, the FASB issued FSP FAS No. 107-1 and Accounting Principles Board Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. 107-1”). FSP No. 107-1 extends the disclosure requirements of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to interim period financial statements, in addition to the existing requirements for annual periods and reiterates SFAS No. 107’s requirement to disclose the methods and significant assumptions used to estimate fair value. FSP No. 107-1 is effective for interim and annual periods ending after June 15, 2009. The adoption of this statement did not have a material impact on the Company’s consolidated financial position or results of operations.

In April 2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Values When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly declined and (2) identifying transactions that are not orderly. The FSP also amends certain disclosure provisions of SFAS No. 157 to require, among other things, disclosures in interim periods of the inputs and valuation techniques used to measure fair value. This FSP is effective for interim and annual periods ending after June 15, 2009 and the adoption of this statement did not have a material impact on the Company’s consolidated financial position or results of operations.

In April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This FSP modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The FSP also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the FSP, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The FSP further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. FSP 115-2 requires entities to initially apply the provisions of the standard to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulated other comprehensive income. This FSP is effective for interim and annual periods ending after June 15, 2009, and the adoption of this statement did not have a material impact on the Company’s consolidated.

In May 2009, the FASB issued FAS No. 165, Subsequent Events The objective of this Statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth:

1.	The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements

2.	The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements

3.	The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

In accordance with this Statement, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009.

In June 2009, the FASB issued FAS No. 168, The FASB Accounting Standards CodificationTM (Codification) will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the

FORTUNET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

3.	Inventories:

Inventories, consisting primarily of parts and components to be used for assembly and installation of products to be leased or sold, are valued at the lower of cost or market, as determined on the first-in, first-out basis. Also classified as inventories are Work In Process (“WIP”) components for future installations of our equipment in the field. The following schedule details inventory between parts and assemblies and WIP:

	June 30,		December 31,
	2009		2008
Parts and assemblies	$	1,416,562	$	1,680,031
WIP		798,142		683,399
	$	2,214,704	$	2,363,430

4.	Fair Value of Certain Financial Assets and Liabilities:

SFAS 157 defines fair value as the price that would be received for selling an asset or the price to be paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. SFAS 157 establishes consistency and comparability by providing a fair value hierarchy that prioritizes the inputs to valuation techniques into three broad levels, which are described below:

	•		Level 1 inputs are quoted market prices in active markets for identical assets or liabilities (these are observable market inputs).

	•		Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability (includes quoted market prices for similar assets or identical or similar assets in markets in which there are few transactions, prices that are not current or vary substantially).

	•		Level 3 inputs are unobservable inputs that reflect the entity’s own assumptions in pricing the asset or liability (used when little or no market data is available).

SFAS 157 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price be used to measure fair value whenever possible.

The auction process for Action Rate Securities (ARS) historically provided a liquid market for these securities. In 2007, however, this process began to deteriorate. During 2008, the Company began to reduce its investment amount of ARS in its portfolio. However, some of the ARS the Company held experienced auction failures during 2008. As a result, when the Company attempted to liquidate its ARS holdings through auction, it was not always able to do so. Note that in the event of an auction failure, the interest rate on the security is typically reset according to the contractual terms in the underlying indenture.

FORTUNET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

In view of the absence of observable market quotes, the Company’s management believes that the Company’s remaining (as of June 30, 2009) investments in auction rate securities should be classified as “level 3” ARS and be valued utilizing the discounted cash flow model. The Company’s fair value assessment of its long-term, level 3 ARS takes into account the underlying investment nature, the present value of expected future principal and interest payments discounted at rates considered to reflect the uncertainty of current market conditions and the overall capital market liquidity. As of June 30, 2009, the Company’s long-term investment ARS portfolio consisted of instruments having $3.125 million par value. Based on the fair value estimate using the discounted cash flow model, we believe that the par value adequately approximates the fair value. These remaining ARS instruments are tax exempt, and the Company has so far received all due monthly interest payments.

Financial assets included in our financial statements and measured at fair value on a recurring basis as of June 30, 2009 are classified based on the above valuation method as is detailed in the table below:

			Fair Value Measurement at June 30, 2009
Description	Total		Level 1		Level 2		Level 3
Assets:
TsAAuction rate securities (long term)	$	3,125,000	$	—	$	—	$	3,125,000
Total assets at fair value	$	3,125,000	$	—	$	—	$	3,125,000

The following table presents the Company’s activity for level 3 assets as defined in SFAS 157, which are measured at fair value on a recurring basis using significant unobservable inputs for the six months end June 30, 2009:

	Auction Rate
	Securities and
	Put Rights
	Agreements
Balance at December 31, 2008	$	9,750,000
Transfer to Level 3		-----
Total gains or (losses) (realized or unrealized) included in earnings		-----
Purchases and (settlements) net		(6,625,000	)
Balance at June 30, 2009	$	3,125,000

The following table summarizes the amortized cost basis, the aggregate fair value and gross unrealized holding gains and losses applicable to our ARS holdings at June 30, 2009 and December 31, 2008, respectively.

	Amortized		Fair		Unrealized Holding
	Cost Basis		Value		Gains		(Losses)		Net
2008:
Maturities less than one year
Municipal Bonds (ARS and
related) Put Rights Agreements	$	6,550,000	$	6,550,000	$	1,137,700	$	1,137,700	$	6,550,000
Maturities greater than five years:
Municipal Bonds Instruments (ARS)	$	3,200,000	$	3,200,000	$	—	$	—	$	—
2009:
Maturities greater than five years:
Municipal Bonds Instruments (ARS)	$	3,125,000	$	3,125,000	$	—	$	—	$	—

FORTUNET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company estimated the fair value of our ARS using the discounted cash flow model. In accordance with the model, we estimated the present value of future principal and interest payments discounted at rates considered to reflect the uncertainty of current market conditions and the overall capital market liquidity. The value derived through the discounted cash flow model was generally consistent with the quoted price indicated by the brokers that handle our remaining ARS at June 30, 2009.

The Company continues to monitor the market for auction rate securities and considers its impact (if any) on the fair market value of the Company’s investments. If the current market conditions continue, in which some auctions for ARS fail, or the anticipated recovery in market values does not occur, the Company may be required to record unrealized losses or impairment charges in 2009. As auctions have closed successfully, the Company has converted its prior investments in ARS into money market funds and short term certificates of deposit deposited with banks. The Company believes it will have the ability to hold, the most if not all, remaining auction rate securities for which auctions may fail until the market recovers. It does not anticipate an urgent need to sell most of these securities in order to continue to operate its business.

5.	Earnings Per Share:

In accordance with the provisions of SFAS No. 128, Earnings Per Share, basic net income is computed by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing the amount of income available to common shareholders by the number of diluted weighted average shares of common stock outstanding during the respective periods. Potentially dilutive securities include common shares purchasable upon exercise of stock options and any non-vested stock.

The following table sets forth the computations for basic and dilutive earnings per common share:

	Three months ended June 30,
	2009		2008
Net income	$	584,189	$	866,336
Basic weighted average shares outstanding		11,045,011		11,349,812
Dilutive non-vested shares		9,000		8,852
Diluted Weighted average number of shares outstanding		11,054,011		11,358,664
Earnings per share - basic	$	0.05	$	0.08
Earnings per share - diluted	$	0.05	$	0.08

	Six months ended June 30,
	2009		2008
Net income	$	803,732	$	1,809,887
Basic weighted average shares outstanding		11,043,511		11,349,812
Dilutive non-vested shares		10,500		8,852
Diluted Weighted average number of shares outstanding		11,054,011		11,358,664
Earnings per share - basic	$	0.07	$	0.16
Earnings per share - diluted	$	0.07	$	0.16

6.	Stock Based Compensation:

On January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payments” (“SFAS No. 123R”), which requires companies to measure the cost of employee services received in exchange for an award of equity

FORTUNET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

instruments based on the grant date fair value of the award. The Company has equity incentive plans that provide for the issuance of stock options, restricted stock and other equity incentives.

For the year 2009, the Company authorized 12,000 shares of restricted stock to be granted to independent members of the board of directors. Subject to the recipients’ continued service on our board of directors, 25% of these shares will vest upon the completion of each fiscal quarter of 2009. Upon the termination of any recipient’s service on our board of directors, all unvested shares will be forfeited back to the Company.

