New Media Lottery Services (NMLS) 10QSB 2007 Q2 Quarterly report (small business)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: October 31, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission file number 000-49884

NEW MEDIA LOTTERY SERVICES, INC.

(Exact name of small business issuer

as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization) 87-0705063 (I.R.S. Employer Identification No.)

370 Neff Avenue - Suite L, Harrisonburg, Virginia 22801

(Address of principal executive offices)

(540) 437-1688

(Issuer's telephone number)

________________________________

(Former name, former address and former

fiscal year, if changed since last report)

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: At December 19, 2006 there were 21,442,143 shares of common stock outstanding.

Transitional Small Business Disclosure Format (Check one): Yes o No x

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

NEW MEDIA LOTTERY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(unaudited)
ASSETS
	October 31,
	2006
CURRENT ASSETS
Cash and cash equivalents	$	266,713
Accounts receivable		291,741
Marketable securities		15,000
Prepaid assets		113,837
Total Current Assets		687,291
PROPERTY AND EQUIPMENT, NET		340,264
TOTAL ASSETS	$	1,027,555
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	411,770
Deferred compensation		112,500
Due to related parties		202,465
Loans payable - related parties		333,177
Total Current Liabilities		1,059,912
NOTES PAYABLE - LONG-TERM PORTION		1,500,000
TOTAL LIABILITIES		2,559,912
MINORITY INTEREST		3,860,776
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 50,000,000 shares authorized, 21,442,143 shares issued and outstanding		21,442
Additional paid-in capital		3,335,688
Accumulated deficit		(8,745,634	)
Accumulated other comprehensive income
Foreign currency translation adjustment		(19,629	)
Unrealized gain on marketable securities		15,000
Total Stockholders' Deficit		(5,393,133	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	1,027,555

Page 1 of 15

NEW MEDIA LOTTERY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
	For the Three Months Ended						For the Six Months Ended
	October 31,						October 31,
	2006			2005			2006			2005
NET REVENUES	$	153,163		$	-		$	207,220		$	-
OPERATING EXPENSES
Depreciation and amortization expense		34,933			27,555			65,292			53,401
General and administrative		395,869			184,097			769,269			306,043
Management fees		62,906			9,000			93,865			81,000
Professional fees		213,056			55,947			478,217			146,194
Programming fees		165,801			124,020			332,639			221,438
Rent expense		23,954			14,708			44,950			28,716
Website expense		123,997			41,581			330,434			65,770
Total Operating Expenses		1,020,516			456,908			2,114,666			902,562
LOSS FROM OPERATIONS		(867,353	)		(456,908	)		(1,907,446	)		(902,562	)
OTHER INCOME (EXPENSES)
Gain (loss) on sale of property and equipment		34			-			(10,505	)		-
Interest income		2,712			750			6,932			750
Interest expense		(35,350	)		(49,638	)		(67,175	)		(84,360	)
Total Other Income (Expenses)		(32,604	)		(48,888	)		(70,748	)		(83,610	)
NET LOSS BEFORE INCOME TAXES AND
MINORITY INTEREST		(899,957	)		(505,796	)		(1,978,194	)		(986,172	)
PROVISION FOR INCOME TAXES		-			-			-			-
MINORITY INTEREST IN SUBSIDIARIES LOSSES		(166,936	)		-			(347,346	)		-
NET LOSS	$	(733,021	)	$	(505,796	)	$	(1,630,848	)	$	(986,172	)
BASIC NET LOSS PER SHARE	$	(0.03	)	$	(0.04	)	$	(0.08	)	$	(0.09	)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING		21,442,143			11,442,143			21,442,143			11,396,310
OTHER COMPREHENSIVE INCOME
NET LOSS	$	(733,021	)	$	(505,796	)	$	(1,630,848	)	$	(986,172	)
Foreign currency translation adjustment		(4,615	)		(301	)		11,694			(2,252	)
Unrealized loss on marketable securities		(3,000	)		-			(3,000	)		-
COMPREHENSIVE LOSS	$	(740,636	)	$	(506,097	)	$	(1,622,154	)	$	(988,424	)

