Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM ****10-K**

** **
| **x** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------|

** **

**Forthe fiscal year ended December 31, 2009**

** **

**or**

 
| **o** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------|

** **

**Forthe transition period from                    to               **

** **

**Commissionfile number: 000-25855**

 

**ElixirGaming Technologies, Inc.**

(Name ofregistrant as specified in its charter)

** **

| **Nevada**                                       | ** ** | **001-32161**             | ** ** | **91-1696010**                            |
|--------------------------------------------------|------------|---------------------------|------------|-------------------------------------------|
| (State or Other  Jurisdiction of  Incorporation) |       | (Commission File  Number) |       | (I.R.S. Employer  Identification  Number) |

** **

**Unit 3705, 37/F, The Centrium**

**60 Wyndham Street**

**Central,Hong Kong**

(Address ofprincipal executive offices)

 

**+852-3151-3800**

**(Registrant’stelephone number, including area code)**

 

**Securitiesto be registered under Section 12(b) of the Act:**

** **

| **Title  of each class to be so registered** | ** ** | **Name  of each exchange on which registered** |
|----------------------------------------------|------------|------------------------------------------------|
| Common Stock                                 |       | NYSE Amex                                      |

 

**Securitiesto be registered under Section 12(g) of the Act:**

**None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

Yes  o  No  x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or15(d) of the Exchange Act.

Yes o No  x

 

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

Yes x No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).

Yes  o  No  x

 

Indicate by check mark ifdisclosure of delinquent filers in response to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company (as defined in Rule 12b-2of the Act):

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)

Yes  o  No  x

 

State the aggregatemarket value of voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the registrant’s most recently completed second fiscal quarter: $11,057,067

 

State the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date: 114,956,667 shares as of March 15, 2010.

 

 

 

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**TABLE OF CONTENTS**

 
|        |   |                                                                                                                 |   | **Page** |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------|--------|----------|
|        |   | **PART I**                                                                                                      |   |     |
| Item 1.     |   | Business                                                                                                             |   | 1        |
| Item 1A.    |   | Risk Factors                                                                                                         |   | 12       |
| Item 1B.    |   | Unresolved  Staff Comments                                                                                           |   | 17       |
| Item 2.     |   | Properties                                                                                                           |   | 17       |
| Item 3.     |   | Legal Proceedings                                                                                                    |   | 17       |
| Item 4.     |   | Submission  of Matters to a Vote of Security Holders                                                                 |   | 18       |
|        |   |                                                                                                                 |   |     |
|        |   | **PART II**                                                                                                     |   |     |
| Item 5.     |   | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Repurchases of Equity Securities |   | 19       |
| Item 6.     |   | Selected Financial  Data                                                                                             |   | 20       |
| Item 7.     |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |   | 20       |
| Item 7A.    |   | Quantitative  and Qualitative Disclosures About Market Risk                                                          |   | 37       |
| Item 8.     |   | Financial  Statements and Supplementary Data                                                                         |   | 38       |
| Item 9.     |   | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                |   | 68       |
| Item 9A(T). |   | Controls and  Procedures                                                                                             |   | 68       |
| Item 9B.    |   | Other Information                                                                                                    |   | 69       |
|        |   |                                                                                                                 |   |     |
|        |   | **PART III**                                                                                                    |   |     |
| Item 10.    |   | Directors,  Executive Officers and Corporate Governance                                                              |   | 70       |
| Item 11.    |   | Executive  Compensation                                                                                              |   | 74       |
| Item 12.    |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     |   | 78       |
| Item 13.    |   | Certain  Relationships and Related Transactions and Director Independence                                            |   | 81       |
| Item 14.    |   | Principal  Accountant Fees and Services                                                                              |   | 86       |
|        |   |                                                                                                                 |   |     |
|        |   | **PART IV**                                                                                                     |   |     |
| Item 15.    |   | Exhibits and  Financial Statement Schedules                                                                          |   | 87       |
|        |   |                                                                                                                 |   |     |
| Signatures  |   |                                                                                                                 |   | 91       |

 

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**CAUTIONARYNOTICE**

 

This annual report on Form 10-K containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Thoseforward-looking statements include our expectations, beliefs, intentions andstrategies regarding the future.  Suchforward-looking statements relate to, among other things, overall industryenvironment, our working capital requirements and results of operations, thefurther approvals of regulatory authorities, adverse court rulings, productionand/or quality control problems, the denial, suspension or revocation ofprivileged operating licenses by governmental authorities, competitivepressures and general economic conditions. These and other factors that may affect our financial results arediscussed more fully in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” included in this report. We caution readers not to place undue reliance on any forward-lookingstatements.  We do not undertake, andspecifically disclaim any obligation, to update or revise such statements toreflect new circumstances or unanticipated events as they occur, and we urgereaders to review and consider disclosures we make in this and other reportsthat discuss factors germane to our business. See in particular our reports on Forms 10-K, 10-Q, and 8-K subsequentlyfiled from time to time with the Securities and Exchange Commission.

 

**PART I**

 

**Item 1.                    Business**

 

**GENERAL**

 

Elixir GamingTechnologies, Inc. is engaged in: (i) the ownership and leasing ofelectronic gaming machines in resorts, hotels and other venues in Asia placedon a revenue sharing basis with venue owners; (ii) the design, manufactureand distribution of table game products; and (iii) the design, manufactureand sale of component parts for the automotive industry. Our primary focus ison the ownership and leasing of gaming machines on a revenue sharing basisacross certain countries in Asia.

 

Pursuant to theSecurities Purchase and Product Participation Agreement (“Product ParticipationAgreement”) dated June 12, 2007 (as amended by an amendment dated October 21,2007), we effected a change in our control under which Elixir Group Limited (“ElixirGroup”), a wholly-owned subsidiary of Melco International Development Limited,became our principal shareholder and our strategic partner in the electronicgaming machine participation business.  On November 6, 2008, theProduct Participation Agreement was terminated and thereby ending the strategicpartnership between us and Elixir Group. Notwithstanding the said terminationof the strategic partnership, Elixir Group remains as our principal shareholderas of the date of this filing. (Please see Part III Item 13. CertainRelationships and Related Transactions and Director Independence of this filingfor more details.)

 

For our electronicgaming machine participation business, we utilize our developed operationalexperience and established market presence and key relationships to identifyand develop new gaming venues, acquire the gaming machines, casino managementsystems and other gaming peripherals directly from manufacturers, dealers andsuppliers and install same in our contracted venues. In addition, we assist thevenue owners in brand-building and marketing promotions.  A good example is the signing of an agreementwith NagaWorld Limited, where we have evolved from a pure machine lessor to aslot floor operator.  In NagaWorld, aluxury casino resort in Phnom Penh, Cambodia, we manage jointly with the casinoowner the slot floor operations and design marketing programs and slotpromotions for our assigned gaming space. We also hire, train and manage the floor staff and set high expectationson the level of customer service.

 

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In addition to theelectronic gaming machine participation business, we have historicallydeveloped, manufactured and distributed various table game devices used in thegaming industry, including automated card verification machines, electroniccard shuffling systems and traditional and high-frequency RFID gamingchips.  However, in April 2009, wecompleted the sale of our card verification and electronic card shufflingassets and have discontinued those product lines and, going forward, our focusfor this business division is now on the development, manufacture anddistribution of both high-frequency RFID and traditional non-RFID gaming chipsand plaques.

 

Through the July 2006acquisition of Dolphin Advanced Technologies Pty Ltd. (“Dolphin”), we alsodesign, manufacture and sell component parts for the automotive industry,including inner and remote door handles, fuel filler hinge assemblies, modulebrackets, steering wheel spoke covers, speaker grills, fasteners, safetyproducts and cosmetic components for automobiles.

 

We have offices inHong Kong, Philippines, Cambodia and Australia.  We also havemanufacturing facilities in Melbourne, Australia.

 

Our mailing address inthe United States is:

 

ElixirGaming Technologies, Inc.

40E. Chicago Avenue, #186

Chicago,Illinois, 60611

USA

 

The telephonenumber in the United States is (312) 867-0848.

 

During the fiscalyear ended December 31, 2009, we owned or had rights to certain trademarksthat we use in connection with the sale of our products, including, but notlimited to VendingDataTM, Deck CheckerTM, Random EjectionTM, Random PlusTM,PokerOneTM, ChipWasherTM, ShuffleProTM, DeckSetter® and DolphinTM. However,pursuant to the Purchase and Settlement Agreement entered into on March 16,2009, we sold to Shuffle Master our portfolio of automated card verificationmachines and electronic card shuffling systems, all related intellectualproperty, and certain inventory of such products. As a result of thisagreement, we ceased to own the relevant trademarks of Random PlusTM, PokerOneTM,ShuffleProTM and Deck CheckerTM. Also, due to the de-emphasis of our businessfocus on certain table game products, we have abandoned the relevant trademarksof Random EjectionTM, ChipWasherTM, and DeckSetter®. Other than the aforesaidtrademarks, this report also makes reference to trademarks and trade names ofother companies.

 

**RECENT DEVELOPMENTS**

 

Duringthe fiscal year ended December 31, 2009 and through the date of thisreport, we have engaged in the following:

 

***New Contracts with NagaWorld Limited (“NagaWorld”)***

 

During the fiscalyear ended December 31, 2009, we established a relationship withNagaWorld, a wholly-owned subsidiary of Hong Kong listed NagaCorp Ltd.(HKSE:3918), to place electronic gaming machines on a participation basis at itsNagaWorld luxury hotel casino resort in Phnom Penh, Cambodia.  NagaWorld is currently the only licensed fullservice casino in Phnom Penh.  During theyear, we expanded our relationship with NagaWorld and currently have 560 gamingmachine seats in operation at this location.

 

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The existingcontract under which we operate, entitled Machines Operation andParticipation Consolidation Agreement (the “Consolidation Agreement”), was signed on December 30,2009.  The Consolidation Agreementwith NagaWorld (a) provides for our right to exercise an option granted byNagaWorld pursuant to an option deed dated July 25, 2009 to place anadditional 200 electronic gaming machines (“Additional Machines”) on aparticipation basis at NagaWorld’s casino resort; and (b) with effect fromthe date of the Consolidation Agreement, supersedes and replaces the terms onthe existing operation of 440 electronic gaming machines at the NagaWorldCasino under the three previous agreements executed with NagaWorld dated December 13,2008 (“December 08 Agreement”), June 15, 2009 (“June 09Agreement”) and July 25, 2009 (“July 09 Agreement”) collectively, the(“Previous Agreements”) with new terms that aligned with the operation of theAdditional Machines.

 

Underthe Previous Agreements: (i) we and NagaWorld shared the win per unit perday from the existing 440 machines and certain operating costs related tomarketing and floor staff at a weighted average of 22.3% / 77.7% split,respectively; (ii) win per unit per day from only 200 out of 440 existingmachines was settled and distributed daily to us; and (iii) both the termsof the December 08 Agreement and the June 09 Agreement were to expirein the first quarter of 2014 while the term of the July 09 Agreement wasto expire at the end of the third quarter of 2014.