Compensation cost related to vested restricted stock was $8,460 and $18,600 for the three months ended June 30, 2009 and 2008, respectively and $16,920 and $37,200 for the six months ended June 30, 2009 and 2008, respectively. Costs associated with these expenses are included in general and administrative expenses. A total of $16,920 of unrecognized compensation costs related to nonvested restricted stock is expected to be recognized over future periods.

7.	Commitments and contingencies:

As of June 30, 2009, the Company has entered into non-cancelable purchase commitments for certain inventory components used in its normal operations. The purchase commitments covered by these agreements are valid for less than one year and, in the aggregate, amount to approximately $39,500.

8.	Significant equity transactions:

At the Annual Meeting of Shareholders held on April 17, 2009, the Shareholders approved a special dividend of $2.50 per share of Common Stock to be declared by the Board of Directors on such terms and conditions that the Board of Directors may determine in accordance with applicable laws and regulations. The Board of Directors declared the special dividend of $2.50 per share of Common Stock, or $27.6 million in the aggregate, on April 17, 2009.

9.	Research and development:

Research and development costs are primarily the costs of software and hardware development and the costs of continued enhancements of the electronic gaming systems that the Company leases to customers. Research and development costs relating principally to the design and development of products generating revenues are expensed as incurred. Hardware, tools and tooling that have an alternative future use, such as for manufacturing, are capitalized. Hand tools used in research and development, as well as special purpose fixtures, are expensed when incurred. The total amount of research and development costs were $407,364 and $292,839 during the three months ended June 30, 2009 and 2008, respectively. The total amount of research and development costs were $790,385 and $466,475 during the six months ended June 30, 2009 and 2008, respectively. A portion of overall software development costs totaling $230,237 was capitalized during the six months ended June 30, 2008 in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. A significant portion of the capitalized research and development costs is attributable to the development of our mobile gaming platform being reviewed by Nevada gaming authorities. Since our mobile gaming platform became commercially available for bingo applications in the fourth quarter of 2008, we discontinued further capitalization of respective software development costs and started to amortize the accumulated software development costs on a regular 5-year straight line schedule. Amortization expense was $105,336 for the three months ended June 30, 2009 and $210,672 for the six months ended June 30, 2009. We have not capitalized any software development costs for the six months ended June 30, 2009.

10.	Concentrations:

FORTUNET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

11.	Income Taxes:

We recorded our income tax provision at an effective rate of 31.0% and 16.8% for the three months ended June 30, 2009 and 2008, respectively. We recorded our income tax provision at an effective rate of 29.8% and 21.3% for the six months ended June 30, 2009 and 2008, respectively. This effective tax rate takes into account, among other items, research and development tax credit of $51,375 resulting in a reduction of the statutory tax rate by approximately 4.0% for the six months ending June 30, 2009. A further reduction in the effective tax rate for the three and six months ending June 30, 2008 was primarily due to the benefit of the tax exempt income.

12.	Subsequent Events:

In the second quarter of 2009, we declared a special dividend of $2.50 per share of Common Stock to the Company’s shareholders totaling $27.6 million, of which $23.9 million was paid as of June 30, 2009. On July 16, 2009 the final dividend payment of $3,666,250 was paid to our largest shareholder.

On August 10, 2009, William R. Jacques Jr. was reappointed to the office of Chief Financial Officer.

Subsequent events have been evaluated through August 13, 2009, the date the financial statements were available to be issued.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

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

(1) Our belief that the Company will have the ability to hold any remaining auction rate securities for which auctions may fail until the market recovers; (2) our belief that we do not anticipate a need to sell auction rate securities in order to continue to operate its business; (3);our belief that in the absence of observable market quotes, the Company’s remaining investments in auction rate securities should be classified as “level 3” ARS and be valued utilizing the discounted cash flow model; (4) our continued efforts to monitor the market for auction rate securities and consider the impact (if any) on the fair value of the Company’s investment; (5) our belief that we have expeditiously developed software and hardware modifications adequately responding to the raised questions; (6) our belief that our cash flow from operations combined with the retained liquid and long-term investments will be adequate to meet our anticipated future requirements for working capital and capital expenditures for the next 12 months and for the foreseeable future; (7) our belief that, we believe that the financial statements included in this Quarterly Report on Form 10-Q correctly present in all material respects our financial position, results of operations and cash flows for the periods covered therein; (8) our anticipation that at some point in time, we may begin selling our gaming platforms for use in conducting traditional casino games, instead of entering into lease contracts as we do now, or pursuant to purchase options contained in lease contracts;;(9) our expectation that the negative trend in our profitability will persist at least in the near future; (10) our expectation that a total of $16,920 of unrecognized compensation costs related to nonvested restricted stock is will be recognized over future periods; (11) our intent to offer our customers equipment lease agreements under which we will lease our wireless gaming terminals and the associated equipment; (12) our expectation that in order to further develop our business and even simply to continue the business as is, we may be now forced to seek additional capital, a daunting task in the current luck of credit environment; (13) our belief that in order to remain competitive in the bingo market, we may find it necessary to increase the volume of consumable bingo products that we provide to our customers, which may affect our overall profitability; (14) our belief that the failed auctions that we have experienced are not a result of the deterioration of the underlying credit quality of these securities; (15) our belief that any unrealized gain or loss associated with these securities will be temporary and will be recorded in accumulated other comprehensive income (loss) in our financial statements; (16) our belief that, based on our cash and cash equivalents balances during 2009, the current lack of liquidity in the credit and capital markets will not have a material impact on our liquidity, cash flows or ability to fund our obligations; (17) our belief that the acceptance of our wireless gaming terminals by gaming establishments and their players will depend on our ability to demonstrate the economic and other benefits of our products to gaming establishments, casino players becoming comfortable with using our wireless gaming terminals, the attractiveness of the casino games that players can play using our wireless gaming terminals, ease of use, and the reliability of the hardware and software that comprise our mobile gaming platforms;(17) our belief that as part of our business strategy, we may seek to acquire businesses, services and technologies that we believe could complement or expand our business, augment our market coverage, enhance our technical capabilities, provide us with valuable customer contacts or otherwise offer growth opportunities; (18) our anticipation that we will delay our mobile gaming growth plans in order to concentrate our efforts and resources on adapting our core bingo business to the recent economic decline that we expect to continue at least in the near future; (19) statements regarding our expectation that the competition in the market for gaming devices will increase and intensify as the market for mobile gaming devices develops; (20) our expectation to continue to make a significant investment in research and development and our commitment to continue to introduce new products for the gaming market; (21) our belief that our research and development efforts have made our mobile gaming platform compliant with the wireless gaming regulations promulgated by the Nevada Gaming Commission; (22)our concern that the NGCB analysis of our new modifications may delay significantly the overall process of reviewing of our mobile gaming platform; (23) our belief the addition of traditional casino

games to our mobile platform will potentially increase these casino operators’ revenues; (24) our belief that the market will not be ready to adapt mobile gaming of traditional casino games in the near future due to the worsening economic environment; (25) our belief that when and if the Nevada market does accept mobile gaming of traditional casino games, we expect to subsequently expand our marketing to additional Nevada casinos that may be attracted to our mobile gaming platform by the potential of new gaming revenues generated in the auxiliary gaming and peripheral public areas of casinos where playing of traditional casino games, such as poker, keno and slots, was previously not available; (26) our expectation to expand marketing efforts for our wireless gaming platform beyond Nevada; (27) our belief that we should adapt a conservative view on the near-term economic viability of traditional casino games, such as poker, slots and keno, to be played on our mobile gaming platform, even if it is approved for use in Nevada casinos; (28) our opinion that economic environment is not likely to quickly improve, at least in 2009 and possibly well beyond 2009; (29) our belief that in this recessionary economic environment, casinos have excessive capacity of slot machines and gaming tables on their main casino floors and are therefore not motivated to promote playing of traditional casino games in the auxiliary gaming areas, such as bingo halls, sports books and bars, since such gaming would involve additional costs to casinos; and (30) our belief that during the hard times of economic contraction, the casinos are unlikely to cannibalize the main casino floors for the sake of generating some additional revenues in the auxiliary areas; whereas in times of economic prosperity and expansion, when the main casino floors are more fully utilized, we believe that the extra revenues generated in the auxiliary gaming areas would be welcome.