Page 2 of 15

NEW MEDIA LOTTERY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
	For the Six Months Ended
	October 31,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,630,848	)	$	(986,172	)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation expense		65,292			53,401
Loss on disposition of assets		10,539			-
Minority interest in subsidiaries losses		(151,751	)		-
Change in operating assets and liabilities:
Accounts receivable		(152,632	)		-
Accounts payable and accrued expenses		45,617			160,884
Deferred Compensation		-			16,000
Prepaid assets		(7,493	)		3,757
Other receivable		-			1,554
Due to related parties		-			(2,000	)
Net Cash Used by Operating Activities		(1,821,276	)		(752,576	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(166,590	)		(39,745	)
Net Cash Used by Investing Activities		(166,590	)		(39,745	)
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred costs		-			(279,213	)
Loans to related parties		(17,500	)		(60,000	)
Capital contributed by shareholders		17,500			-
Proceeds from issuance of notes payable		-			1,000,000
Proceeds from issuance of loans payable, related parties		-			776,491
Payments on notes payable		-			(5,929	)
Net Cash Provided by Financing Activities		-			1,431,349
EFFECT OF FOREIGN CURRENCY
TRANSLATION ADJUSTMENT		11,696			(2,252	)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS		(1,976,170	)		636,776
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD		2,242,883			92,000
CASH AND CASH EQUIVALENTS,
END OF PERIOD	$	266,713		$	728,776

Page 3 of 15

NEW MEDIA LOTTERY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (continued)
(unaudited)
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	65,259	$	564
Cash paid for income taxes	$	-	$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for assets	$	-	$	8,250
Capital assets acquired for accounts payable	$	-	$	216,750

Page 4 of 15

NEW MEDIA LOTTERY SERVICES, INC. & SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its April 30, 2006 Annual Report on Form 10-KSB, as amended. Operating results for the six-months ended October 31, 2006 are not necessarily indicative of the results to be expected for year ending April 30, 2007.

NOTE 2 - GOING CONCERN CONSIDERATIONS

The accompanying condensed consolidated financial statements have been prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As reported in its Annual Report on Form 10-KSB, as amended, for the year ended April 30, 2006, the Company has incurred operating losses of approximately $7,114,785 (excluding minority interest and other comprehensive loss) from inception of the Company through April 30, 2006. The Company’s stockholders’ deficit at April 30, 2006 was $3,770,980. Additionally, the Company has sustained additional operating losses for the six months ended October 31, 2006 of approximately $1,907,000 (excluding minority interest). These factors combined, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans to address and alleviate these concerns are as follows:

Management is continually striving to overcome our operating losses by expanding the player base of our various projects and thereby increasing our operating income. The ability to expand the player base is principally contingent on raising additional capital for marketing and new project developments. As of March 17, 2006 our future is directly tied to NMLS Plc., which raised $3.2 million from its public offering. Management is confident that both entities are in a better position to raise future potential funds subject to new project needs and existing project performance. In addition to our on-going efforts to achieving break-even cash flow, we also have the support of two key current shareholders who can meet operating shortfalls.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Page 5 of 15

NEW MEDIA LOTTERY SERVICES, INC. & SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

NOTE 3 - MATERIAL EVENTS

On October 4, 2006, Cell Phone Systems SA, a Venezuelan company of which we own 45% of the outstanding capital stock (“CPS”), entered into an agreement with the State of Aragua, Venezuela to provide mobile lottery games, internet gaming and sports betting and permits CPS to introduce Fixed Odds Betting Terminals ("FOBT") to the Venezuelan market for the first time. We accrued $72,500 as of October 31, 2006, for expenses related to the acquisition of the contract.

During the six months ended October 31, 2006, the Company acquired an exclusive license from Las Vegas Gaming, Inc. (“LVGI”) to utilize their numbers generating engine for lottery applications. NMLS Plc. issued LVGI 200,000 new ordinary shares as consideration for the grant of the license and issued an additional 50,000 new ordinary shares to Tony Caporicci, the new head of the NMLS Terminal Based Products Division, for his role in introducing the transaction.