 

Pursuantto the terms of the Consolidation Agreement, we and NagaWorld now have jointcontrol over the operation of a total of 640 electronic gaming machines(comprising the Additional Machines and the existing 440 machines placed and inoperation pursuant to the Previous Agreements), including floor staff andrespective audit rights. We and NagaWorld will share the win per unit per dayfrom all the 640 machines and certain operating costs related to marketing andfloor staff at a 25% / 75% split, respectively, (subject to Elixir Gaming’sentitlement to receive 100% of the win per unit per day from certain machinesduring certain periods of time as described below). Win per unit per day earnedfrom all the 640 machines are settled and distributed daily to us. TheConsolidation Agreement is for a term of six years commencing March 1,2010.

 

Inconsideration for NagaWorld entering the Consolidation Agreement, we paid toNagaWorld a $1.38 million one-time non-refundable contract amendment fee and acommitment fee of $4.1 million. Both the one-time contract amendment fee andcommitment fee were to be paid in three installments. The first 50% installmentwas due and paid by us on December 30, 2009, the second 25% installmentwas due and paid by us on January 15, 2010, and the third and final 25%installment was due and paid by us on January 28, 2010.

 

Belowis a table showing various agreements with NagaWorld and respective commitmentfees paid during the year ended December 31, 2009.

 
| ** **              | ** ** | ** **    | ** ** | ** **                 | ** ** | **Prepaid Commitment Fee**         | ** ** |
|-------------------------|------------|---------------|------------|----------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **Number of** | ** ** | **Prepaid Commitment**     | ** ** | **Remaining on the Balance Sheet** | ** ** |
| **Agreement**           | ** ** | **Machines**  | ** ** | **Fee Paid (in millions)** | ** ** | **as of December 31, 2009**        | ** ** |
| December 08             |       | 200           |       | $                          | —     |                               | $          | — |   |
| June 09                 |       | 40            |       | 1.00                       |       | —                             |       |
| July 09                 |       | 200           |       | 5.84                       |       | 2.79                               |       |
| Previous Agreements     |       | 440           |       | 6.84                       |       | 2.79                               |       |
| Consolidation Agreement |       | 200           | (1)        | 2.05                       |       | 2.05                               | (2)        |
|                    |       | 640           |       | $                          | 8.89       |                               | $          | 4.84 |   |

 

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(1)   As of December 31, 2009, none of the 200 contracted machines seatswere operational.   As of March 15, 2010,120 of the contracted 200 machine seats were operational.

 

(2)   Represents 50% of the total commitment fee for the 200 machineseats.  The remaining 50% was paid toNagaWorld in January 2010.

 

Whilewe and NagaWorld will share the win per unit per day from the 640 machines at a25% / 75% split, respectively, we will be entitled to 100% of the win per unitper day from the 200 existing machines placed under the July 09 Agreementuntil we have received a total accumulated win per unit per day of $7.3 millionfrom the said 200 machines and 100% of the win per unit per day from theAdditional Machines until we have received a total accumulated win per unit perday of $5.47 million from the Additional Machines (representing the $4.1million commitment fee plus the Company’s 25% share of the win per unit per dayfrom the Additional Machines).

 

***Regulatory Changes in Cambodia***

 

On December 2,2008, Cambodia’s Prime Minister issued a directive which required slot machineoperators in the country to obtain licenses issued by the Ministry of Economyand Finance and to operate only in hotels certified by the Ministry ofTourism.  According to the directive, all then existing slot machineoperators had only six months to comply.  In addition, the directivesought strict compliance with the foreigners-only rule that permits onlyforeigners or Cambodians with foreign passports to gamble in the country.

 

On February 24,2009, Cambodia’s Prime Minister called for the closure of the country’s solebookmaker, Cambo Six and indicated the government would not renew its licenseupon expiration in 2011.  Subsequent to this action, approximately 70 slotclubs in Cambodia’s Phnom Penh area were closed. Our partner NagaWorld, whichoperates under an exclusive casino license in the Phnom Penh area, is the onlygaming establishment in operation in the city.

 

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With the exceptionof the operations at NagaWorld, all of our previous contracted venues inCambodia were closed in early 2009.  Weregained physical possession of our machines from the closed venues and somehave since been redeployed.  At present,we plan to focus our resources in the Cambodia market on our operations atNagaWorld and other locations outside of the Phnom Penh area.

 

***Sale of Certain Table Game Products to and Settlement of Litigationwith Shuffle Master, Inc.***

 

OnMarch 16, 2009, we entered into a Purchase and Settlement Agreement withShuffle Master, Inc. (the “Purchase and Settlement Agreement”) pursuant towhich we sold to Shuffle Master our portfolio of automated card verification machinesand electronic card shuffling systems, all related intellectualproperty, including but not limited to, the trademarks of Random PlusTM, PokerOneTM,ShuffleProTMand Deck CheckerTM, and certaininventory of such products.

 

Inaddition, we settled all outstanding patent infringement litigation withShuffle Master with respect to U.S. Patent No. 6,655,684 dealing withautomated shuffler technology.  The totalconsideration paid by Shuffle Master to us under the Purchase and SettlementAgreement was a base amount of $2.4 million plus $400,000 for related finalinventory, or $2.8 million in total. Also, as part of the transaction, weagreed not to engage, directly or indirectly, in the business related to themanufacturing or selling of automated card verification machines andelectronic card shuffling systems, anywhere in the world, for a period of sevenyears from the date of closing.

 

Regardingthe settled litigation with Shuffle Master, this traced back to October 5,2004, when Shuffle Master first filed a patent infringement action against usin the United States District Court, District of Nevada (Case No. CV-S-04-1373-JCM-LRL)claiming that the use, importation and offering for sale of our PokerOneshuffler infringed Shuffle Master’s United States Patent, No. 6,655,684.We responded by denying Shuffle Master’s claim of patent infringement. On February 1,2008, the District Court granted our motion for summary judgment on all patentinfringement claims.  On February 29, 2008, Shuffle Master filed anotice of appeal in respect of the February 1, 2008 court ruling.  OnFebruary 15, 2008, we delivered a demand to Shuffle Master for $3.0million in damages for the wrongful injunction they obtained in 2004.  Wealso filed a motion in District Court to recover our attorney fees in thelitigation.  Shuffle Master initially filed an appeal from the DistrictCourt ruling, but subsequently withdrew their appeal.

 

Althoughwe had a reasonable level of confidence in the eventual favorable outcome ofour claims for damages and attorney fees, it was not a certainty. In addition,by pursuing the matter in courts, it could have possibly taken another lengthyperiod and we would have incurred considerable additional legal expenses beforegetting a final ruling. As such, we entered into the Purchase and SettlementAgreement with Shuffle Master. We believe that this transaction was a mutuallyamicable solution and provided significant financial benefits to us as not onlydid it improve our cash position but it also freed up our resources to focus onaddressing market opportunities that furthered our strategy of expanding ourelectronic gaming machine participation business.

 

***Amendment to Elixir International Note***

 

On July 24, 2009, we entered into an agreement (the “Second Amendment”)with Elixir International Limited pursuant to which the parties amended theterms of the Trade Credit Facility Agreement between them dated April 21,2008 as amended by an Amendment to Trade Credit Facility Agreement and RelatedNote dated November 6, 2008 (the “Facility Agreement”). (See Part III Item 13. CertainRelationships and Related Transactions and Director Independence of this filingfor more details.) Pursuant to the

 

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Second Amendment, Elixir International agreed to restructure thepayment schedule on the outstanding principal balance of approximately $9.2million under the Facility Agreement. Under the revised payment schedule, weare not required to make any repayments of principal or interest under theFacility Agreement until July 1, 2010 provided that interest at the rateof 5% will continue to accrue on the outstanding principal balance. As of December31, 2009, the total outstanding balance was approximately $9.4 millionincluding principal balance of $9.2 million and additional accrued interest. Therepayment of the outstanding principal balance and interest accrued thereon isto be repaid in 18 equal monthly installments commencing on July 1, 2010.

 

***Reduced Size of Board of Directors Supports EnhancedEfficiency***

 

Duringthe week of September 28, 2009, and in connection with the recommendationsby our nominating committee of the board of directors on right-sizing our boardas a means to enhance efficiency, we were advised by certain members of ourboard of directors, including Lorna Patajo-Kapunan, Maj. Gen. Paul A. Harvey,Daniel Sham and Ted Chan, that each did not intend to be nominated for re-electionto the board of directors at our 2009 Annual Meeting of Stockholders.  Asa result of the re-election of the remaining board members at our annualshareholder meeting on October 30, 2009, our current board of directorswas reduced to five from nine members.

 

***Chief Executive Officer Extends Employment Contract***

 

OnNovember 10, 2009, Mr. Clarence Chung, our chairman and chiefexecutive officer, renewed his employment contract for the position of chiefexecutive officer for a term of three years commencing from January 1,2010 to December 31, 2012.  The contract may be renewed thereaftersubject to further agreement between the parties. The annual salary remains at$1.00 with the provision for a discretionary performance bonus of such amountand form (whether in cash or in kind) to be determined as being payable uponthe achievement of certain objectives set by the compensation committee and atsuch time as may be deemed appropriate by the compensation committee.

 

On January 22, 2010, thecompensation committee of the board of directors resolved to grant to Mr. Chung,on that day, as part of his compensation package under the November 10,2009 employment agreement: (a) options to purchase 500,000 shares ofCompany $.001 par value common stock at an exercise price of $0.275 per shareprovided that all these options will only be vested and become exercisable on January 1,2011; and (b) 472,727 shares of restricted common stock, pursuant to our2008 Stock Incentive Plan. All 472,727 restricted common shares are subject tovesting and risk of forfeiture based on our ability to meet certain financialand non-financial performance targets as of and for the fiscal year ending December 31,2010. The determination of the vesting or forfeiture of the shares shall bemade by the compensation committee of our board of directors on or before April 30,2011.

 

***Impairment of Gaming Machine Assets***

 

Ourboard of directors, acting on the recommendation of management and the auditcommittee of the board of directors, approved a non-cash impairment charge toour gaming machine in the amount of $13.7 million during the year ended December 31,2009. A substantial portion of the impairment was the write-down to fair marketvalue of certain gaming machines in inventory deemed as non-performing for ourcurrent target markets or their customer preferences.  To a lesser extent, the impairment alsoincluded the write-down of the Philippine operation gaming assets based onwhether the current carrying value of the machines in operation in this marketis higher than the expected value as forecasted by projected future cash flows.We engaged an independent valuation firm for purposes of confirming thespecific amount of impairment to our Philippine operations’ gaming assets.Based on the conclusions of the independent valuation firm and Company’susability study and future deployment plans, we recorded a non-cash impairmentcharge of $13.7 million during the year ended December 31, 2009.  We do not expect that the impairment chargewill trigger any future cash expenditures in connection with the impairment.

 

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**GAMINGMACHINE PARTICIPATION**

 

**Overview**

 

Since September 2007,our primary business model has focused on the ownership and leasing ofelectronic gaming machines placed with venue owners on a revenue sharing basisacross certain countries in Asia. Utilizing our developed operational experience and established marketpresence and key relationships, we identify and develop new gaming venues, andacquire the gaming machines, casino management systems and other gamingperipherals and install same in our contracted venues.