Our expectations, beliefs, objectives, anticipations, intentions and strategies regarding the future, including, without limitation, those concerning expected operating results, revenues and earnings are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from results contemplated by the forward-looking statements including, but not limited to unexpected difficulties in penetrating new markets as a result of regulatory, competitive or other barriers; inability to devote additional resources to our marketing efforts; inability to devote additional resources to our research and development initiatives to enhance product development; unexpected changes to zoning laws that effect our ability to continue to manufacture products in our current facility; inability to cut our costs that may result in a loss of our existing customers to our competitors; legality of our electronic bingo player units; our inability to create or introduce new products for the conventional bingo market; our failure to gain approval for our gaming platforms to play traditional casino games; unanticipated decreases in our manufacturing capabilities; unfavorable outcome of potential litigation matters; loss of existing distributors or our failure to further broaden our distribution channels; unanticipated substantial decrease or increase in our research and development expenses; unexpected changes to credit ratings of the auction rate securities instruments we hold; difficulty in evaluating the value of the auction rate securities; inability to accurately value the underlying assets supporting auction rate securities; changes in default rates applicable to the underlying assets, underlying collateral value, and the strength and quality of the market and its liquidity; inability to accurately predict the impact of the recordation of any unrealized gain or loss associated with auction rate securities in our financial statements; unexpected changes in our liquidity, cash flows due to unexpected changes in the credit and capital markets; inability to predict the impact of market changes with respect to our auction rate securities; unanticipated need to liquidate our auction rate securities; an unanticipated need for additional funds for operating expenses, new business opportunities, recession, decrease in consumer spending, or other events; inability to protect and defend our intellectual property rights; the failure of the overall gaming industry to sustain its revenues; unexpected need to expand our operations and inability to enter into a new manufacturing lease; unanticipated drop or increase in inventory levels; inability of our leasing revenue to meet our operating expenses in the short and long terms; inability to finance additional expenses related to the procurement of equipment and the manufacturing of equipment and component parts in order to expand our production efforts; unanticipated increase in expenditures during the next 12 months; lack of growth in the gaming industry; inability to procure additional customers and enter into new lease agreements; rapid technological changes in the gaming industry that render our technology obsolete; difficulties demonstrating the economic benefits of our products; inability to meet the evolving industry standards of casino and player demands; failure to achieve market acceptance of our products; lack of demand for our consumable bingo products; inability to predict the length of the economic decline; inability to predict the timing of expenses related to the development of our manufacturing infrastructure; inability to predict the amount of investment funds that will be consumed in order to develop our manufacturing infrastructure; inability to penetrate new jurisdictions and markets; and inability to improve our financial, accounting and operation systems and controls. We assume no obligation to update any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should also review the cautionary statements and discussion of the risks of our business set forth elsewhere herein under the heading “Risk Factors” under Part I, Item 1A and our other filings with the Securities and Exchange Commission (“SEC”).

Overview

We are an established and profitable manufacturer of multi-game and multi-player server-based gaming platforms. Our gaming platforms include networks of both wireless and stationary player terminals, cashier-based point-of-sale terminals, self-service point-of-sale kiosks and game file servers that conduct and control bingo games. Our gaming platforms have been adapted (although not yet approved for sales in Nevada) to conduct traditional casino games, such as keno, poker and slots, in addition to, and optionally concurrently with, bingo. Our gaming platforms enable patrons to play bingo using either our wireless or our stationary player terminals. In addition, our gaming platforms have been adapted (although not yet approved for sales in Nevada) to enable patrons to play certain traditional casino games using our stationary player terminals.

Based on our belief that our research and development efforts have made our mobile gaming platform compliant with the wireless gaming regulations promulgated by the Nevada Gaming Commission on March 23, 2006 and Mobile Gaming System Policies published by Nevada Gaming Commission on July 21, 2006, we submitted our mobile gaming platform for review by the Nevada gaming authorities in 2006. At the very end of the third quarter of 2008, we have received a communication from the Nevada Gaming Control Board (the “NGCB”) raising new additional questions regarding certain software and hardware aspects of our mobile gaming platform. Although we believe that we have expeditiously developed software and hardware modifications adequately responding to the raised questions, we can provide no assurances that the latest modifications may be acceptable to the NGCB. Even assuming that the modifications are acceptable to the NGCB, we are concerned that the NGCB analysis of the new modifications may delay significantly the overall process of reviewing of our mobile gaming platform. If our wireless gaming devices are eventually approved by the Nevada gaming authorities and the economy revives, Nevada casino patrons will be able to play traditional casino games using our wireless player terminals. However, there can be no assurance that we will obtain such approval in the foreseeable future or at all. See also, “Risk Factors” under Part I, Item 1A.

If we obtain the necessary approvals, we will continue to market our wireless gaming platform to Nevada casinos, most likely commencing with casinos with bingo halls where our mobile gaming platforms are already in use for playing bingo games. We believe the addition of traditional casino games to our mobile platform will potentially increase these casino operators’ revenues. However, we do not believe the market will be ready to adapt mobile gaming of traditional casino games in the near future due to the adverse economic environment. When and if the Nevada market does accept mobile gaming of traditional casino games, we expect to subsequently expand our marketing to additional Nevada casinos that may be attracted to our mobile gaming platform by the potential of new gaming revenues generated in the auxiliary gaming and peripheral public areas of casinos where playing of traditional casino games, such as poker, keno and slots, was previously not available. In such a case, we expect to subsequently expand marketing efforts for our wireless gaming platform beyond Nevada.

Meanwhile, we believe that we should adapt a conservative view on the near-term economic viability of traditional casino games, such as poker, slots and keno, to be played on our mobile gaming platform, even if it is approved for use in Nevada casinos. As evidenced and widely publicized in numerous city, state and national publications, including the Las Vegas Review Journal, the New York Times, and the Wall Street Journal, the Center for Business and Economic Research at the University of Nevada, Las Vegas, as well as investment banking gaming industry analysts, including Deutsche Bank, the economic health of the Nevada gaming industry drastically worsened in 2008, and in our opinion, it is not likely to quickly improve, at least in 2009 and possibly well beyond 2009. In this recessionary economic environment, we believe that casinos have excessive capacity of slot machines and gaming tables on their main casino floors and are therefore not motivated to promote playing of traditional casino games in the auxiliary gaming areas, such as bingo halls, sports books and bars, since such gaming would likely divert revenues from main casino floors rather than generate extra revenue, and yet, would involve additional costs to casinos. During the hard times of economic contraction, we believe that casinos are unlikely to cannibalize the main casino floors for the sake of generating some additional revenues in the auxiliary areas; whereas in times of economic prosperity and expansion, when the main casino floors are more fully utilized, we believe that the extra revenues generated in the auxiliary gaming areas would be welcome. See also, “Risk Factors” under Part I, Item 1A.

Since our inception, we have been a technology innovator in the gaming equipment industry. We helped to define the core concepts of modern gaming technologies including server-based networks, concurrent multi-

gaming, cashless gaming, downloadable gaming and, notably, mobile gaming. We continue to focus on research and development and are continuously upgrading our wireless player terminals to serve as a multi-game platform that enables patrons to play traditional casino games in casino public areas in addition to playing bingo. We also introduced and started commercial deliveries of new advanced bingo flashboards that utilize long-life color light emitting diodes instead of conventional incandescent lamps. In addition, we also recently introduced and started commercial deliveries of advanced automatic ball blowers for bingo, keno and lottery applications working in conjunction with our flashboards and player terminals. In addition, we have recently started manufacturing and commercial deliveries of advanced barcoded bingo paper products supplementing our electronic bingo products. We print the barcoded bingo paper products on high-speed variable-data web presses in our recently expanded manufacturing facilities in Las Vegas, NV. Although our continuous development of new products and manufacturing infrastructure is capital extensive, we are committed to continue to introduce new products for the gaming market.

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

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

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

We envision that if we develop electronic product sales revenue, we will also see a recurring revenue component generated from software upgrades and/or maintenance of the software components of our sold products.

Our expenses primarily consist of:

(a)

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

(b)

general and administrative expenses, including the costs of activities associated with the management of our company and related support, which includes all payroll and benefits other than payroll in connection with research and development activities, travel costs, professional fees, facility lease expenses and bad debt expense reserves;

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

(d)	costs of research and development activities geared to the further development of our gaming platform, including labor costs and costs of hardware and software testing, prototyping and development tools; and

(e)	cost of maintaining, upgrading and expanding our manufacturing infrastructure including electronic assembly lines and web printing presses.

We envision that the development of our product revenue in the bingo consumables market, will require us to record costs of products sold (rather than leased) that include materials, labor, and direct and indirect manufacturing costs and associated warranty costs, if any.