NOTE 4 - SUBSEQUENT EVENTS

On December 5, 2006, the company obtained a loan in the amount of $600,000 from Comerica Bank of which we have drawn down $500,000. The note is due December 5, 2007, bearing interest approximately equal to the Eurodollar Prime rate plus 2.5%.

Page 6 of 15

Item 2. Management’s Discussion or Plan of Operation.

This Management’s Discussion or Plan of Operation section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially from the anticipated results discussed herein. Our financial performance is highly dependent on our ability to continue to generate income and cash flow from our clients’ electronic lottery and bingo operations and our ability to obtain capital as necessary to expand existing operations and implement new projects. We cannot assure you that we will achieve profitability, that our clients’ operations will generate the revenues we expect or that we will have the capital to complete any or all of our existing or future projects.

Overview.

During the three months ended October 31, 2006, we recorded revenues in excess of $153,000 on net losses of approximately $733,000. We continue to intensify marketing efforts in connection with our Irish client’s internet bingo operations which have yielded positive results that have exceeded our expectations. We continue to develop the electronic lottery and bingo platforms that we can easily migrate among our clients. Our operating expenses remained consistent with the last fiscal quarter but increased significantly over the three month period ended October 31, 2005 as we continue to allocate proceeds from our subsidiary's March 2006 offering to the development of gaming software, to marketing our client’s bingo website and to general and administrative expenses and professional fees incurred in connection with our European operations. Though our cash position is diminishing, we expect that (i) revenues generated from our client’s bingo website in Ireland will continue to increase, (ii) we will begin to recognize revenues from electronic lottery kiosks to be distributed throughout Ireland during the next two quarters and (iii) we will begin to recognize revenues upon the initiation of a full marketing campaign which is planned during the fourth fiscal quarter of this year in Brazil, the amalgamation of which we hope will replenish available cash and provide us with the financial resources to grow our business. In addition, we are actively seeking financing and expect that our existing majority shareholders can provide funding required to meet any shortfalls.

The Company.

New Media Lottery Services, Inc. (the “NM-US”), through its direct and indirect subsidiaries, New Media Lottery Services plc (“NM-PLC”) and New Media Lottery (International) Services Ltd. (collectively, “we”, “us” the “Company” or like terms), designs, builds, implements, manages, hosts and supports web based and wireless device based lottery programs operated by governments and charitable organizations outside of the United States. We commenced providing services to clients in August 2003. We have begun generating limited revenues from the long-term agreements with our clients pursuant to which we provide our services in return for a percentage of the lottery’s net sales, which is typically defined as sales less prizes.

We offer an integrated range of products and services to develop, build and host lotteries for state-operated lotteries and their licensees, such as charitable lottery organizations (CLO’s). The fundamental elements of the lottery infrastructure we have established include proprietary software platforms that support internet website, internet kiosk delivered and mobile phone lottery operations and website and game concepts. We have partnered with other organizations which provide us access to the mobile phone and banking applications required for our new media gaming options. Our gaming platform and business model can be replicated and implemented on varying scales in discrete geographical areas in the future. Our ability to re-brand our product for other organizations reduces implementation time and organizational and capital costs associated with establishing each client’s internet/wireless presence.

We have assembled a management team that combines a strong lottery operations background, extensive game development experience and the technological expertise required to create and operate these lottery systems.

Page 7 of 15

Our market comprises small and mid-sized state-operated and charity operated lotteries. The lotteries we develop and implement target the young-adult generation of potential lottery players who do not relate to the traditional paper-based games their parents play and who incorporate new media devices, such as cellular telephones, internet and other wireless apparatus into their daily lives.