 

Electronic gamingmachine participation operations began in September 2007 and comprised 45%of our consolidated revenues for the year ended December 31, 2009.

 

**Operations**

 

Wecontract with the venue owners or operators for the placement of electronicgaming machines on a revenue sharing basis and directly acquire and install thegaming machines and other gaming peripherals at the relevant gaming venues.The targetmarket for our electronic gaming machine participation business is hotels andresorts and various other gaming venues across Asia.  We focus onunderserved gaming markets that we believe are poised for significant growth,and many of the targeted venue owners have little or no gaming operationsexperience.

 

Weutilize electronic gaming machines from leading manufacturers, includingInternational Game Technology, Aristocrat Technologies, WMS Gaming andInterblock.  As of December 31, 2009 we had an inventory of 1,702gaming machines suitable for deployment and believe, given our currentselective growth plans, that we will need to supplement our existing inventorywith the purchase of a certain number of new and used gaming machines from cashon hand and cash from operations over the next twelve months.

 

Wehelp market, design and develop the gaming venues of the venue owners to whomwe lease our electronic gaming machines and related systems.  We contractwith the venue owner for the leasing and maintenance of the electronic gamingmachines on a revenue sharing basis.  Weprovide the development and implementation of various related gaming servicesin the Asia Pacific region with a principal focus, to date, on Cambodia and thePhilippines.  Our solutions and offerings include:

 

·                  Developing the technical andnetwork design, layout and overall space configuration of the gaming floor inorder to best utilize and leverage the available space and present an appealingenvironment to customers; and

 

·                  Selecting the optimal mix ofelectronic gaming machines for the property to optimize the economic potentialof the gaming floor and overall experience for the venue owner’s customers.

 

Weassist the venue owner by providing training for its gaming floor personnelregarding the operation and maintenance of the gaming machines andback-of-the-house accounting.  In addition, we maintain all performancedata and provide ongoing technical and operations support in order to optimizegame performance throughout the floor.

 

Weexpect that our electronic gaming machine participation revenues and grossmargins will be influenced by a number of factors, including the number andtype of machines in service, the levels of play and the revenue sharingpercentage.  In addition, we may initially install fewer electronic gamingmachines than contracted for at a venue and increase the number of machines graduallyas a way to build demand for our product.  Our cost of sales includes thedepreciation, joint cost sharing (primarily, in the event our contract dictateswe are involved in the management of the floor operations) and otherinstallation and maintenance costs of the electronic gaming machines.

 

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**Competition**

 

Theglobal gaming industry is highly competitive.  Our competitors principallyinclude private companies in Cambodia and both public and private companies inthe Philippines with operations focused in Asia.   Part of our operating strategy includesaddressing markets and customers where we will face less competition and entrybarriers due to several factors including:

 

·      **UnitedStates Gaming Laws:**  All of themajor gaming equipment suppliers are licensed by a large number of UnitedStates regulatory agencies.  In order for one of these companies to enterthe markets we serve in Asia on a direct revenue sharing model with a foreignoperator, the operator would be required to comply with various United Statesregulatory procedures.  We are not subject to this requirement as we havesurrendered all our gaming licenses in the United States.

 

·      **LocalKnowledge:**  Through ouroperating experience, we have an extensive database of contacts andrelationships throughout the Asian region that provides us with a uniqueopportunity to penetrate these under-developed markets.

 

**Gaming Regulations and Licensing of Gaming Machine Participation**

 

Theregulatory structures in the Asian countries where we are pursuing ourelectronic gaming machine participation business, including the Philippines andCambodia, are not as developed or clearly defined as the United States. In general, all of the countries in which we currently operate require thevenue owner to obtain a gaming license in order to operate the electronicgaming machines leased by us and we demand that all venue owners to whomwe lease electronic gaming machines, being our customers in the Philippines andCambodia, hold the required gaming licenses to operate their venues.  Since our business model primarily focuses onleasing the gaming machines to the venue owner, technically, we are notconsidered to be an operator or owner of the gaming operations by the relevantauthorities (although to a certain extent we have assumed some operator roles,including but not limited to the design of marketing programs, recruitment,training and management of floor staff, in certain of our venues) and thus, we are not required to obtain anyform of gaming license in either the Philippines or Cambodia for ourparticipation business in such jurisdictions.  However, current gaminglaws, including licensing requirements and other regulatory obligations, couldchange or become more stringent resulting in additional regulations beingimposed upon us and our electronic gaming machine participationoperations.  Any such adverse developments in the regulation of the gamingindustry could be difficult to comply with and significantly increase our costswhich, in turn, could cause our projects to be unsuccessful.

 

**TABLEGAME PRODUCTS**

 

**Overview**

 

Duringthe fiscal year ended December 31, 2009, our table game products werefocused on the development, manufacture and sale of gaming chips whichincluded:

 

·      High-frequencyRFID casino chips which are traditional casino chips embedded with a RFID tagthat allows casinos to identify counterfeit casino chips and track tableplay.  The high-frequency 13.56 MHz RFID casino chip is designed toprovide real-time data capability, enhanced chip security, player tracking andaccounting management benefits for casinos. The high-frequency RFID chipsenable casinos to read 1,000 chips per second and have a memory capacity ofover 10,000 bits.

 

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·                  Traditional casino chips forvarious table games, including a wide range of American-style gaming chips with30 different color combinations, various sizes and other personalized printingcombinations.

 

·                  High-frequency RFID casinoplaques, which use modern, efficient plastic thermoforming techniques and aprocess of printing graphics to polymer that provides for a broad range ofcolors or designs, including a full photographic finish. Our plaques have unique security features including apatented RFID inlay which is tamper-proof and identifies each plaque, acurrency grade ceramic DNA strand embedded in the plastic, a multi-directionalhologram and serialization. They are available in five rectangular and threesquare shapes or customized to buyer requirements.  The development of our high-frequency RFIDgaming plaques was completed during the fourth quarter of 2009.

 

Duringthe fiscal year ended December 31, 2009, our table game products alsoincluded the development, manufacture and sale, through our distributornetwork, of products that automate the current manual processes supportingcasino table games and provide additional security to the gamingindustry.  These products included:

 

·                  The Deck CheckerTM, anautomated playing card scanner that scans decks of playing cards to ensure anaccurate count and verifies that all of the playing cards are present.

 

·                  The RandomPlus CardShuffler, a shuffling device capable of shuffling up to eight decks of playingcards at once.

 

·                  The ShufflePro Shuffler, ahigh-speed playing card-shuffler designed for use with one or two deck tablegames such as standard poker room games and baccarat.

 

·                  The ChipWasher, afully-automated gaming chip cleaner that washes and sanitizes gamingchips.  During the three-month periodended September 30, 2009, we recorded an impairment loss of $424,500related to the write-down of an intangible asset associated with the chipwasher patents.

 

Pursuantto the Purchase and Settlement Agreement, in March 2009 we sold to ShuffleMaster our portfolio of automated card verification machines and electroniccard shuffling systems, including Deck CheckerTM, RandomPlus Cardshuffler, ShufflePro shuffler, all related intellectual property, andcertain inventory of such products and, at the same time, settled with ShuffleMaster all outstanding patent infringement litigation with respect to U.S.Patent No. 6,655,684 dealing with automated shuffler technology.  The total consideration paid by ShuffleMaster to us under the Purchase and Settlement Agreement was $2.8 million,including a base amount of $2.4 million plus $400,000 for related inventory.Meanwhile, as a result of closing down our China manufacturing facility duringthe second quarter of 2009, we decided to exit the chip washer business andceased the production of ChipWasher after evaluating the market opportunitiesfor this product.

 

**Marketingand Distribution**

 

Duringthe fiscal year ended December 31, 2009, we terminated our distributionagreements with third-parties as detailed below.

 

On January 6, 2006, we entered into adistribution agreement with Elixir Group which provided exclusive distributionrights for our high-frequency RFID casino chips for certain Southeast Asiacasino properties and non-exclusive distribution rights elsewhere in Asia.  In October 2006 and February 2007,the distribution agreement was expanded to encompass our entire line of tablegame products and Elixir Group’s exclusive distribution rights to include allof Asia, Australia and New Zealand. This distribution agreement was terminatedwith effect on February 1, 2009.

 

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In June 2007, we entered into a distributionagreement with Suzo Happ Group, pursuant to which Suzo Happ Group served as theexclusive distributor of our table game products in North, Central and SouthAmerica, Europe, South Africa and the Russian Federation.  In order tofacilitate the sale of our portfolio of automated card verificationmachines and electronic card shuffling systems to Shuffle Master under thePurchase and Settlement Agreement mentioned above, this distribution agreementwas terminated with effect on March 13, 2009.  Pursuant to the termination arrangement withSuzo Happ and, indeed, under the terms of the original distribution agreement,we purchased back the unsold inventory of our products from Suzo Happ andreimbursed it for the costs incurred by it in relation to the certification ofour products, upon termination of the distribution agreement.

 

Since,pursuant to the Purchase and Settlement Agreement, we have undertaken toShuffle Master for a period of seven years not to engage or participate,directly or indirectly, in the manufacturing and selling of automated cardverification machines and electronic card shuffling systems, we believe thetermination of the distribution agreements with Elixir Group and Suzo Happ willnot have any material adverse effects on our overall business.

 

Regardingour Dolphin’s high-frequency RFID and traditional non-RFID gaming chips andplaques, we have engaged a local marketing agent in Australia for promoting anddistributing these gaming chip products for us in Australia, New Zealand andcertain other Asian territories including Macau and Singapore and at present,our customers include, amongst others, City of Dreams casino, Altira casino andGalaxy casino in Macau, Crown Casino in Melbourne and Burswood Casino in Perth,Australia.  Meanwhile, we are currentlyin discussion with another marketing agent for promotion and distribution ofour gaming chip products in Europe and South Africa. However, since the gamingchip products are generally be regarded as “gaming device” by the gamingauthorities in most of the states of U.S., which therefore requires themanufacturer of these products to be licensed, we currently do not have theintention to market or sell our Dolphin’s gaming chip products in the U.S.market.

 

**Competition**

 

Thegaming products industry is competitive.  We compete with establishedgaming products companies, which have more substantial histories, backgrounds,experience and records of successful operations, greater technical, marketingand other resources, more employees and more extensive facilities than we haveor will have in the foreseeable future.  During the fiscal year ended December 31,2009, our most significant competitors in the table game products segment wereShuffle Master for automated card verification machines and electronic cardshuffling systems and Gaming Partners International Corporation for our gamingchips and plaques.

 

**GamingRegulations and Licensing**

 

Inconnection with the negotiation and development of the Product ParticipationAgreement with Elixir Group, we decided to focus our primary businessoperations on the ownership and leasing of electronic gaming machines inAsia.  In order to most efficiently accomplish our goals and objectiveswith respect to the Asian electronic gaming machine market, we decided tosurrender our gaming licenses in the United States. This process was completedin early 2008.