Millennium, our wholly owned subsidiary, distributes our bingo products in selected territories in the United States. All of our other operations, including the operation and maintenance of our bingo products in all territories and the exclusive distribution of our bingo products in Nevada, Texas and Washington, are conducted by FortuNet.

During the three months ended June 30, 2009, we incurred $60,413 and during the six months ended June 30, 2009, we incurred $204,145 in legal expenses incurred in a routine course of business.

Deferred taxes are primarily the result of differences in tax and financial amortization lives of other assets and differences in property and equipment depreciation.

Application of Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the reporting date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, bad debts, player terminal depreciation and litigation. We base our estimates and judgments on historical experience and on various other factors that are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

There has been no material change in the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements from the critical accounting policies described in our Annual Report on Form 10-K and amended Form 10-K for fiscal year ended December 31, 2008.

Legal Contingencies

We are currently not involved in any legal claims and legal proceedings. We have not accrued any liability for estimated losses related to legal contingencies that may arise in the future.

Results of Operations

Consolidated Income Statement

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

	Three Months Ending June 30,								Six Months Ending June 30,
	2009				2008				2009				2008
Revenues
Sales revenue	$	3,964,655	100.0	%	$	3,974,999	100.0	%	$	8,107,980	100.0	%	$	8,096,632	100.0	%
Cost of revenue		774,993	19.5	%		584,295	14.7	%		1,700,429	21.0	%		1,265,276	15.6	%
Gross profit		3,189,662	80.5	%		3,390,704	85.3	%		6,407,551	79.0	%		6,831,356	84.4	%
Operating costs and expenses
General and administrative		1,157,714	28.2	%		1,259,547	31.7	%		2,425,120	29.9	%		2,441,223	30.2	%
Sales and marketing		1,115,006	28.1	%		1,083,818	27.3	%		2,319,780	28.6	%		2,214,736	27.4	%
Research and development		407,364	10.3	%		292,839	7.3	%		790,385	9.7	%		466,475	5.7	%
Total operating expenses		2,638,084	66.6	%		2,636,204	66.3	%		5,535,285	68.2	%		5,122,434	63.3	%

Income from operations		551,578	13.9	%		754,500	19.0	%		872,266	10.8	%		1,708,922	21.1	%

Other income		245,326	6.2	%		5,033	0.1	%		164,371	2.0	%		10,309	0.1	%
Interest income, net		50,241	1.3	%		282,070	7.1	%		108,452	1.3	%		577,528	7.2	%
Income before taxes		847,145	21.4	%		1,041,603	26.2	%		1,145,089	14.1	%		2,296,759	28.4	%
Provision for income taxes		262,956	6.6	%		175,267	4.4	%		341,357	4.2	%		486,872	6.0	%
Net income	$	584,189	14.8	%	$	866,336	21.8	%	$	803,732	9.9	%	$	1,809,887	22.4	%

Three Months and Six Months Ended June 30, 2009 and June 30, 2008

For the second quarter of 2009 our sales slightly decreased, and although in the first six months of the current year our sales slightly increased as compared to the first six months of the prior year, our quarterly and semi-annual profits nevertheless significantly decreased due to a significant increase in our operating costs as detailed below. In view of the quickly deteriorating economic environment and in combination with other negative factors and risks specific to the Company outlined elsewhere in this document, we expect the negative trend in our profitability to persist at least in the near future.

Sales revenue. Sales revenue was $3,964,655 for the three months ended June 30, 2009, as compared to $3,974,999 for the three months ended June 30, 2008, a decrease of $10,344, or 0.3%. Sales revenue was $8,107,980 for the six months ended June 30, 2009, as compared to $8,096,632 for the six months ended June 30, 2008, an increase of $11,348, or (0.1%).

For the six months ended June 30, 2009 approximately 54.3% of our revenues were derived through 9 distributors. During the same period, we derived approximately 36.5% of our revenue from our single largest distributor, K&B Bingo Sales Incorporated, doing business as Good Time Bingo (“K&B Bingo”). (See “Risk Factors” under Item 1A herein.)

For the six months ended June 30, 2009, the net change in our revenue as a result of changes in our customer base was an increase in revenue of $16,220 over the same period in the prior year, and the net change in revenue as a result of changes in operations at our existing customer locations was a decrease of revenue of $7,373 over the same period in the prior year.

Cost of revenue. Cost of revenue was $774,993 for the three months ended June 30, 2009, compared to $584,295 for the three months ended June, 2008, an increase of $190,698, or 32.6%. Cost of revenue was $1,700,429 for the six months ended June 30, 2009, compared to $1,265,276for the six months ended June 30, 2008, an increase of $435,153, or 34.4%. The increase is primarily due to the ongoing depreciation of our web printing presses commercially producing bingo consumables since the fourth quarter of 2008 and to the ongoing of amortization of previously accumulated capitalized software development cost combined with an increase in the equipment repairs and upgrade costs and partially offset by a decrease in the equipment depreciation costs.

General and Administrative. General and administrative expenses were $1,115,714 or 28.2% of revenue, for the three months ended June 30, 2009 as compared to $1,259,547, or 31.7% of revenue, for the three months ended June 30, 2008, a decrease of $143,833 or 11.4%. General and administrative expenses were $2,425,120, or 29.9% of revenue for the six months ended June 30, 2009 compared to $2,441,223, or 30.2% of revenue for the six months ended June 30, 2008, a decrease of $16,103, or 0.07%. This decrease in general and administrative expenses was attributable primarily to the reduced expense of our on going legal cost.

In the three and six months ended June 30, 2009, the cost associated with the stock grants to our directors was $8,460 and $16,920 respectively. In the three and six months ended June 30, 2008, the cost associated with the stock grants to our directors was $18,600 and $37,200. We expect to have similar costs associated with the stock grants to our directors in the remaining quarters of 2009.

Sales and marketing. Sales and marketing expenses were $1,115,006, or 28.1% of revenue for the three months ended June 30, 2009 as compared to $1,083,818, or 27.3% of revenue for the three months ended June 30, 2008, an increase of $31,188, or 2.9%. Sales and marketing expenses were $2,319,780, or 28.6% of revenue for the six months ended June 30, 2009, compared to $2,214,736, or 27.4% of revenue, for the six months ended June 30, 2008, an increase of $105,044, or 4.7%.These increases were attributable primarily to the increase of commissions paid to the distributors.

Research and development. Research and development expenses were $407,364, or 10.3% of revenue, for the three months ended June 30, 2009, as compared to $292,839, or 7.3% of revenue, for the three months ended June 30, 2008, an increase of $114,525, or 39.1%. Research and development expenses were $790,385, or 9.7% of revenue, for the six months ended June 30, 2009, compared to $466,475, or 5.7% of revenue, for the six months ended June 30, 2008, an increase of $323,910, or 69.4%. The overall increase in research and development costs was primarily attributable to the cessation of the capitalization of the software development costs associated with our mobile gaming platform in the fourth quarter of 2008 and with the subsequent expensing of labor costs associated with the ongoing maintenance of the software.

Other income and interest income. Interest income from investments for the three months ended June 30, 2009 was $50,241 or 1.3% of revenue, compared to $282,070 or 7.1% of revenue, for the three months ended June 30, 2008, a decrease of $231,829, or 82.2%. Interest income from investments for the six months ended June 30, 2009 was $108,452 or 1.3% of revenue, compared to $577,527 or 7.2% of revenue, for the six months ended June 30, 2008, a decrease of $469,075, or 81.2%. The decrease was the result of the liquidation of auction rate securities during 2008 and the transfer of the freed funds into money market and short term certificate of deposits accounts yielding lower interest rates than we previously experienced with the auction rate securities and the liquidation of investments for the payment of dividends in May 2009. Other income for the three months ended June 30, 2009 was $245,326 or 6.2% of revenue, compared to income of $5,033 or 0.1% of revenue, for the three months ended June 30, 2008 an increase of $240,293. Other income for the six months ended June 30, 2009 was $164,371 or 2.0% of revenue, compared to income of $10,309 or 0.1% of revenue, for the six months ended June 30, 2008 an increase of $154,062. The increases in the other income for the second quarter of 2009 and the overall increase in the other income category for the first two quarters of 2009, are primarily attributable to the liquidation of our previous investment in Canadian Government Insured Investments recorded at the end of the second quarter of 2009 at a favorable exchange rate of the Canadian dollar to US dollar.