To date, our most significant achievements have consisted of:

·   obtaining long-term contracts with non-U.S. based licensed lottery organizations to operate specific new media game programs;

·   developing proprietary software platforms that support internet website delivered, internet kiosk delivered and mobile phone lottery operations;

·   developing a library of digital lottery game designs;

·   implementing the technical, operational, design and marketing facets of our business in preparation for a full-scale roll-out of programs;

·   completing a soft launch of our game software on behalf of three clients;

·   completing a full launch of an internet based bingo site for our Irish client Rehab Lotteries; and

·   consummating an offering of the securities by our Irish subsidiary, New Media Lottery Services plc (“NM-PLC”) from which we realized net proceeds of $2,876,271.

We derive revenues primarily from lottery service contracts, which are typically five years or more in duration for the base contract term with five-year extension options resulting in total contract lives of in excess of ten years. Our contracts generally provide compensation to us based upon a percentage of a lottery’s net sales. We also anticipate deriving revenues from the delivery of lottery products to a variety of internet-based kiosks.

All of our clients are outside the United States. In addition, all of our assets, primarily consisting of equipment we use to operate online lottery systems for our customers, are held outside of the United States. Accordingly, we will be subject to all of the risks of international operations, including increased governmental regulation of the online lottery industry in the markets where we operate; exchange controls or other currency restrictions; and political instability.

Our business is highly regulated, and the competition to secure new contracts is often intense.

Notable Recent Achievements.

On October 4, 2006, Cell Phone Systems SA, a Venezuelan company of which we own 45% of the outstanding capital stock (“CPS”), entered into an agreement with the State of Aragua, Venezuela to provide mobile lottery games, internet gaming and sports betting and permits CPS to introduce Fixed Odds Betting Terminals ("FOBT") to the Venezuelan market for the first time. The rights granted under this agreement permit us to offer games throughout Venezuela. Under the agreement, which extends for a period of ten years, CPS earns a fee equal to approximately 15-20% of gross sales which after prizes and lottery fees will be distributed on equal basis, after costs and expenses incurred by CPS, to us and our partner in CPS, Smart Media Technologies. We will provide, implement and operate all aspects of the gaming operations of the lottery and Smart Media Technologies will provide mobile phone and banking applications for the operations.

Page 8 of 15

In October 2006, we acquired an exclusive license from Las Vegas Gaming, Inc. (“LVGI”) to utilize its numbers generating engine for lottery applications. We are also analyzing various other applications of LVGI’s gaming software platform for deployment in South America, Europe and Asia . The right to utilize this software allows us to offer an end-to-end solution for platforms such as mobile gaming, video lottery machines and web-based applications and when bundled with our product offerings provides a complete, turnkey lottery system. The LVGI system has been used for more than 20 years in Nevada and has several gaming licenses and patents attached to the intellectual property. We expect to offer an integrated system combining our platform and the LVGI software beginning in the first calendar quarter of 2007. The combined systems can be migrated among our various clients.

The LVGI license extends for an initial three year term and is subject to three yearly incremental extensions thereafter. The exclusive territories are Europe, Eastern Europe and South America and both companies will work closely together in pursuit of additional markets. We will pay commissions to LVGI on a monthly basis calculated on various net win programs. NM-PLC issued LVGI 200,000 new ordinary shares as consideration for the grant of the license and issued an additional 50,000 new ordinary shares to Tony Caporicci, the new head of the NMLS Terminal Based Products Division, for his role in introducing the transaction.

Plan of Operation.

Our business can be divided into three discrete components, as follows:

o   identifying and contracting with new clients;

o   developing, implementing and hosting lotteries; and

o   gaming software development for our clients’ lotteries and third parties.

During fiscal 2007, we expect to continue to advance each of the elements of our business in varying degrees. Given our limited financial resources, as more fully discussed in this section under the sub-heading “Liquidity and Capital Resources,” we will focus our efforts on projects that present the greatest opportunity to generate revenues in the near-term. We believe that both developing our existing clients’ lottery programs and gaming software development represent the most effective and efficient use of our capital. We intend to re-invest profits generated from these operations to grow our business and provide funds to expand existing clients’ programs and develop programs for new clients.