 

Inmost jurisdictions, our table game products, other than the gaming chipproducts, fall within the general classification of “associated equipment”,which is defined as equipment that is not classified as a “gaming device,” butwhich has an integral relationship to the conduct of licensed gaming. Regulatory authorities in some jurisdictions have discretion to requiremanufacturers and/or distributors to meet licensing or suitability requirementsprior to or concurrently with the use of associated equipment. Additionally, in most jurisdictions, the regulatory authorities must approveassociated equipment after testing in an appropriate testing lab (either staterun or independent) in advance of its use at licensed locations.  Duringfiscal 2008 and 2009, in those jurisdictions in the United States that allowthe sale of our approved table game products through a licensed distributor, wesold through Suzo Happ Group, our then exclusive distributor for North andSouth America, Europe and South Africa. The distribution agreement withSuzo Happ Group was subsequently terminated on March 13, 2009 as explainedabove. In other jurisdictions where sales through a distributor are notallowed, including New Jersey, Mississippi, Indiana and Washington, ourproducts were not available.  In the Asian markets, our products weredistributed by Elixir Group, pursuant to the terms of the January 2006distribution agreement as amended in 2007. This distribution agreement wassubsequently terminated with effect on February 1, 2009.

 

Regardingour Dolphin’s gaming chips products, in most jurisdictions outside the U.S.market, neither manufacturer nor distributor of the gaming chips products arerequired to be licensed. However, since the gaming chip products are generallybe regarded as “gaming device” by the gaming authorities in most of the statesof U.S., which therefore requires the manufacturer of these products to belicensed, we currently do not have the intention to market or sell ourDolphin’s gaming chip products in the U.S. market.

 

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**ProductDevelopment, Manufacturing and Assembly**

 

Aspart of our cost cutting measures and focus on our core participation business,on December 31, 2008, we scaled down the facility for the manufacture andassembly of our table game products in Xiaolan, China.  This facilityfocused on enhancements to our shuffler, deck checker and chip washer productlines.  Following the sale to ShuffleMaster of our portfolio of automated card verification machines andelectronic card shuffling systems, all related intellectualproperty, and certain inventory of such products pursuant to the Purchase andSettlement Agreement as set out above, we closed the China facility during thesecond quarter of 2009.  As a result ofthe close down of this facility, we ceased the production of ChipWasher, andduring the three-month period ended September 30, 2009, we recorded animpairment loss of $424,500 related to the write-down of an intangible assetassociated with the chip washer patents.

 

**Suppliers**

 

Duringthe fiscal year ended December 31, 2009, most components for our Shufflersand DeckChecker products were sourced in China. Shuffler and DeckCheckerassembly was conducted in China and final units were shipped to our Macauwarehouse for distribution to the North American, Asian, Australian andEuropean markets. As a result of our sale of the portfolio ofautomated card verification machines and electronic card shufflingsystems and all related intellectual property to Shuffle Master in April 2009,the related sourcing of materials and the assembly and production of suchproducts has been discontinued. The manufacture of RFIDcasino chips is performed at Dolphin, our subsidiary in Australia, whichspecializes in plastic injection molding. Dolphin has licensed certain RFIDtechnology from a third party.

 

**NON-GAMINGOPERATIONS**

 

Dolphinspecializes in tool-making, custom injection molding and clean room manufactureof high-precision plastic products together with non-gaming product lines ofhigh-quality products for the automotive industry.  From our state of theart facility in Melbourne, Australia, we produce various automotive componentsincluding inner remote door handles, fuel filler hinge assemblies, modulebrackets, steering wheel spoke covers, speaker grills, fasteners, safetyproducts and vehicle cosmetic components. In addition to Australia, Dolphinsupplies components to auto manufacturers in North and South America, Europe,and the Asia Pacific region.

 

**Marketingand Distribution**

 

Wemarket our automotive products through automotive organizations andinstitutions and are a preferred supplier to General Motors Holden, Toyota,Autoliv and Bridgestone, all of whom typically include us among the suppliersfrom whom they solicit bids on supply contracts.

 

**Competition**

 

Theautomotive tool-making and injection molding products businesses are highlycompetitive.  Our competitors include ITW Deltar, Hook Plastics, PalmPlastics & Tooling, Hasico and Sneddon & Kingston Plastics,all of whom have greater financial resources, infrastructure andexperience.  However, it should be notedthat the recent financial crisis has resulted in some consolidation of ourcompetitor base.

 

**ProductDevelopment, Manufacturing and Assembly**

 

Automotivecomponents manufactured by our Dolphin division are used for both internal andexternal applications and some are safety products.  We use our experienceand expertise in engineering, tool-making and process technology in partnershipwith leading automakers. We provide to our customers full design, developmentand prototyping of new products. Simultaneous engineering and Production Part Approval Process, aprocess which includes 19 procedures that a supplier must adhere to and must beapproved by customers, is standard for automotive components manufactured atthe Dolphin subsidiary.

 

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In addition, we occasionallyengage research and development consultants to complement our skill set inspecific areas of engineering activities.  We hire contract personnel on avaried basis depending upon production and installation volumes.

 

**RESEARCHAND DEVELOPMENT**

 

The research and developmentcenter, located in Zhuhai, China was closed down at the end of 2008.  Since then, all research and developmentrelated to non-gaming operations has been performed at our facilities inMelbourne, Australia.  Our current research and development emphasis is toimprove our existing product lines and we spent $276,781 in 2009 and $678,047in 2008 on research and development activities.

 

**INTELLECTUALPROPERTY**

 

In October 2005, weacquired the rights to U.S. Patent No. 6,659,875, which covers a uniqueprocess for manufacturing RFID chips and plaques. We also hold patents coveringsimilar processes issued by Australia and the United Kingdom. In addition, in February 2007,we filed a new provisional specification in Australia to protect additionalenhancements in the manufacture of RFID chips and plaques.

 

We had one ChipWasher patentapplication on file with the USPTO and five applications pending in foreignjurisdictions which expired in September 2009 and were not renewed.

 

In April 2009, pursuantto the Purchase and Settlement Agreement with Shuffle Master, we completed thesale of our card verification and electronic card shuffling assets, includingthe exclusive rights to our table game products, primarily through federal andforeign intellectual property rights, such as patents, copyrights andtrademarks to Shuffle Master.

 

For those intellectualproperty applications, claims and rights that do not form part of the subjectmatter of the transaction under the Purchase and Settlement Agreement withShuffle Master and continue to be held by us, there can be no assurance thatany of the claims contained in our pending United States or foreign patent ortrademark applications will be issued, that any of these rights will not beinfringed by others or that already issued patents or trademark registrationswill not be invalidated or canceled. Third parties could infringe on our rightsor successfully duplicate our products without infringing on our legal rights.

 

Many elements incorporatedin our proprietary products are in the public domain or otherwise not amenableto legal protection and the steps taken by us will not, in and of themselves,preclude competition with our proprietary products.

 

**EMPLOYEES**

 

As of March 15, 2010,we had approximately 14 full-time employees in Hong Kong, 1 full-time employeein the United States, 34 full-time employees in the Philippines, 31 full-timeemployees and 123 contracted staff for floor operation at NagaWorld in Cambodiaand 63 full-time employees in Australia. None of our employees are representedby labor unions, and we consider our relationship with our employees to besatisfactory.

 

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**AVAILABLEINFORMATION**

 

Our website is located atwww.elixirgaming.com.  The information on or accessible through our websiteis not part of this annual report on Form 10-K.  A copy of thisannual report on Form 10-K is located at the SEC’s Public Reference Room at100 F Street, NE, Washington, D.C. 20549. Information on the operation of thePublic Reference Room can be obtained by calling the SEC at1-800-SEC-0330. The SEC also maintains an internet site that contains reports,proxy and information statements and other information regarding our filings atwww.sec.gov.

 

**EXECUTIVEOFFICERS OF THE REGISTRANT**

 

The names of our executiveofficers and their ages, titles and biographies as of March 15, 2010 areset forth below.

 
| **Name**                 | ** ** | **Age** | ** ** | **Position**                                                  |
|--------------------------|------------|---------|------------|---------------------------------------------------------------|
| Clarence (Yuk Man) Chung |       | 47      |       | Chairman of the Board, President and Chief Executive  Officer |
| Andy (Kin Ming) Tsui     |       | 40      |       | Chief Accounting Officer                                      |

 

Our executive officers areappointed by, and serve at the discretion of, our board of directors. Eachexecutive officer is a full time employee although our chief executive officer,Mr. Clarence Chung, also serves as an executive director of MelcoInternational Development Limited, the parent corporation of our principalshareholder, Elixir Group Limited. There are no family relationships betweenany of our executive officers or directors.

 

Clarence (Yuk Man) Chungjoined our board in October 2007 and has served as our chairman of theboard since August 2008 and was appointed chief executive officer in October 2008.Mr. Chung is also a director of Melco International Development Limited (“Melco”)and joined Melco in December 2003. Mr. Chung has many years offinancial experience working in the financial industry in various capacities asa chief financial officer, an investment banker and a merger and acquisitionspecialist. He is also currently a director of Melco Crown EntertainmentLimited, a company listed on the Nasdaq Global Market. Mr. Chung was namedone of the “Asian Gaming 50 - 2009” by Inside Asian Gaming magazine. He holds amaster degree in business administration from the Kellogg School of Managementat Northwestern University and is a member of the Hong Kong Institute ofCertified Public Accountants and the Institute of Chartered Accountants inEngland and Wales.

 

Andy (Kin Ming) Tsui hasserved as chief accounting officer since April 2009 and as vice presidentof finance since July 2008. Prior to joining our Company, Mr. Tsuihad been the regional finance controller-Asia for Minteq International Inc., awholly-owned subsidiary of Minerals Technologies Inc. (NYSE: MTX) based inShanghai since June 2005.  From March 2003to May 2005, he served as manager of financial analysis at the corporateoffice of Minteq International Inc. in New York. Mr. Tsui holds a Masterof Business Administration degree from Baruch College, City University of NewYork and is a certified public accountant in the United States.

 

**Item 1A.****                         ****Risk Factors**

 

In this report we make, andfrom time-to-time we otherwise make, written and oral statements regarding ourbusiness and prospects, such as projections of future performance, statementsof management’s plans and objectives, forecasts of market trends, and othermatters that are forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934.  Statements containing the words or phrases “will likelyresult,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,”“believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,”“should” or similar expressions identify forward-looking statements, which mayappear in documents, reports, filings with the Securities and ExchangeCommission, news releases, written or oral presentations made by officers orother representatives made by us to analysts, stockholders, investors, newsorganizations and others, and discussions with management and other of ourrepresentatives.  For such statements, we claim the protection of the safeharbor for forward-looking statements contained in the Private SecuritiesLitigation Reform Act of 1995.