Provision for income taxes. An income tax provision of $262,956 with an effective tax rate of 31.0% was recorded for the three months ended June 30, 2009, as compared to $175,267 with an effective tax rate of 16.8% for the three months ended June, 2008, an increase of $87,689, or 50.0%. An income tax provision of $341,357 with an effective tax rate of 29.8% was recorded for the six months ended June 30, 2009, as compared to $486,872 with an effective tax rate of 21.2% for the six months ended June, 2008, an increase of $145,515, or

29.9%. The increase in the tax provision for the second quarter of 2009 is primarily attributable to a profitable liquidation of our prior investment in Canadian Government Insured Investments. The overall decrease in the tax provision is primarily due to the decrease in the taxable income for the six months ended June 30, 2009 combined with the research and development tax credit of $51,375 yielding a reduction of the statutory tax rate by approximately 4.5%.

Liquidity and Capital Resources

As of June 30, 2009, our principal sources of liquidity were cash and cash equivalents of approximately $6.1 million and accounts receivable (net of allowance for doubtful accounts) of $1.4 million. Note that out of the approximately $6.1million of cash and cash equivalents, approximately $3.7 million was due and payable as a remainder of a special dividend to shareholders, and that the payment of the remaining portion of the special dividend occurred in the third quarter of 2009, prior to publishing of this current quarterly report. Note also that the special cash dividend of $2.50 per share of Common stock was approved by the Company’s outside shareholders on April 17, 2009, was supported by the Company’s inside shareholders and was declared by the Company’s Board of Directors on the same date. Even after payment of this special dividend, we anticipate that our leasing revenue, which is our principal source of revenue today, will be sufficient to fund our current operating expenses in the short term.

We expect to incur significant additional expenses in connection with the further development of our manufacturing infrastructure including our bingo paper printing presses and electronic assembly lines as well as the procurement of components for the manufacturing of additional stationary and wireless player terminals primarily to firm up our bingo revenues in the adverse economic environment. We anticipate that these expenses will consume a substantial portion, if not all, of our recurring lease revenues as well as a significant portion if not all, of our remaining liquid and long-term investment funds. Although the specific extent and the timing of such expenses are not yet determined, significant expenditures of our available funds will negatively affect the interest we earn on these funds.

Except to the extent we become obligated under supply contracts that we enter into to procure equipment and components, our fixed payment commitments are limited to our facilities leases.

We believe that our cash flow from operations combined with the available liquid funds and long-term investments will be adequate to meet our anticipated future requirements for working capital and capital expenditures for the next 12 months and for the foreseeable future. Currently, there is no plan to raise additional capital; however, if necessary we may seek other advisable additional financing through bank borrowings or public or private debt or equity financings. Additional financing, if needed, may not be available to us, or, if available, the financing may not be on terms favorable to us. The terms of any financing that we may obtain in the future could impose additional limitations on our operations and management structure. Our estimates of our anticipated liquidity needs may not be accurate in the current unfavorable economic environment if unforeseen events occur, resulting in the need to raise additional funds.

Summary of Consolidated Statements of Cash Flow

	Six Months Ended June 30
	2009			2008

Net cash provided by operating activities	$	2,492,873		$	2,2203,694
Net cash provided by investing activities		8,272,003			10,311,142
Net cash used in financing activities		(24,514,921	)		-
Net (decrease) in cash and cash equivalents		(13,750,045	)		12,514,836
Cash and cash equivalents, beginning		19,898,214			4,513,935
Cash and cash equivalents, ending	$	6,148,169		$	17,028,771

Operating Activities

For the six months ended June 30, 2009, net cash of $2,492,873 provided by operating activities was primarily due to net income of $803,732, depreciation and amortization of $1,251,538, stock issued for services of $50,954 and change in operating assets and liabilities of $386,649. For the six months ended June 30, 2008, net cash of $2,203,694 provided by operating activities was primarily due to the net income of $1,809,887, depreciation and amortization of $987,929, stock issued for services of $98,832 and change in operating assets and liabilities of ($594,122). The decrease in net cash provided by operating activities during the six months ended June 30, 2009 as compared to the six months ended June 30, 2008 was primarily due to the decrease in operating income and the distribution of the declared special dividend.

Investing Activities

For the six months ended June 30, 2009, $8,272,003 of net cash was provided by investing activities, with $182,246 spent on capital expenditures, $2,987,165 for marketable securities repurchasing and $11,441,414 of marketable securities sold during the period.

Financing Activities

For the six months ended June 30, 2009, $568,644 of net cash was used for the purchase of treasury stock and $23,946,277 was used for the payment of a special cash dividend. For the six months ended June 30, 2008, no net cash was provided by financing activities.

Off-Balance Sheet Arrangements

As of June 30, 2009, we have no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This Quarterly Report does not include information described under Item 3 of Form 10-Q pursuant to the rules of the Securities and Exchange Commission that permit “smaller reporting companies” to omit such information.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

As required by Rule 13a-15(b) promulgated under the Securities Exchange Act, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the design and operating effectiveness as of June 30, 2009 of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act. Based on this evaluation our Chief Executive Officer and our Chief Financial Officer concluded that, as of June 30, 2009, our disclosure controls and procedures were effective at the reasonable assurance level to enable the Company to record, process, summarize and report

information required under the Securities and Exchange Commission’s rules in a timely fashion. As was previously reported, the Company addressed a significant deficiency in its disclosure controls and procedures by hiring a corporate controller to remedy a prior lack of separation of duties within the accounting department. Our new corporate controller has familiarized herself with many of the Company’s tax and accounting reports and work papers and continues to familiarize herself with such reports and work papers. This familiarity has enabled us to significantly improve our separation of duties in the accounting department.

Changes in Internal Controls Over Financial Reporting

During the three months ending June 30, 2009, our new corporate controller familiarized herself with many of the Company’s tax and accounting reports and work papers, thus enabling the Company to improve its separation of duties in the accounting department by assigning certain duties to her. She continues to familiarize herself with other of the Company’s tax and accounting reports and work papers with a view towards enabling the Company to further improve its separation of duties by assigning additional duties to her in the future.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company currently is not involved in any litigation. Nevertheless in rare instances, we may be threatened with or may be named as a defendant in lawsuits arising in the ordinary course of business, such as personal injury claims and unemployment-related claims, and from time to time, we also prosecute various collection claims against delinquent customers.

ITEM 1A. RISK FACTORS

Set forth below and elsewhere in this Quarterly Report on Form 10-Q, and in other documents we filed with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statements contained in this Quarterly Report. The risk factor set forth below entitled: “Our cash resources have been substantially depleted by the payment of a special dividend of $2.50 per share, and we are now more vulnerable to the uncertainties of the current unfavorable economic environment” have been added from our prior statement on form 10-K for the year ended December 31, 2008. In addition, the risk factor below entitled “A material reduction in the yield on our investment of the proceeds of our initial public offering and our retained earnings could materially and adversely affect our net income and earnings per share”, and” a material reduction in the yield on our investment of the proceeds of our initial public offering and our retained earnings could materially and adversely affect our net income and earnings per share” have been materially modified from our prior statement on Form 10-K for the year ended December 31, 2008.

Risks Relating to Our Business

Our cash resources have been substantially depleted by the payment of a special dividend of $2.50 per share, and we are now more vulnerable to the uncertainties of the current unfavorable economic environment.

In the second quarter of 2009, we declared a special dividend of $2.50 per share of Common Stock to the Company’s shareholders totaling $27.6 million. The payment of the special dividend resulted in a drastic depletion of our financial security cushion, and as a result, we are now much more vulnerable to the uncertainties of the current recessionary economic environment. Consequently, our ability to earn interest and dividends on our liquid funds has been drastically reduced resulting in a substantial negative impact on our earnings. Moreover in order to further grow our business, and even to simply continue the business essentially “as is”, we may be now forced to seek additional capital, a daunting, if not impossible, task in the current unfavorable credit market environment.

Our bingo revenues and potential mobile gaming revenues may be negatively affected or not realized at all due to the general decline in the local, regional, national and international economic environment.