By completing the implementation of lottery systems for our Irish, English and Brazilian clients and developing an affiliate tracking system which allows us both to offer incentives to advertisers for directing paying customers to our site and to build player loyalty, we stand prepared to implement full-scale marketing campaigns from which we expect to build meaningful player bases and generate material revenues. The electronic internet bingo operations of our Irish client, Rehab Lotteries, represent our most mature client with the greatest potential to generate meaningful revenues in the near-term. Accordingly, we expect to devote significant financial resources to the development of this program during the current quarter by implementing both internet advertising programs and marketing programs that take advantage of that entity’s charitable affiliation by partnering with recognizable local brands. During the last few fiscal quarters, we have marketed Rehab’s internet bingo operations on an expanded basis and management believes that the results have been promising as both the player base and the amount wagered per player per session has increased beyond expectations.

Once we have augmented the marketing program for Rehab Lotteries in Ireland, we expect to focus on the operations of our Brazilian clients which have licenses to offer internet lottery products from the Brazilian States of Para and Santa Catarina, and on developing the opportunity under the Aragua, Venezuela contract.

Page 9 of 15

During the second fiscal quarter of 2007, our clients Rehab Lotteries and Inspired Broadcasting Networks plc completed in-house testing of the gaming software we have been developing for the kiosk lottery terminals that Inspired will operate on behalf of Rehab. During October, Inspired placed terminals at several locations in Ireland to field test the kiosks and the players’ response to the games and system that we developed. The terminals apparently have been well received by players, though the roll-out of the Inspired kiosks on a commercial basis will be dependent upon the results of a full field testing and the speed with which the kiosks can be manufactured. Inspired has advised us that it expects field testing should be completed during the current quarter. The kiosks have been sited at pubs and other social establishments, initially in Ireland and eventually in England. Revenues generated by the kiosks will be apportioned between Inspired, the retail establishments and Rehab lotteries, which will receive one third of the net revenues and we will receive 50% of the proceeds allocated to Rehab.

Our near-term business priorities are to continue concentrated marketing and promotion of the Rehab Lottery’s bingo site to both increase the player base and the amount wagered per player, to begin aggressive marketing for our Brazilian client and to commence the development of a lottery in Venezuela. We believe that we will have sufficient cash, derived from the proceeds of the offering completed by our subsidiary in March 2006, the receipt of proceeds from a recent $600,000 loan and from revenues generated from operations, to undertake the marketing of Rehab Lottery’s bingo site and the roll-out of our Brazilian client’s operations but not to fund the development of the Venezuelan lottery opportunity.

We expect to proceed with the development of gaming opportunities in Venezuela to the extent our current cash allows and based on additional funding that can be obtained. We believe that our gaming delivery platforms are sufficiently developed to permit us to migrate the operations we have established elsewhere to our Venezuelan operations. At this juncture, we believe that our primary impediment is available cash. We believe that with sufficient capital, we could complete the development of a gaming system in Venezuela in three to four months and commence marketing this system almost immediately.

We will continue our efforts to procure new lottery contracts. While we expect that the cost to develop and implement lottery systems for new clients will decrease for each new client during the next several years as we become more efficient in our ability to migrate our existing lottery programs to new clients, marketing a lottery is highly capital intensive. Currently, we do not possess the financial resources to devote to the marketing and advertising phases of any new programs in which we may become involved that are required for the program to achieve profitability. Accordingly, we expect to enter into contracts only with entities for which we believe we could obtain financing to support such operations.

We continue to be optimistic regarding our opportunity to fill a market niche that is not fully serviced by the large, multinational lottery service corporations and has not yet been fully developed or exploited. Although competition for small and mid-sized government and charity operated lotteries has intensified as lottery service companies seek new revenue sources and new competitors enter the market, we consider this segment of the market to be supported by only a few internationally known companies and that neither the charity lottery market place nor the internet/wireless lottery marketplace has been significantly penetrated. We believe that our management and personnel have the lottery experience, gaming know-how and technological expertise necessary to attract, service and grow small to mid-size lottery organizations and that by being among the first companies, to our knowledge, dedicated to serving this market, we will be able to establish our Company as the premier provider of services and products for this market segment.