 

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Our future results,including results related to forward-looking statements, involve a number ofrisks and uncertainties.  No assurance can be given that the resultsreflected in any forward-looking statements will be achieved. Anyforward-looking statement speaks only as of the date on which such statement ismade.  Our forward-looking statements are based upon assumptions that aresometimes based upon estimates, data, communications and other information fromsuppliers, government agencies and other sources that may be subject torevision.  Except as required by law, we do not undertake any obligationto update or keep current either (i) any forward-looking statement toreflect events or circumstances arising after the date of such statement, or (ii) theimportant factors that could cause our future results to differ materially fromhistorical results or trends, results anticipated or planned by us, or whichare reflected from time to time in any forward-looking statement.

 

In addition to other mattersidentified or described by us from time to time in filings with the SEC, thereare several important factors that could cause our future results to differmaterially from historical results or trends, results anticipated or planned byus, or results that are reflected from time to time in any forward-lookingstatement. Some of these important factors, but not necessarily all importantfactors, include those set out below.

 

***We have a history of significant operating losses and anticipatecontinued operating losses for at least the near term.*** For the fiscalyears ended December 31, 2009 and 2008, we have incurred net losses of$26,359,450 and $26,955,196, respectively, and our operations have used $6,955,397and $30,096,613 of cash, respectively. As of December 31, 2009, we had anaccumulated deficit of $380,926,107. We expect to continue to experiencenegative cash flows from operations until such time as we are able tosubstantially increase revenues and control expenses to levels that will allowus to operate on a positive cash flow basis. While management will endeavor togenerate positive cash flows from our placement of electronic gaming machinesin Asia, there can be no assurance that we will be successful in generatingpositive cash flows from operations.

 

***Our revenues from our gaming machine participation operations aredifficult to predict and may vary from our projections because the businessmodel is new and the venues are not operated by us.***  Ourprimary focus now is on the ownership and leasing of gaming machines on arevenue sharing basis across certain countries in Asia.  We focus ontargeting venue owners in underserved gaming markets who have little or nogaming operations or experience.  Since we participate on a revenuesharing basis with these venue owners, our revenue generated from the revenuesharing arrangements will be dependent to a significant degree on the effortsand capabilities of the venue owners.  Our revenues and results from ourgaming machine participation operations may be difficult to predict and mayvary depending on the ability of the venue owners to manage the gamingoperations of their venues.  Accordingly,there can be no guarantee that the venue owners will be able to manage thegaming operations successfully or that the gaming venues operated by them willperform at levels consistent with our financial projections and underlyingforecasts and assumptions. Further, we have very limited past businessrelationships with the venue operators and assume that the venue operators arereputable. In the event that any of the venue operators are not reputable thiswould expose us to the risk of being unable to collect the revenue to which weare entitled under the revenue share arrangements and protect our gamingmachine assets.

 

***We could require additional funding in the future to continue tooperate our business.***  As ofDecember 31, 2009, we had working capital of approximately $7.4million.  Since December 31, 2009,our working capital has been reduced because of the payment of $2.74 million toNagaWorld in relation

 

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to the Machines Operationand Participation Consolidation Agreement entered into on December 30,2009.  The $2.74 million paymentrepresents the total of the remaining two installments which represented 50% ofthe $1.38 million one-time non-refundable contract amendment fee and the $4.1million commitment fee for the placement of an additional 200 machines.  Since December 31, 2009, our workingcapital has been positively affected by the inflow of cash from our operationsat NagaWorld.  We believe we havesufficient cash on hand to fulfill all current obligations as they becomedue.  Based on our internal revenue projections, existing contemplatedmachine placement rollout plans and our inventory of electronic gamingmachines, we believe we have the needed capital to fund our operations over thenext twelve months. However, if our revenue projections fail to meet ourexisting internal projections, we are required to procure additional gamingmachines for projects or due to reasons not currently contemplated, we wouldneed to raise additional capital within the next twelve months.  We would endeavor to raise funds throughvarious financing sources, including the sale of our equity and debt securitiesand the procurement of commercial debt financing. However, there can be noguarantees that such funds will be available on commercially reasonable terms,if at all. If such financing is not available on satisfactory terms, we may beunable to expand or continue our business as desired and operating results maybe adversely affected. Any debt financing will increase expenses and must berepaid regardless of operating results and may involve restrictions limitingour operating flexibility. If we issue equity securities to raise additionalfunds, the following results can occur:

 

·                  the percentage ownership of our existingstockholders will be reduced;

 

·                  our stockholders may experience additionaldilution in net book value per share; and/or

 

·                  the new equity securities may have rights,preferences or privileges senior to those of the holders of our common stock.

 

***Our growth into markets outside the United States exposes us to risksinherent in international business operations.*** We intend tomarket our gaming machine participation business and sell our remaining line(excluding the portfolio of automated card verification machines and electroniccard shuffling systems which we have sold to Shuffle Master pursuant to thePurchase and Settlement Agreement) of table game products outside the UnitedStates. We intend to focus our sales efforts for our table game products,namely the RFID and traditional non-RFID gaming chips and plaques, in Asia,Australia, and Europe but our international expansion efforts may not besuccessful. Our international operations expose us to risks and challenges thatwe would otherwise not face if we conducted our business only in the UnitedStates, such as:

 

·                  increased cost of enforcing our intellectualproperty rights;

 

·                  heightened price sensitivity from customersin emerging markets;

 

·                  our ability to establishlocal manufacturing, support and service functions, and to form channelrelationships with resellers in non-U.S. markets;

 

·                  localization of ourelectronic gaming machines and components, including translation into foreignlanguages and the associated expenses;

 

·                  compliance with multiple,conflicting and changing governmental laws and regulations;

 

·                  foreign currencyfluctuations;

 

·                  laws favoring localcompetitors;

 

·                  weaker legal protections ofcontract terms, enforce recoveries of receivables and intellectual propertyrights and mechanisms for enforcing those rights;

 

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·                  market disruptions createdby public health crises in regions outside the United States, such as Avianflu, SARS and other diseases;

 

·                  difficulties in staffing andmanaging foreign operations, including challenges presented by relationshipswith workers’ councils and labor unions; and

 

·                  changing regional economic,political and regulatory conditions.

 

***We may be unable to adequately protect our intellectual propertyrights.*** Our success in businesses, in particular, inrelation to our table game products and non-gaming business, is impacted bymaintaining the confidentiality and proprietary nature of our intellectualproperty rights. Our ability to compete may be damaged, and our revenues may bereduced if we are unable to protect our intellectual property rightsadequately. To protect these rights, we rely principally on a combination of:

 

·                  contractual arrangements providing fornon-disclosure and prohibitions on use;

 

·                  patents and pending patent applications;

 

·                  trade secret, copyright and trademark laws;and

 

·                  certain built-in technical product features.

 

Patent, trade secret,copyright and trademark laws provide limited protection. The protectionsprovided by laws governing intellectual property rights do not prevent ourcompetitors from developing, independently, products similar or superior to ourproducts and technologies. In addition, effective protection of copyrights,trade secrets, trademarks, and other proprietary rights may be unavailable orlimited in certain foreign countries. We may be unaware of certain non-publiclyavailable patent applications, which, if issued as patents, could relate to ourservices and products as currently designed or as we may modify them in thefuture. Legal or regulatory proceedings to enforce our patents, trademarks orcopyrights could be costly, time consuming, and could divert the attention of managementand technical personnel.

 

***It is possible that our table game products and/or, non-gaming productswill be the subject of future patent litigation if the products are sold andinstalled in the United States and, if commenced, could subject us to continuinglitigation costs and risks.*** To the extent that weintroduce new products that incorporate the same or similar technology, it islikely that a competitor will bring one or more claims against us seekingdamages, injunctive or other equitable relief, or both. We cannot predict theoutcome of any present or future litigation that may occur.

 

If our future productsincorporate technologies that infringe the proprietary rights of third partiesand we do not secure licenses from them, we could be liable for substantialdamages that would cause a material reduction in revenues and impair ourprospects for achieving growth and profitability.

 

In furtherance of thedevelopment of our services or products, we may need to acquire licenses forintellectual property to avoid infringement of third-party rights or claims ofinfringement. These licenses may not be available on commercially reasonableterms, if at all. Claims for infringement, if made, could damage our businessprospects, our results of operations and financial condition, whether or notthe claims have merit, by:

 

·                  consuming substantial time and financialresources required to defend against them;

 

·                  diverting the attention of management fromgrowing our business and managing operations;

 

·                  resulting in costly litigation; and

 

·                  disrupting product sales and shipments.

 

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If any third party prevailsin an action against us for infringement of its proprietary rights, we could berequired to pay damages and either enter into costly licensing arrangements orredesign our products so as to exclude the infringing technology. As a result,we would incur substantial costs and delays in product development, sales andshipments, our revenues may decline substantially and we may not be able toachieve the growth required for us to achieve profitability.

 

***Elixir Group holds a significant interest in our common stock, giving ElixirGroup the significant power over our management and all shareholder actions.*** As of March 15,2010, Elixir Group owned 45.8 million shares of our common stock, representingapproximately 40% of our issued and outstanding common shares, and has the rightto acquire another 10 million common shares upon the exercise of outstandingcommon stock purchase warrants. Accordingly, Elixir Group has significantcontrol over our management and all matters requiring approval by ourshareholders, including the power to elect our board members and effect theapproval of mergers and other significant corporate transactions. Thisconcentration of ownership will make it difficult for other shareholders toeffect substantial changes in our company, and also will have the effect ofdelaying, preventing or expediting, as the case may be, a further change incontrol of our Company.

 

***Our common stock may be delisted from the NYSE Amex and if this occursyou may have difficulty converting your investment into cash efficiently*****.**  The NYSE Amex has establishedcertain standards for the delisting of a security from the NYSE Amex.  The standards for delisting from the stockmarket include, among other things, common stock selling for a substantialperiod of time at a low price per share, if the issuer fails to effect areverse split of such shares within a reasonable time after being notified thatthe stock exchange deems such action to be appropriate.  Our common stock has continuously traded below$1.00 since August 2008. While we have not received any communications todate from the NYSE Amex concerning the selling price of our common shares,there can be no assurance that the NYSE Amex will take action to delist ourcommon stock from the exchange due to the low selling price of the shares.  If that were to occur, we would considereffecting a reverse split of our common stock in order to raise our share priceto a level satisfactory to the NYSE Amex. However, reverse splits of the thinly traded shares have, at times,resulted in declining share prices after a proportional adjustment in shareprice to give effect to the split.  Ifour common stock were to be excluded from the NYSE Amex, or if we elected toconduct a reverse split in order to maintain the listing, the price of our commonstock and the ability of holders to sell such stock could be materiallyadversely affected.

 

***Our board of directors may issue blank check preferred stock, which mayaffect the voting rights of our holders and could deter or delay an attempt toobtain control of us.*** Our board of directors is authorized,without stockholder approval, to issue preferred stock in series and to fix andstate the voting rights and powers, designation, preferences and relative,participating, optional or other special rights of the shares of each suchseries and the qualifications, limitations and restrictions thereof. Preferredstock may rank prior to our common stock with respect to dividends rights,liquidation preferences, or both, and may have full or limited voting rights.Accordingly, issuance of shares of preferred stock could adversely affect thevoting power of holders of our common stock and could have the effect ofdeterring or delaying an attempt to obtain control of us.