The recent deterioration in the worldwide economic environment has materially negatively impacted the gaming market, including the bingo segment and the potential mobile gaming market. Over the course of the last quarter, attendance at gaming establishments and the per player revenues reported at gaming establishments have significantly decreased. The abrupt and sudden worsening of the economic environment has already negatively impacted and is likely to continue to negatively impact our bingo revenues. The economic decline has also diminished our prospects for generating revenues in the potential mobile gaming market because casinos currently have a substantial underutilized gaming floor space for slot machines and gaming tables. The underutilized gaming floor space of casinos may deter casinos from utilizing mobile gaming devices in the auxiliary gaming areas, such as bingo halls, keno parlors, sports and race books and bars. Moreover, additional capital expenditures and/or lease payments required for mobile gaming devices in auxiliary gaming areas may deter casinos from operating such mobile gaming devices because of the lower costs associated with operating already existing games on the main gaming floors of casinos.

If we are unable to comply fully with the mobile gaming regulations, we may incur substantial additional development costs and delays or completely preclude us from entering into the mobile gaming market.

Nevada gaming laws and regulations require that our mobile gaming systems be approved by the Nevada Gaming Commission before we may distribute these systems to Nevada casinos. The Nevada Gaming Commission (through the NGCB) continues to apply stringent requirements regarding the overall security and integrity of mobile gaming systems. To the extent that our mobile gaming platform currently being reviewed by the NGCB may not comply with the latest such requirements, we would need to undertake additional research and development activities that may be costly, time consuming or require the procurement of components that are costly and scarce in supply. Despite undertaking additional research and development activities, we may not be able to design or develop a mobile gaming platform that fully complies with the NGCB’s evolving requirements, in which case we would be unable to manufacture, distribute or operate wireless player terminals that enable casino players to play traditional casino games in the public areas of gaming establishments, and therefore be unable to fully execute the growth strategy we pursued so far, and instead, we may have to change our focus in favor of stabilization of our core bingo business.

Losing any of our limited number of independent distributors (such as K&B Sales Incorporated) upon whom we depend for a significant portion of our revenue, or losing the business of a significant number of customers of those distributors, would negatively impact our operations.

We are dependent upon a small number of independent distributors to market and sell our products to casinos and bingo halls. For the six months ended June 30, 2009 approximately 54.3% of our revenues were derived through 9 distributors. During the same period, we derived approximately 36.5% of our revenue from our single largest distributor, K&B Bingo Sales Incorporated, doing business as Good Time Bingo (“K&B Bingo”). Due to our payment of commissions to distributors, our customer contracts derived from distributors generate lower profit margins than our contracts derived from direct sales, or house accounts. Because we do not directly control our distributors or their customer intake practices, contracts with customers derived from distributors may be susceptible to higher default rates and lower profit margins than our house accounts.

Some of our distributors are not contractually prohibited from marketing or selling products of our competitors. Our contracts with our distributors typically cover one to three year terms and are automatically renewed for one year unless terminated upon the expiration of the then current term. Upon the expiration of a contract term, we may not be able to renew any of these contracts on terms that are favorable to us, or at all. Our competitors may provide incentives to our distributors to market and sell their products in addition to or in lieu of ours. The loss of any of our distributors or the loss of business from any customer of any of our distributors may result in a material reduction in our revenue, resulting in a material adverse effect on our business, financial condition and results of operations. Towards the end of 2007 and at the beginning of 2008, we lost a significant portion of revenues from charitable bingo hall customer locations that were serviced through one of our distributors in the amount of approximately $1,500,000.

K&B Bingo of Dallas, Texas is one of our largest distributors and generates approximately 36.5% of our revenue. K&B Bingo is a wholly owned subsidiary of Aces Wired of Dallas, Texas. Aces Wired is currently being investigated by the Texas gaming authorities for alleged violations of Texas Penal Code provisions relating to gambling promotion; keeping a gambling place; possession of a gambling device, equipment or paraphernalia; and engaging in organized criminal activity relating to same. As reported on the Form 8-K filed by Aces Wired with the SEC on October 15, 2008, no criminal charges had been filed as of that date, by authorities against Aces Wired or any of its officers, directors or other employees. However, Aces Wired has been advised that local authorities are seeking to develop charges against Aces Wired and certain of its officers, directors and other employees consistent with the allegations in the search and arrest warrants executed on May 21, 2008. In that regard, on October 9, 2008, the District Attorney of Bexar County, Texas sent formal notification advising Aces Wired that it was conducting an investigation into violations of state criminal laws by certain of Aces Wire’s officers, directors and other employees (including former directors and employees) involving gambling, fiduciary misapplication of funds, securities fraud, organized crime and money laundering.

We have previously relied upon publicly filed information for current information on the status of the Texas investigation of Aces Wired. However, as of December 3, 2008 Aces Wired is no longer a public reporting company. Since current public information will no longer be available to us by access to the SEC filings, monitoring and determining the current status of the investigation and the condition of Aces Wired with any degree of certainty will be much more difficult, if not impossible, in the future.

The ongoing investigation of Aces Wired by the Texas Attorney General and local authorities may potentially impact the operations of K&B Bingo throughout the state of Texas. While the investigation of Aces Wired has not impacted our ability to generate revenues in Texas through K&B Bingo to date, in the event that K&B Bingo’s activities are suspended in Texas, the loss of revenues generated by K&B Bingo could have a material impact upon our results of operations. Currently the Company does not hold a bingo distributor license in the state of Texas. If our relationship with K&B Bingo terminates or is terminated and we cannot obtain a bingo distributor license in Texas in order to maintain our relationship with existing end users, the loss of end users in Texas would have a material adverse affect upon our business and operations.

Our past trend of accumulating investment funds may reverse and may result in a depletion of the funds due to the impending needs to upgrade both our manufacturing infrastructure and our fleet of rental equipment in the field.

Due to the increasing competitive pressures in our core bingo market, we may no longer be able to postpone a costly upgrade of our existing fleet of rental equipment with the new models that we have developed in the process of pursuing mobile gaming opportunities. For the same reasons, we may no longer be able to postpone a costly upgrade of our manufacturing infrastructure, including very expensive web printing presses.

The combined cost of such upgrades may not only prevent us from continuing our trend of accumulating cash resources but may also result in a substantial, or even complete, depletion of our investment funds and we redeploy such funds into these upgrades. In such a case, the interest we earn on available investment funds that currently constitutes a substantial portion of our net income may drastically decrease, since such interest is generally proportional to the amount of funds invested.

We may have to refocus our business strategy from that of growth into the mobile gaming market to a strategy of stability and maintenance of our core bingo business in the near term.

We may not be able to implement our growth strategy primarily due to the recent drastic decline in the economic environment and its resultant impact on the gaming market. Our ability to implement our growth strategy is dependent on a number of factors which are outside of our control, including market demand for our gaming products, our ability to obtain licenses, permits and other forms of approval from gaming regulators, participation levels in discretionary leisure activities of consumers, higher fuel and transportation costs and an economic slowdown. Among other things, implementation of our growth strategy may be adversely affected if: we are not able to maintain and attract a sufficient number of customers to meet required levels of profitability that will enable us to continue to pursue our growth strategy, we are unable to adequately penetrate new jurisdictions and markets at reasonable cost thereby limiting the future demand for our products below the level assumed by our growth strategy, or we are forced to significantly alter our business strategy to meet changes in our consumer markets. Therefore in the near term, we anticipate that we will delay our mobile gaming growth plans in order to concentrate our efforts and resources on adapting our core bingo business to the recent economic decline that we expect to continue at least in the near future. Consumable bingo products, such as paper bingo products, may carry a different gross profit margin than electronic bingo products. In order to remain competitive in the bingo market, we believe that we may find it necessary to increase the volume of consumable bingo products that we provide to our customers, which may affect our overall profitability.

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

The market for gaming devices generally is intensely competitive, and we expect competition to increase and intensify as the market for mobile gaming devices develops. We currently compete with other providers of electronic bingo products, such as Arrow International, VKGS, LLC, or Video King, formerly a division of BK Entertainment Corp., GameTech International, Inc., the merged Planet Bingo, LLC and Melange Computer Services, Inc., Electronic Game Solutions, Inc. and California Concepts, Inc. in the marketing of our BingoStar wireless bingo systems. We expect to face competition with several new entrants in the market, including I-bingo, Inc. and eQube, Inc. Although none of our competitors that manufacture mobile bingo devices is currently licensed in Nevada other than GameTech International, Inc., we may face competition from these providers in the market for mobile gaming devices in the future. Given the market penetration, name recognition, marketing resources and familiarity with the gaming device industry generally, traditional casino

game device manufacturers could be a significant competitive threat to us. We expect fierce competition in our expansion efforts from multiple large competitors dominating their respective markets, such as Aristocrat Leisure, Ltd., International Game Technology, Inc., Alliance Gaming Corporation, WMS Gaming Inc. and Shuffle Master, Inc., that may enter the market for mobile gaming devices. In addition, we may face a strong competition from Cantor Fitzgerald Ltd., that already offers wireless sports betting in the United Kingdom, holds an Operator of Mobile Gaming Systems license in Nevada, and in April of 2008 started field testing of mobile gaming system in Las Vegas, NV. The competition in the potentially lucrative Nevada market for mobile gaming systems is anticipated to become even more fierce when other of Nevada’s currently licensed Operators of Mobile Gaming Systems, including International Game Technology, Inc., Sona Mobile, Inc. and GameTech International, Inc. enter the market.