Results of Operations for the Three and Six Months ended October 31, 2006.

Our total assets decreased from $1.69 million on July 31, 2006 to $1.03 million on October 31, 2006 resulting largely from a depletion in cash used to fund operations, including marketing our clients’ lotteries. Accounts receivable, which were generated exclusively from our Irish client’s ongoing web based bingo operations, increased from approximately $121,000 at July 31, 2006 to nearly $292,000 at October 31, 2006.

Page 10 of 15

For the three and six month periods ended October 31, 2006, we recorded revenue of approximately $153,000 and $207,000, respectively, as compared to no revenue during the same periods in 2005. Revenues generated during the last two quarters were derived almost entirely from our Irish client’s web based bingo operations which we began marketing in earnest during the quarter. As of October 31, 2006, NMLS has incurred expenses of approximately $243,000 that are recoupable out of the Irish Bingo operations before our client will begin participating in net revenues. Management attributes the increase in net revenues to intensified marketing efforts and public acceptance of the bingo operations.

During this fiscal quarter, net losses decreased compared to the three months ended July 31, 2006 from nearly $898,000 to $733,000, resulting primarily from a decrease in operating expenses from period to period. For the three months ended October 31, 2006, net losses increased over the same quarter during the 2005 period by nearly $227,000 to approximately $733,000, or 45%, and for the six months ended October 31, 2006 net losses increased by approximately $645,000 to $1.63 million, or 65%, as compared to the same period during fiscal 2005. Net loss per share for the quarter ended October 31, 2006 was $.03, as compared to a net loss per share of $0.08 over the same period during the prior year, because of the increased number of shares outstanding between the periods resulting from the conversion of approximately $3.087 million of debt into 10 million shares of common stock in March 2006.

Liquidity and Capital Resources.

Our business is capital-intensive in that we require cash to implement lotteries for our clients. We have expended considerable capital and will continue to allocate significant financial resources to develop the fundamental elements of a web and wireless device based lottery infrastructure which allows us to migrate this infrastructure from client to client and re-brand our product for other organizations. While these efforts will reduce the set-up time and organizational and capital costs associated with establishing each client’s internet/wireless presence, we require significant capital to market and promote each lottery to build a player base and achieve profitability. We also require capital to retain our highly skilled personnel, including our computer programmers, operations specialists and game developers.

We expect our principal internal sources of liquidity to be existing cash on hand and revenues generated from operations, as we anticipate that we will be generating more meaningful revenues from operations as fiscal 2007 progresses. We do not have sufficient capital resources to fund our current or future operations. Our Irish subsidiary New Media-PLC is actively seeking investments. On December 5, 2006, New Media-PLC arranged for line of credit of up to $600,000, of which it has drawn down $500,000 as of the date hereof.

Cash used in operations increased by over $700,000 from the period ended July 31, 2006 to $1.82 million used during the last fiscal quarter and increased by approximately $1.1 million used compared to the same period in 2005. Working capital decreased approximately $1.86 million to $(373,000) at October 31, 2006 compared to $1.5 million at April 30, 2006. Our working capital ratio at October 31, 2006 was (0.35) to 1 compared to 1.48 to 1 at April 30, 2006. The decrease in working capital was primarily related to cash used in operations, mainly for general and administrative expenses, professional fees, programming fees and website expense.

At October 31, 2006, we had cash, cash equivalents and accounts receivable of approximately $458,000, no borrowing capacity under lines of credit and outstanding loans of $1.5 million (not including accrued interest). In December, we obtained a loan in the amount of $600,000 of which we have drawn down $500,000.

We will require significant additional cash to develop and implement lotteries for new clients and without such funds we are hesitant to accept new clients. As of the date hereof, we have not identified any sources to satisfy our capital requirements. Management believes that once we have proved our business model, we will be able to locate project financing for each new lottery client. We will seek to obtain such financing from local sources within the country where our clients are located. Alternatively, we will seek to access the capital markets in Europe and the United States, though we can not be certain that the capital we require will be available to us from any source or that if it is available that it will be on favorable terms. We will be selective as to contracts we enter into in the hopes that the returns we can generate from new contracts will be appealing to any new investors. The availability and cost of capital in the future may inhibit our ability to grow our Company.