 

***The global recession has negatively impacted the demand for automobileswhich, in turn, could make it difficult to collect on accounts receivables fromour Dolphin subsidiary customers. ***For the fiscalyears ended December 31, 2009 and 2008, we have reported net accountreceivables of $808,831 and $535,983, respectively, from the automotive segmentof our Dolphin subsidiary. Due to the global recession and subsequent reduceddemand for automobiles, many auto manufacturers, which include some of ourDolphin subsidiary’s customers, are experiencing financial and operatingdifficulties.  These difficulties could impact our customers’ ability topay us and our ability to collect on receivables due from these customers.  For the fiscal year ended December 31,2009, our largest non-gaming customer, Futuris Automotive, accounted for 8% ofthe Company’s consolidated revenues. While no non-gaming customer accounts for over 10% of the Company’sconsolidated revenues for the fiscal year ended December 31, 2009, theloss of any major customers could negatively impact the financial performanceof the non-gaming segment and increase the risk of impairment on the long-livedassets and intangible assets.  While theautomotive parts industry has recently shown signs of stabilization, we believeit will remain volatile throughout 2010.

 

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**Item 1B.****                         ****Unresolved Staff Comments**

 

Not applicable.

 

**Item 2.****                                  ****Properties**

 

In May 2009, we closedour United States office at 6650 Via Austi Parkway, Suite 170, Las Vegas,Nevada, which consisted of approximately 2,600 square feet of office facilitiesused for accounting and administration. We currently have a mailing address at40 E. Chicago Avenue, #186, Chicago, Illinois.

 

We also lease the followingoffices throughout Asia and in Australia:

 
| **Location/Activities**                                         | ** ** | **Expiration Date********of Lease** | ** ** | **Monthly********Lease********Payment********(USD)** | ** ** | **Area  (sq. ft.)** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------|------------|---------------------|------------|
| Hong Kong;  Administrative office                               |       | March 2011                     |       | 8,700                                                |       | 1,920               |       |
| Melbourne, Australia;  Manufacturing and Administrative offices |       | December 2013                  |       | 17,000                                               |       | 32,000              |       |
| Melbourne, Australia;  Warehouse facilities                     |       | January 2014                   |       | 16,000                                               |       | 32,000              |       |
| Philippines;  Administrative office                             |       | April 2012                     |       | 5,200                                                |       | 5,100               |       |
| Philippines; Warehouse  facilities                              |       | March 2010 (1)                 |       | 2,900                                                |       | 5,800               |       |
| Cambodia;  Administrative office                                |       | September 2011                 |       | 3,200                                                |       | 9,860               |       |
| Cambodia; Warehouse  facilities                                 |       | March 2011                     |       | 2,000                                                |       | 7,535               |       |

 

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(1)   Leaserenewed in March 2010 and expires March 2011.

 

**Item 3.****                                  ****Legal Proceedings**

 

There are no pending legalproceedings to which we or our properties are subject, except as set forthbelow or for routine litigation incurred in the normal course of business.

 

On October 5, 2004,Shuffle Master filed a patent infringement action against us in the UnitedStates District Court, District of Nevada (Case No. CV-S-04-1373-JCM-LRL)claiming that the use, importation and offering for sale of our PokerOneshuffler infringed Shuffle Master’s United States Patent, No. 6,655,684.  We responded by denying Shuffle Master’sclaim of patent infringement. On February 1, 2008, the District Courtgranted our motion for summary judgment on all patent infringementclaims.  On February 29, 2008, Shuffle Master filed a notice ofappeal of the February 1, 2008 court ruling.  On February 15,2008, we delivered a demand to Shuffle Master for $3.0 million in damages forthe wrongful injunction they obtained in 2004.  We also filed a motion inDistrict Court to recover our attorney fees in the litigation.  ShuffleMaster initially filed an appeal from the District Court ruling, butsubsequently withdrew their appeal.

 

While originally the casewould have gone back to the District Court to resolve our claims for damagesand attorney fees, on March 16, 2009, we entered into a Purchase andSettlement Agreement with Shuffle Master (the “Purchase and SettlementAgreement”) pursuant to which we sold to Shuffle Master our portfolio ofautomated card verification machines and electronic card shuffling systems, allrelated intellectual property, including but not limited to, the trademarks of RandomPlusTM, PokerOneTM, ShuffleProTM and Deck CheckerTM, and certain inventory of suchproducts. In addition, we and Shuffle Master have settled all outstandingpatent infringement litigation with respect to U.S. Patent No. 6,655,684dealing with automated shuffler technology. The total consideration paid by Shuffle Master to us under the Purchaseand Settlement Agreement was $2.8 million.

 

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***Purton Litigation***

 

On October 5, 2007,William Purton filed an action against us in the Supreme Court of Victoria atMelbourne, Australia claiming he was owed monies under the July 2006 sharesale agreement by which we acquired Dolphin.  In addition, Mr. Purtonclaimed he was owed money for an independent contractor agreement that heclaims he was offered.  We subsequently filed acounterclaim.   After considering external legal counsel’sadvice on an amicable settlement of this litigation, on June 17, 2009, weentered into a deed of release with William Purton and the other plaintiffs inwhich he has control (collectively, the “Purton Parties”), for the settlementof all legal claims, disputes and proceedings between the parties. Pursuant tothe terms of the release, on a without admission basis, we paid to PurtonParties a lump sum of $550,000. The remaining reserve for the Purton litigationof $655,506 was reversed from accrued expenses and reported as other income inthe consolidated statements of operations. With the notification ofdiscontinuance of litigation filed with the Supreme Court of Victoria atMelbourne, Australia on June 24, 2009, this litigation matter was settled.

 

***Sales Tax Audit***

 

In February 2004, theState of Nevada initiated a sales/use tax audit of the Company’s equipmentlessors. As of the date of this filing, the State of Nevada has not made adetermination if there has been a double tax payment of the sales/use tax.Based on ongoing correspondence with the Nevada Department of Tax, we believecertain payments made to the State of Nevada and other states may not berecoverable and, therefore, we provided an additional allowance for thereceivable balance. As of December 31, 2009, we had a tax refundreceivable balance of $83,324, net of an allowance of $350,189. We willcontinue to assess the collectability of this receivable balance and makeappropriate adjustments when necessary.

 

**Item 4.            SubmissionOf Matters To A Vote Of Security Holders**

 

On October 30, 2009, weheld our 2009 annual meeting of shareholders in Hong Kong.  Out of114,956,667 common shares issued and outstanding as of the record date andentitled to vote at such annual meeting, there were present at such meeting, inperson and by proxy, shareholders holding 86,874,058 of our votingshares.  We held the annual meeting of shareholders, for the purposes of:

 

·                  Electing five directors, each to serve untilour 2010 annual meeting of shareholders; and

 

·                  Ratifying the appointment ofErnst & Young, as our independent registered public accounting firm,for the fiscal year ending December 31, 2009.

 

All of the persons nominatedto serve on our board of directors, namely, Mr. Clarence Chung, Mr. VincentL. DiVito, Mr. John W. Crawford, Mr. Samuel Tsang and Dr. AnthonyTyen, were elected to our board of directors for terms of one year each.

 
| ** **                | ** ** | **For**    | ** ** | **Withheld** | ** ** | **Abstained** | ** ** |
|---------------------------|------------|------------|------------|--------------|------------|---------------|------------|
| Clarence (Yuk Man)  Chung |       | 86,715,117 |       | 158,941      |       | —        |       |
| Vincent DiVito            |       | 81,291,842 |       | 5,582,216    |       | —        |       |
| John Crawford             |       | 81,294,547 |       | 5,579,511    |       | —        |       |
| Samuel (Yuen Wai) Tsang   |       | 86,705,919 |       | 168,139      |       | —        |       |
| Anthony (Kanhee) Tyen     |       | 81,306,569 |       | 5,567,489    |       | —        |       |

 

Our shareholders approvedthe ratification of Ernst & Young as our independent registered publicaccounting firm.

 
| Shares voted for  |   |   |   | 86,804,276 |   |   |   |
|-------------------|--------|--------|--------|------------|--------|--------|--------|
| Shares against    |   |   |   | 65,154     |   |   |   |
| Shares abstaining |   |   |   | 4,628      |   |   |   |

 

There were no brokernon-votes cast on any of the above matters.

 

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**PART II**

 
| **Item 5.** | ** ** | **Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Repurchases of Equity Securities** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------|

 

**Market Information**

 

Ourcommon stock currently trades on the NYSE Amex under the symbol “EGT”.

 

Thefollowing table sets forth the high and low closing sale prices of our commonstock, as reported by the NYSE Amex, for each quarter during the past twofiscal years:

 
| **2009**       | ** ** | **Low** | ** ** | **High** | ** ** |
|----------------|------------|---------|------------|----------|------------|
| Fourth Quarter |       | $       | 0.25       |     | $          | 0.27 |   |
| Third Quarter  |       | $       | 0.27       |     | $          | 0.30 |   |
| Second Quarter |       | $       | 0.16       |     | $          | 0.17 |   |
| First Quarter  |       | $       | 0.10       |     | $          | 0.12 |   |

 
| **2008**       | ** ** | **Low** | ** ** | **High** | ** ** |
|----------------|------------|---------|------------|----------|------------|
| Fourth Quarter |       | $       | 0.03       |     | $          | 0.36 |   |
| Third Quarter  |       | $       | 0.25       |     | $          | 1.22 |   |
| Second Quarter |       | $       | 1.15       |     | $          | 2.23 |   |
| First Quarter  |       | $       | 1.71       |     | $          | 4.74 |   |

 

**Holders of Record**

 

Asof December 31, 2009, we had outstanding 114,956,667 shares of common stock,held by approximately 236 shareholders of record.

 

**Dividend Policy**

 

Wehave never declared or paid cash dividends on our common stock. We presentlyintend to retain earnings to finance the operation and expansion of ourbusiness and do not anticipate declaring cash dividends in the foreseeablefuture.

 

**Equity Compensation Plan Information**

 

InSeptember 2008, our shareholders approved the adoption of our 2008 StockIncentive Plan. We previously had two other stock options plans, our Amendedand Restated 1999 Stock Option Plan and our Amended and Restated 1999Directors’ Stock Option Plan, both of which expired in January 2009.  However, all options previously granted underour expired stock option plans remain outstanding.  Pursuant to the aforementioned plans, as ofDecember 31, 2009, there were options outstanding to purchase 10,737,065 sharesof our common stock with a weighted average exercise price per share of $1.84and options available for future issuance to purchase 4,500,000 shares of ourcommon stock.

 

Thefollowing table sets forth certain information as of December 31, 2009 aboutour stock plans under which our equity securities are authorized for issuance.