Additionally, traditional casino operators, most of whom are much larger than us, may attempt to enter the emerging mobile gaming market. Some of our competitors and potential competitors have significant advantages over us, including greater name recognition, longer operating histories, pre-existing relationships with current or potential customers, proprietary technology, significantly greater financial, marketing and other resources and more readily available access to capital that could allow them to respond more quickly to new or changing opportunities.

Finally, other providers of electronic bingo products have in the past reduced, and may in the future continue to reduce, the prices of their products to gaming establishments in order to win those gaming establishments as customers and to gain market share. Electronic and paper bingo competitors may have greater financial, marketing, technical or other resources, and greater ability to respond to pricing pressures than we do. They may also have broader product lines, ability to reduce price through product bundling, greater experience with high-volume manufacturing, greater customer service capabilities, or larger and more established sales organizations and customer bases. To maintain or capture a position in the market, we must develop new and enhanced electronic and paper bingo products and introduce them at competitive prices on a timely basis, while managing our research and development costs. Competition in the bingo market tends to increase when there is an overall decline in the economy. In particular, pricing pressure increases the number of new entrants into the bingo market and could adversely affect our revenues. To the extent that competitive pressures force us to reduce our prices or provide other incentives to establish or maintain relationships with gaming establishments, our business and operating results could be adversely affected.

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

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

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

As a manufacturer, distributor and operator of gaming platforms, we currently hold licenses in a number of jurisdictions, including Nevada. Our officers, including our major stockholder, Yuri Itkis, are required to obtain and maintain licenses, permits and other forms of approval in certain jurisdictions. We are under continuous scrutiny by the applicable regulatory authorities. Our officers’ current regulatory approvals may be revoked, suspended or curtailed at any time. Our officers’ failure to obtain or maintain regulatory approval in any jurisdiction may prevent us from obtaining or maintaining regulatory approval in other jurisdictions. The failure to maintain a license in a single jurisdiction or a denial of a license by any new jurisdiction may cause a negative “domino effect” in which the loss of a license in one jurisdiction could lead to regulatory investigation and possible loss of a license in other jurisdictions.

Some jurisdictions also require licenses, permits or other forms of approval for specific gaming devices. If other jurisdictions adopt mobile gaming laws, these approval requirements may vary from jurisdiction to jurisdiction and the license, permit and approval process may be costly and more difficult to obtain that the licenses we have obtained in Nevada pursuant to the Nevada Mobile Gaming Law. As a general matter, the

regulatory approval of devices involving traditional casino games is more difficult to obtain than those for bingo products. Some jurisdictions require the regulatory approval of entities and individuals before the pursuit of regulatory approval of specific gaming devices, but other jurisdictions allow the pursuit of such regulatory approvals concurrently. Although we (and the individuals associated with us) may obtain regulatory approval in a particular jurisdiction, we may not be able to manufacture, distribute or operate our mobile gaming platforms in that jurisdiction without separate and specific regulatory approval of our mobile gaming platform. Any failure of our gaming platform to meet the requirements for approval or to obtain the approval in any jurisdiction will cause us to not be able to distribute our gaming platforms in the jurisdiction, which would have a material adverse affect upon our business and operations.

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

All of our lease contracts relate to our electronic bingo products. In the year ended December 31, 2008, we derived 98% of our revenues and cash flow from our portfolio of contracts to lease electronic bingo products to gaming establishments, such as casinos, and bingo halls. Our contracts are typically for a term ranging from one to three years in duration and several are on a month-to-month basis. Not all of our contracts preclude our customers from using bingo devices of our competitors. Upon the expiration of one of our contracts, a gaming establishment may award a contract through a competitive procurement process, in which we may be unsuccessful in winning the new contract or forced to reduce the price that we charge the gaming establishment in order to renew our contract. In addition, some of our contracts permit gaming establishments to terminate the contract at any time for our failure to perform and for other specified reasons. The termination of or failure to renew or extend one or more of our contracts, or the renewal or extension of one or more of our contracts on materially altered terms could, depending upon the circumstances, have a material adverse effect on our business, financial condition, results and prospects.

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

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

Our future success depends to a significant degree on the skills, experience and efforts of our key personnel. We depend heavily on the ability and experience of a small number of senior executives who have experience with our operations and the electronic gaming device industry, including, Yuri Itkis, our Chief Executive Officer, Chairman of the Board of Directors, William R. Jacques Jr., our Chief Financial Officer; Jack Coronel, our Chief Compliance Officer; and Boris Itkis, our Chief Technical Officer, Vice President of Engineering and member of the Company’s Board of Directors. The loss of any of these senior executives or the failure of any of these senior executives to obtain or maintain the requisite regulatory licenses, permits or determination of suitability may have a material adverse effect on our business and operations.

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

Our future success depends upon our ability to attract, train and retain key marketing personnel and key managers as we further develop our products and as we plan to enter new markets and/or expand in existing markets. In connection with the audit of our financial statements for 2007 and 2008, our management, together with our independent registered public accounting firm, identified a significant deficiency in our internal control over financial reporting arising from the apparently insufficient current level of staffing in our accounting

department; our efforts to augment our accounting staffing with qualified individuals on a timely basis may not remediate this significant deficiency. Due to licensing requirements of these personnel that may be imposed by gaming authorities, our pool of potential employees may be more limited than in other industries. Competition for individuals with the skills required is intense, and we may not be successful in recruiting such personnel. In addition, we may not be able to retain such individuals as they may leave our company and go to work for our competitors. If we are unable to attract or retain key personnel, our business, financial condition and operating results could be materially adversely affected. We rely heavily on a corporate culture of lean staffing. While helpful to our efforts to contain our costs, our lean staffing exposes us to increased risks of internal control deficiencies and increased harm upon employee departures.

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

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

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

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

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

Because we have not yet begun full-scale production of mobile gaming devices under the Nevada Mobile Gaming Law, we have invested the bulk of the proceeds of our initial public offering and retained earnings. Our net income and earnings per share for the quarter ended December 31, 2008 depended substantially on the yield that we achieved on these investments. Approximately 32% of our income before tax resulted from these investments. Our primary investment objective is to preserve principal while maximizing yield without significantly increasing our risk. Some of our investments consist of non-taxable auction rate securities, or ARS. Our ARS investments totaled $3,125,000 at June 30, 2009.

The ARS that we purchase consist of municipal bonds with maturities greater than five years and have credit ratings of at least AAA, and do not include mortgage-backed instruments. The auction process for ARS is

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

We believe that, based on our cash and cash equivalents balances during 2009, the current lack of liquidity in the credit and capital markets will not have a material impact on our liquidity, cash flows or ability to fund our obligations.

We continue to monitor the market for our ARS and consider its impact (if any) on the fair market value of our investments. If the market conditions of 2008 continue through 2009, in which some auctions for ARS fail, or the anticipated recovery in market values does not occur, we may be required to record additional unrealized losses or impairment charges in 2009. As auctions have closed successfully in 2008, we have converted our investments in ARS to money market funds. We believe we will have the ability to hold any ARS for which auctions fail until the market recovers. We do not anticipate having to sell these securities in order to operate our business.

Although we have invested these proceeds in relatively conservative investments, based on the current market conditions, there can be no assurance that we will continue to enjoy the same yields on our investments as we did during 2008. Moreover, there can be no assurance that these investments will continue to generate a positive yield. Assuming no other changes in our sources of revenues, any decrease in the yield on these investments, and any loss on these investments, would directly and materially reduce our revenues.