Page 11 of 15

We expect that the additional funding from outside sources which we will require to implement lotteries for new clients will decrease in the coming periods for several reasons. First, we expect to generate revenues sufficient to allow us to implement new client lotteries, including the ability to execute marketing and promotional campaigns, from internal funds. Second, as we continue to develop the electronic platforms that are the backbone of our operations, we expect to realize a critical mass and take advantage of economies of scale as we gain more practical experience implementing and operating lotteries. Finally, once the shakeout period ends, in which we learn what marketing techniques are effective and identify the games players find attractive, we will be able to allocate our resources more efficiently and effectively. For example, we will be able to migrate the fundamental elements of the lottery infrastructure, as described above, from one lottery to another which will reduce the set-up time and organizational and capital costs, and also reduce the cost of acquiring player and maximizing gross revenues generated per player, thereby lowering our capital requirements to start-up and maintain new lottery clients. Theoretically, if our business model is accepted, we can concentrate on marketing to new media device users who we believe we can reach inexpensively because (i) we will require a relatively small organizational infrastructure, even when fully operational, (ii) we will have a significant existing library of games to offer and (iii) the manner in which our games are delivered and played (cell phones, PDA’s, internet kiosks and other wireless devices) is inherently inexpensive and the costs are decreasing each year.

Our future liquidity and capital requirements to execute our near-term plans will depend on a number of factors, including the speed at which our existing operations grow, our ability to bring our other clients’ operations on-line and our ability to raise additional capital in a timely manner through additional investment.

We do not believe that our current cash resources and expected revenues from operations will be sufficient to support all of our current business goals and objectives in the near term and that we will be required to obtain capital to effectuate our business plan as currently contemplated. We cannot assure you that we will be successful in raising additional capital on terms acceptable to us or at all. If we cannot raise additional capital, we may have to modify our business plan.

Financing Activities During the Last Quarter.

We did not enter into any financing arrangements during the last quarter.

Critical Accounting Policies.

None.

Revenue Recognition.

None.

Off-Balance Sheet Arrangements.

Page 12 of 15

We do not have any off-balance sheet arrangement or commitment that will have a current effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of our company. From time to time, our representatives and we may make written or verbal forward-looking statements, including statements contained in this report and other company filings with the SEC and in our reports to stockholders. Statements that relate to other than strictly historical facts, such as statements about our plans and strategies, expectations for future financial performance, new and existing products and technologies, and markets for our products are forward-looking statements within the meaning of the Act. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "will" and other similar expressions identify forward-looking statements. The forward-looking statements are and will be based on our then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors are cautioned that such statements involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated results due to many factors including, but not limited to, our limited revenues, our future capital needs, uncertainty of capital funding, acceptance of our product offerings, the effects of government regulations on our business, competition, and other risks. We undertake no obligation to publicly update or revise any forward-looking statements.

Item 3. Controls and Procedures.

(a) Disclosure Controls and Procedures. Our management, with the participation our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

(b) Internal Control Over Financial Reporting. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 2. Changes in Securities and Small Business Issuer Purchase of Equity Securities.

(a) None.

(b) None.

(c)  During the three months ended October 31, 2006, the Company did not issue any securities.

Page 13 of 15

(d) None.

(e) None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.

Exhibit No.	Description
10.28	Agreement dated October 4, 2006 by and among The Unincorporated Autonomous Lottery Service of Aragua,Cell Phone Systems 2005 C.A. and various other parties, for the provision of lottery services in Venezuela.
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

Page 14 of 15

SIGNATURES

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

	NEW MEDIA LOTTERY SERVICES, INC.
Date: December 20, 2006	By:	/s/ John T. Carson
		John T. Carson
		President

By:	/s/ Randolph H. Brownell, III
	Chief Operating Officer and Chief Financial Officer

Page 15 of 15