 

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| ** **                                                  | ** ** | ** **               | ** ** | ** **            | ** ** | **(c)**                      | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | ** **               | ** ** | ** **            | ** ** | **Number of Securities**     | ** ** |
| ** **                                                  | ** ** | **(a)**                  | ** ** | ** **            | ** ** | **Remaining Available for**  | ** ** |
| ** **                                                  | ** ** | **Number of Securities** | ** ** | **(b)**               | ** ** | **Future Issuance Under**    | ** ** |
| ** **                                                  | ** ** | **to be Issued Upon**    | ** ** | **Weighted-Average**  | ** ** | **Equity Compensation**      | ** ** |
| ** **                                                  | ** ** | **Exercise of**          | ** ** | **Exercise Price of** | ** ** | **Plans**                    | ** ** |
| ** **                                                  | ** ** | **Outstanding**          | ** ** | **Outstanding**       | ** ** | **(Excluding Securities**    | ** ** |
| **Plan Category**                                           | ** ** | **Options**              | ** ** | **Options**           | ** ** | **Reflected In Column (A))** | ** ** |
| Equity compensation plans approved by security  holders     |       | 10,737,065               |       | $                     | 1.84       |                         | 4,500,000  |   |
| Equity compensation plans not approved by security  holders |       | —                   |       | —                |       | —                       |       |
| Total                                                       |       | 10,737,065               |       | $                     | 1.84       |                         | 4,500,000  |   |

 

Thefirst column reflects outstanding stock options to purchase: (i) 6,074,465shares of common stock pursuant to our Amended and Restated 1999 Stock OptionPlan; (ii) 92,600 shares of common stock pursuant to our Amended and Restated1999 Directors’ Stock Option Plan; (iii) 4,070,000 shares of common stockpursuant to certain non-plan options approved by our stockholders in September2007; and (iv) 500,000 shares of common stock pursuant to our 2008 StockIncentive Plan.

 

Thethird column reflects 4,500,000 shares remaining for issuance under our 2008Stock Incentive Plan as of December 31, 2009.

 

**Item 6.****                                                          ****SelectedFinancial Data**

 

Notapplicable.

 

**Item 7.****                                                          ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**OVERVIEW**

 

Weintend for this discussion to provide the reader with information that willassist in understanding our financial statements, the changes in certain keyitems in those financial statements from year to year, and the primary factorsthat accounted for those changes, as well as how certain accounting principlesaffect our financial statements.  Thediscussion also provides information about the financial results of the varioussegments of our business to provide a better understanding of how thosesegments and their results affect our financial condition and results ofoperations as a whole.  This discussionshould be read in conjunction with our consolidated financial statements andaccompanying notes as of and for the fiscal years ended December 31, 2009 and2008 included elsewhere in this report.

 

ElixirGaming Technologies is a provider of gaming technology solutions, with aprimary focus on leasing electronic gaming machines on a revenue sharing basisto gaming establishments within Pan Asian markets.  We identify and secure venues for theplacement of electronic gaming machines and casino management systems, whichtrack game performance and provide statistics on each installed electronicgaming machine owned and leased by us. We contract with the venue owners or operators for the placement of theelectronic gaming machines on a revenue sharing basis. In addition, we acquireand install the gaming machines, casino management systems and other gamingperipherals at the relevant gaming venues.

 

Asof December 31, 2009, our gaming machine participation operations wereconcentrated in two countries, Cambodia and the Philippines. In Cambodia, wehad 440 machines at one venue, NagaWorld, a wholly-owned subsidiary of HongKong listed NagaCorp Ltd. (HKSE: 3918). In the Philippines, we had 859 machines in operation at seven venues.

 

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Weremain focused on selectively growing our installed base through the additionof high-potential new venues in our target markets.  Pursuant to the Machines Operation andParticipation Consolidation Agreement entered into with NagaWorld datedDecember 30, 2009, we are entitled to add a total of 200 gaming machines seatsto our operations at NagaWorld. To date during the first quarter of 2010, wehave already added 120 gaming machine seats and we anticipate the addition ofthe remaining 80 gaming machine seats will be completed by the end of thesecond quarter of 2010.  In addition, wecontinue to actively pursue placement opportunities in new and existingmarkets, where we can leverage our expertise and relationships and capitalizeon the strong propensity to gamble.  Keymarkets of interest are border cities in Cambodia with strong feeder marketsfrom neighboring countries such as Thailand and Vietnam, as well asopportunities in new countries such as Vietnam and Laos.  For such new potential projects, as withNagaWorld, we are seeking an operator role.

 

Inaddition to our primary gaming machine participation business, our operationsconsist of table game products, which focus on the design, manufacture anddistribution of RFID and traditional non-RFID casino chips and plaques, andnon-gaming products, which focus on the design, manufacture and sale ofcomponent parts primarily for the automotive industry.

 

Webelieve that our gaming chip operations remain an under-exploited asset for theCompany.  During the fiscal year endedDecember 31, 2009, we focused on increasing our marketing efforts to expand ourdistribution channels for these products beyond our largest existing markets ofMacau and Australia, where we have strong customer relationships and marketpenetration.  We have also focusedgreater resources on development and, during the fourth quarter of 2009, addedhigh-margin plaques to our product portfolio. Based on these initial efforts, we have already seen solid improvementin our gaming chip sales from new and existing customers and believe we havebetter positioned ourselves to capitalize on the future growth opportunitiesfor the global gaming chip and plaque market.

 

Withregard to our non-gaming operations, Dolphin auto component sales volumes havebeen negatively impacted due to the decline in auto production in Australiaresulting from the global financial crisis and strength of the Australiandollar.  However, as a qualified supplierto several major manufacturers, we believe Dolphin is positioned to gain marketshare in the future with the consolidation of competitors in the market place.

 

Ourfinancial performance has improved materially during the fiscal year endedDecember 31, 2009.  Our consolidatedrevenue for the fiscal year ended December 31, 2009 was $15.6 million, of whichrevenue from our gaming machine participation, table games and non-gamingoperations comprised 45%, 29% and 26%, respectively, of consolidatedrevenue.  This compares to consolidatedrevenue of $11.1 million for the fiscal year ended December 31, 2008, of whichrevenue from our gaming machine participation, table games and non-gamingoperations comprised 31%, 5% and 64%, respectively, of consolidatedrevenue.  The improvement in consolidatedrevenue was driven by strong growth in our gaming machine participation and tablegames operations which were partially offset by the weakness in our non-gamingproduct sales.

 

Duringthe fiscal year ended December 31, 2009, we underwent a major reorganization ofour operations and streamlined our cost structure.  In April 2009, we completed the sale of ourportfolio of automated card verification machines and electronic card shufflingsystems, all related intellectual property, and certain inventory of suchproducts to Shuffle Master and settled all outstanding litigation with ShuffleMaster, which traced back to October 5, 2004. The total consideration paid by Shuffle Master was $2.8 million, ofwhich $2.4 million was received in March 2009 and $400,000 was received inApril 2009.   We believe that thistransaction provided significant financial benefits to us as it improved ourcash position and freed resources to focus on addressing market opportunitiesthat further our strategy of expanding our core electronic gaming machineparticipation business.

 

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Inaddition, we have successfully executed various cost reduction initiatives.Such reductions are critical given the current economic climate and provide amuch leaner cost structure to expand our core gaming machine participationoperations and derive greater benefits from the leverage inherent in ouroperating model.  During the fiscal yearended December 31, 2009, we reduced selling, general and administrative cashexpenses by $6.8 million, or 46%, compared to the prior year.  Based on our cost reduction measures andcurrent scale of operations, we believe we can maintain quarterly selling,general and administrative cash expenses in the approximate range of $1.6 to$1.8 million.

 

Asa result, we achieved positive adjusted EBITDA (as defined below) for thefiscal year ended December 31, 2009, the first year since we enacted our newbusiness model in September 2007. Despite the difficult global economic environment and the challenges wesuffered in our Philippines market partly due to severe adverse weather thatresulted in record flooding in certain regions during the second half of theyear, we were able to achieve this important target largely due to the strengthof our core gaming machine participation operations in Cambodia and thesuccessful execution of our aggressive cost reduction initiatives.

 

Inaddition to our efforts to reorganize our operations and streamline our coststructure, we made progress in improving our liquidity and financialflexibility to pursue selective growth opportunities in our core gaming machineparticipation business.  On July 24,2009, we entered into an agreement with Elixir International, a wholly-ownedsubsidiary of Elixir Group, to amend the unsecured promissory note issued by usin April 2008 and as amended in November 2008 to Elixir International. Thisagreement, which became effective July 1, 2009, provides for the deferment ofthe repayment of principal and accrued interest payments until July 2010 andimmediate cash flow benefits to Elixir Gaming by reducing cash outlays byapproximately $1.6 million per quarter during the deferment period.

 

**RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2009 AND 2008**

 

Thefollowing is a schedule showing summarized operating results on a consolidatedbasis and separately by each of our three segments, namely, gaming machineparticipation, table game products and non-gaming products for the fiscal yearsended December 31, 2009 and 2008.

 

OnMarch 16, 2009, we entered into a Purchase and Settlement Agreement withShuffle Master, Inc. (the “Purchase and Settlement Agreement”) pursuant towhich we sold Shuffle Master our portfolio of automated card verificationmachines and electronic card shuffling systems, all related intellectualproperty, including but not limited to, the trademarks of Random PlusTM,PokerOneTM, ShuffleProTM and Deck CheckerTM, and certain inventories of suchproducts.  All historical revenues andexpenses from these assets sold to Shuffle Master have been reclassified asdiscontinued operations.

 
| ** **                       | ** ** | ** ** | ** **  | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
|----------------------------------|------------|------------|-------------|------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** ** | ** **  | ** ** | ** ** | **from 2008 to 2009**   | ** ** |
| ** **                       | ** ** | **2009**   | ** **  | **2008**   | ** ** | **Dollar  Amount**      | ** ** | **%  Amount** | ** ** |
| Total:                           |       |       |        |       |       |                    |       |   |   |
| Revenues                         |       | $          | 15,622,659  |       | $          | 11,113,493              |       | $ | 4,509,166 |   | 41 | % |
| Gross loss                       |       | $          | (2,253,665  | )          | $          | (4,595,216              | )          | $ | 2,341,551 |   | (51 | )% |
| Gross margin percentage          |       | (14        | )%          | (41        | )%         |                    |       |   |   |
| Adjusted EBITDA/(LBITDA) (*)     |       | $          | 32,860      |       | $          | (11,389,475             | )          | $ | (11,422,335 | ) | N/A |   |
| Operating loss                   |       | $          | (27,789,049 | )          | $          | (26,407,081             | )          | $ | (1,381,968 | ) | 5 | % |
| Net loss                         |       | $          | (26,359,450 | )          | $          | (26,955,196             | )          | $ | 595,746 |   | (2 | )% |
|                             |       |       |        |       |       |                    |       |   |   |
| Basic and diluted loss per share |       | $          | (0.23       | )          | $          | (0.23                   | )          |   |   |   |   |   |

 