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

We purchase most of the parts, components and subassemblies necessary for the manufacture of our products from outside sources. We assemble these parts, components and subassemblies into finished products in our manufacturing facility. While most of the parts, components and subassemblies are produced by more than one manufacturer and can be purchased through more than one supplier, we currently rely upon approximately 12 vendors from whom we purchase substantially all of our components. We currently obtain the touch screens for our wireless gaming terminals from a single supplier. While changing suppliers for this component is not impossible, doing so would require significant time and effort on the part of our engineering and management teams and may cause us to miss revenue generating opportunities until we are able to obtain touch screen monitors from a new supplier. In addition, the supplies of the central processing units, memory and peripheral drives for our mobile gaming platforms are often uncertain and subject to significant backlogs from time to time due to spikes in general demand for such products. We compete with other companies for the production capacity of third party manufacturers and suppliers of these and other components. Certain of these competing companies have substantially greater financial and other resources than we have and thus we may be at a competitive disadvantage in seeking to procure production capacity.

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

of a component, we may be forced to write off a substantial quantity of obsolete inventory of components or to sell such components in the open market at a loss.

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

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

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

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

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

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

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

We currently derive substantially all of our revenues by leasing our wireless gaming terminals and associated equipment to our gaming establishment customers. If and when market acceptance of our wireless gaming terminals is established, our gaming establishment customers may prefer to purchase our wireless gaming terminals rather than lease them. If we sell our wireless gaming terminals in the future, we must price

them in a manner that reflects the ongoing lease revenues that leasing them generates. If we are unable to sell our wireless gaming terminals for a sales price in excess of the lease revenues that we would otherwise receive, our revenues may eventually decline.

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

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

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

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

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

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

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

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

which of the many possible future products will meet evolving industry standards and casino or player demands.

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

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

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

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

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

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

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

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

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

· Difficulties in integrating operations, technologies, services, accounting and personnel;

· Difficulties in supporting and transitioning customers of our acquired companies to our technology platforms and

business processes;

· Diversion of financial and management resources from existing operations;

· Potential loss of key employees;

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

· Potential write-offs of acquired assets.

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

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

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

It is possible that third parties may copy or otherwise obtain and use our information and proprietary technology without our authorization or otherwise infringe on our intellectual property rights. We may have to rely on litigation to enforce our intellectual property rights and contractual rights. If litigation that we initiate is unsuccessful, we may not be able to protect the value of our intellectual property and our business could be adversely affected.

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

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

In addition, we may face claims of infringement that could interfere with our ability to use technology or other intellectual property rights that are material to our business operations. If a claim of infringement against us is successful, we may be required to pay royalties to use technology or other intellectual property rights that we had been using or we may be required to enter into a license agreement and pay license fees, or we may be required to stop using the technology or other intellectual property rights that we had been using. We may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable time. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to the Company and divert our resources, which may have a material adverse effect on our growth initiatives.

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

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

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

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

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

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

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

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

The long-term lease for our Las Vegas, Nevada facilities expires in December of 2013. These facilities provide us with a convenient central location from which to service our customers. We may not be able to extend the leases on the current terms or, if required, locate new adequate manufacturing facilities on commercially reasonable terms or at all.

Our stock may be delisted by Nasdaq.

During the quarter ended June 30, 2009, our stock traded below $1.25 per share. Should our stock price drop below $1.00 per share for a consecutive period of 30 days after April 19, 2009, we may receive a notification from Nasdaq that our stock may be delisted. If subsequently, we are unable to comply with applicable Nasdaq listing requirements, and our stock may eventually be delisted. In the latter case, our stock may become less liquid and less valuable. If we are delisted, and we fail to continue to meet certain SEC standards, our common stock will become subject to the SEC’s “penny stock” rules. The term “penny stock” generally refers to low-priced (below $5), speculative securities of very small companies. While penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or in the Pink Sheets, they may also trade on securities exchanges, including foreign securities exchanges. In addition, penny stocks include the securities of certain private companies with no active trading market.

Before a broker-dealer can sell a penny stock, SEC rules require the firm to first approve the customer for the transaction and receive from the customer a written agreement to the transaction. The firm must furnish the customer a document describing the risks of investing in penny stocks. The firm must tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade. Finally, the firm must send monthly account statements showing the market value of each penny stock held in the customer’s account.

Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price. Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.

Ownership of our stock is highly concentrated.

As of the date of the filing of this report, our Chairman of the Board, Chief Executive Officer, Yuri Itkis, beneficially owned 74.86 percent of our stock. Such a high concentration of control by a single individual may make change of Company’s control less likely and may negatively affect the price of our stock. This means that Mr. Itkis can approve or reject all matters on which the Company needs approval by not less than a majority of stockholders, including mergers, acquisitions, sales of assets, amending the Company’s Certificate of Incorporation, electing the Company’s Board of Directors, among other things, and essentially gives Mr. Itkis control of the management and day to day operations of the Company. This might make the Company less attractive for strategic partners or tender offers which might suppress the value of our common stock.

Risks Relating to Our Industry

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

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

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

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

We expect a substantial portion of our future growth to result from the general expansion of the gaming industry. The expansion of gaming activities in new markets can be very controversial and may depend heavily on the support of national, local and tribal governments. Changes in government leadership, failure to obtain requisite voter support in referenda, failure of legislators to enact enabling legislation and limitations on the volume of gaming activity that is permitted in particular jurisdictions may prevent us from expanding our

operations into new markets. A failure by the gaming industry to expand at the rate that we expect could have a material adverse effect on our business, growth rates, financial condition and operating results.

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

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

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

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

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

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

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

Because we are a registered company under the Nevada Gaming Control Act, any person who acquires five percent or more of any class of our voting securities is required to report the acquisition to the Nevada Gaming Commission. The Nevada Gaming Control Act requires any person who acquires 10 percent or more of our voting securities to apply to the Nevada Gaming Commission for a finding of suitability within 30 days after the

Chairman of the Nevada Gaming Control Board mails a written notice requiring the filing. If such person fails or refuses to apply for a finding of suitability or license within 30 days after being ordered to do so by the Nevada gaming authorities, or if such person refuses or fails to pay the investigative costs incurred by the Nevada gaming authorities in connection with such person’s application, the person may be found unsuitable. The same restrictions apply to the owner of record if the owner of record, after request, fails to identify the beneficial owner. Any person found unsuitable and who holds any voting security may be guilty of a criminal offense. We will be subject to disciplinary action if, after we receive notice that a person is unsuitable to hold an equity interest or to have any other relationship with us, we:

·	Allow that person to exercise, directly or indirectly, any voting right relating to us held by the person;
·	Pay remuneration in any form to that person for services rendered or otherwise; or
·	Fail to pursue all lawful efforts to require the unsuitable person to relinquish such person’s voting securities including, if necessary, the immediate purchase of the voting securities for cash at fair market value.

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

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

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

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

At the Company’s Annual Meeting of Shareholders, held on April 17, 2009, the following proposals were voted on by the Shareholders as detailed below:

1. Election of Directors.

Name of Nominee	Voted For		Voted Against		Abstain
Yuri Itkis		10,400,346		38,102		3,192
Boris Itkis		10,397,876		40,573		3,192
Merle Berman		10,402,711		35,737		3,192
Darrel Johnson		10,402,029		36,419		3,192
Harlan W. Goodson		10,402,911		35,737		2,992

2. Ratification of the appointment of Schechter Dokken Kanter Andrews & Selcer Ltd. as the independent registered public accounting firm for the Company for the fiscal year ending December 31, 2009.

Voted For	Voted Against	Abstain
10,379,079	60,677	1,885

3. Approval of a special dividend of $2.50 per share of Common Stock to be declared by the Board of Directors.

Voted For	Voted Against	Abstain
10,435,603	6,038	0

ITEM 6. EXHIBITS

See Exhibit Index.

Exhibit Index

Number		Description

3	.1	Amended and Restated Articles of Incorporation of FortuNet, Inc.(1)
3	.2	Amended and Restated Bylaws of FortuNet, Inc.(2)
4	.1	Form of Certificate Representing Common Stock, $.001 Par Value Per Share, of FortuNet, Inc.(1)
31	.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31	.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32	.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

(2)	Incorporated by reference to Amendment No.3 of the Company’s Registration Statement filed on Form S-1 (File No. 333-128391) filed with the Commission on November 21, 2005.

SIGNATURES

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

	FortuNet, Inc.

	By	/s/ Yuri Itkis
		Yuri Itkis, Chief Executive Officer

	By	/s/ William R. Jacques Jr.
		William R. Jacques Jr., Chief Financial Officer

Date: August 13, 2009