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| Gaming machine participation: |   |   |       |   |   |       |   |   |       |
|-------------------------------|--------|--------|------------|--------|--------|------------|--------|--------|------------|
| Revenues                      |   | $      | 6,997,776  |   | $      | 3,433,096  |   | $      | 3,564,680  |   | 104 |  % |
| Gross loss                    |   | $      | (4,107,650 | )      | $      | (5,638,343 | )      | $      | 1,530,693  |   | (27 | )% |
| Gross margin percentage       |   | (59    | )%         | (164   | )%     |       |   |   |       |
|                          |   |   |       |   |   |       |   |   |       |
| Table game products:          |   |   |       |   |   |       |   |   |       |
| Revenues                      |   | $      | 4,515,923  |   | $      | 608,786    |   | $      | 3,907,137  |   | 642 | % |
| Gross profit                  |   | $      | 1,965,199  |   | $      | 130,808    |   | $      | 1,834,391  |   | 1402 | % |
| Gross margin percentage       |   | 44     | %          | 21     | %      |       |   |   |       |
|                          |   |   |       |   |   |       |   |   |       |
| Non-gaming products:          |   |   |       |   |   |       |   |   |       |
| Revenues                      |   | $      | 4,108,960  |   | $      | 7,071,611  |   | $      | (2,962,651 | ) | (42 | )% |
| Gross profit/(loss)           |   | $      | (111,214   | )      | $      | 912,319    |   | $      | (1,023,533 | ) | (112 | )% |
| Gross margin percentage       |   | (3     | )%         | 13     | %      |       |   |   |       |

 

----

(*)         “AdjustedEBITDA/(LBITDA)” is earnings/(losses) before interest, taxes, depreciation,amortization, stock-based compensation, and other non-cash operating income andexpenses. Adjusted EBITDA/(LBITDA) is presented exclusively as a supplementaldisclosure because management believes that it is widely used to measure theperformance and, as a basis for valuation, of gaming companies. Management usesAdjusted EBITDA/(LBITDA) as a measure of the operating performance of itssegments and to compare the operating performance of its operations with thoseof its competitors. The Company also presents Adjusted EBITDA/(LBITDA) becauseit is used by some investors as a way to measure a company’s ability to incurand service debt, make capital expenditures and meet working capitalrequirements. Gaming companies have historically reported EBITDA/(LBITDA) as asupplement to financial measures in accordance with generally accepted accountingprinciples in the United States (“GAAP”). Adjusted EBITDA/(LBITDA) should notbe considered as an alternative to operating income as an indicator of theCompany’s performance, as an alternative to cash flows from operatingactivities as a measure of liquidity, or as an alternative to any other measuredetermined in accordance with GAAP. Unlike net income/(loss), AdjustedEBITDA/(LBITDA) does not include depreciation or interest expense and,  therefore, does not reflect current or futurecapital expenditures or the cost of capital. The Company compensates for theselimitations by using Adjusted EBITDA/(LBITDA) as only one of severalcomparative tools, together with GAAP measurements, to assist in the evaluationof operating performance. Such GAAP measurements include operating income, netincome/(loss), cash flows from operations and cash flow data. The Company hassignificant uses of cash flows, including capital expenditures, interestpayments, debt principal repayments, taxes and other non-recurring charges,which are not reflected in Adjusted EBITDA/(LBITDA). Elixir Gaming’scalculation of Adjusted EBITDA/ (LBITDA) may be different from the calculationmethods used by other companies and, therefore, comparability may be limited.

 

Areconciliation of EBITDA/(LBITDA), as adjusted, to the net loss is providedbelow.

 
| ** **                                 | ** ** | **2009**   | ** **  | **2008**   | ** ** |
|--------------------------------------------|------------|------------|-------------|------------|------------|
|                                       |       |       |        |       |       |
| Net Loss – GAAP basis                 |       | $          | (26,359,450 | )          | $          | (26,955,196 | ) |
| (Income)/Loss from discontinued operations |       | (1,540,251 | )           | 1,360,128  |       |
| Interest expense                           |       | 536,805    |        | 737,028    |       |
| Interest income                            |       | (85,273    | )           | (706,552   | )          |
| Income tax expense                         |       | 486,806    |        | (209,322   | )          |
| Depreciation and amortization              |       | 11,348,858 |        | 9,671,784  |       |
| Stock option expense                       |       | 875,790    |        | 2,593,995  |       |
| Impairment of assets                       |       | 14,686,523 |        | 2,118,660  |       |
| Flood damage losses                        |       | 83,052     |        | —     |       |
| **Adjusted EBITDA/(LBITDA)**               |       | **$**      | **32,860**  | ** ** | **$**      | **(11,389,475** | **)** |

 

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Total revenue increased$4,509,166 to $15,622,659 in the fiscal year ended December 31, 2009 over theprior year primarily due to the increase in gaming machine participationrevenue and a large gaming chip order to a new casino in Macau. Gaming machineparticipation revenue increased by $3,564,680 to $6,997,776, reflecting thesignificant growth in consolidated average net win per machine and an increasein the number of gaming machines in operation. However, non-gaming product sales decreased $2,962,651 to $4,108,960 asa result of the global recession and subsequent reduced demand for automobiles,which negatively impacted some of our Dolphin subsidiary’s customers.

 

Our net loss decreased$595,746 to $26,359,450 while loss per share remained the same at $0.23 pershare in the fiscal year ended December 31, 2009 as a result of higher gamingparticipation revenues driven by improving average net wins; higher revenue andgross profit from increased gaming chip orders; substantially reduced operatingexpenses; and benefits from legal settlement gain, all of which were partiallyoffset by impairment charges on gaming equipment and systems; higherdepreciation impact on our gaming machine participation business as itcontinues to ramp up net win results, lower sales and resulting gross marginsin our non-gaming business, reduced interest income, and higher income taxexpense compared to the prior year.

 

**Gaming Machine Participation**

 

In September 2007, we began our electronic gamingmachine participation operations in Asia as part of our primary focus onplacing gaming machines on a revenue sharing basis. Revenue from our gamingmachine participation operations during the fiscal year ended December 31,2009 increased $3,564,680 to $6,997,776 compared to revenue of $3,433,096 forthe prior year. The increase in revenue was primarily the result of higheraverage net win per machine compared to the prior year when our gaming machineparticipation operations were still immature.

 

Gross loss from gaming machine participationoperations decreased $1,530,693 to $4,107,650 for the fiscal year endedDecember 31, 2009 compared to a gross loss of $5,638,343 for the prioryear as revenue from gaming machine participation increased significantly morethan depreciation expenses for our gaming machine participation operations,partially offset by higher gaming machine operating costs.  Revenues haveyet to cover the cost of machine depreciation, which is recorded in cost ofoperations.  Our cost of goods sold for the fiscal year endedDecember 31, 2009 included $10,054,265 depreciation of electronic gamingmachines and $1,051,161 of other expenses, which include approximately $150,000in machine redeployment costs.

 

As of December 31, 2009, we had a total of 1,702gaming machine seats of which 403 were held in inventory and 1,299 machineswere in operation.  Of the 1,299 gaming machine seats in operation, 440were in operation in one venue/one location in Cambodia and 859 machines werein operation in seven venues in the Philippines.

 
| ** **                                   | ** ** | **December 31** | ** ** |
|----------------------------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **2009**             | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **Units**            | ** ** | **Carrying Value** | ** ** | **Units** | ** ** | **Carrying Value** | ** ** |
|                                         |       |                 |       |   |   |   |   |   |   |
| **Machines and systems used in operations**  | ** ** | **1,299**            | ** ** | **$** | **19,248,038** | ** ** | **977** | ** ** | **$** | **24,389,649** | ** ** |
| ** **                                   | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Machines and systems held for future use** | ** ** | **403**              | ** ** | **7,258,928** | ** ** | **1,098** | ** ** | **23,961,896** | ** ** |
| ** **                                   | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total gaming machines and systems**        | ** ** | **1,702**            | ** ** | **$** | **26,506,966** | ** ** | **2,075** | ** ** | **$** | **48,351,545** | ** ** |

 

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In Cambodia, regulatory changes within the last yearimpacted the competitive landscape of gaming operations in this market. Due to directives issued by the Cambodian government in December 2008 andFebruary 2009, all slot clubs in the Phnom Penh area, including our thencontracted venues, were closed with the exception ofthe slot operations within NagaWorld. In December 2008, we established arelationship to place electronic gaming machines on a participation basis atNagaWorld hotel casino resort in the capital city of Phnom Penh.  NagaWorld operates under an exclusive casinolicense in Phnom Penh and our operations within NagaWorld are now our onlyoperations in Cambodia.

 

During the fiscal year ended December 2009, we placed440 gaming machine seats in prime locations of NagaWorld’s casino resortpursuant to three contracts between us and NagaWorld.  On December 30, 2009, we entered into anothercontract with NagaWorld entitled Machines Operation and ParticipationConsolidation Agreement (the “Consolidation Agreement”).   The Consolidation Agreement (a) provides forour right to exercise an option granted by NagaWorld pursuant to an option deeddated July 25, 2009 to place an additional 200 electronic gaming machines on aparticipation basis at NagaWorld’s casino resort; and (b) with effect from thedate of the Consolidation Agreement, supersedes and replaces the terms of theexisting operation of 440 electronic gaming machines at the NagaWorld Casinounder the three previous agreements executed with NagaWorld dated December 13,2008 (“December 08 Agreement”), June 15, 2009 (“June 09 Agreement”) and July25, 2009 (“July 09 Agreement”) (collectively, the “Previous Agreements”) withnew terms that aligned with the operation of the additional 200 machines.

 

Under the PreviousAgreements: (i) we and NagaWorld would share the win per unit per day from theexisting 440 machines and certain operating costs related to marketing andfloor staff at a weighted average of 22.4% / 77.6% split, respectively; (ii)win per unit per day from only 200 out of 440 existing machines would besettled and distributed daily to us; and (iii) both the term of the December 08Agreement and the June 09 Agreement would expire in the first quarter of 2014while the term of the July 09 Agreement would expire at the end of the thirdquarter of 2014.

 

Pursuant to the terms ofthe Consolidation Agreement, we and NagaWorld will have joint control over theoperation of the new total of 640 electronic gaming machines (comprising the200 additional machines and the existing 440 machines placed and in operationpursuant to the Previous Agreements), including floor staff and respectiveaudit rights. We and NagaWorld will share the win per unit per day from all the640 machines and certain operating costs related to marketing and floor staffat a 25% / 75% split, respectively, (subject to Elixir Gaming’s entitlement toreceive 100% of the win per unit per day from certain machines during a certainperiod of time as described below). Win per unit per day from all the 640machines will be settled and distributed daily to us. The ConsolidationAgreement is for a term of six years commencing March 1, 2010.

 

In consideration for theentering into the Consolidation Agreement by NagaWorld, we paid to NagaWorld a$1.38 million one-time non-refundable contract amendment fee and a commitmentfee of $4.1 million. Both the one-time contract amendment fee and commitmentfee were to be paid in three installments. The first 50% installment was dueand paid by us on December 30, 2009, the second 25% installment was due andpaid by us on January 15, 2010, and the third and final 25% installment was dueand paid by us on January 28, 2010.

 

While we and NagaWorldwill share the win per unit per day from the 640 machines at a 25% / 75% split,respectively, we will be entitled to 100% of the win per unit per day from the200 existing machines placed under the July 09 Agreement until we have receiveda total accumulated win per unit per day of $7.3 million from the said 200machines and 100% of the win per unit per day from the additional machinesuntil we have received a total accumulated win per unit per day of $5.47million from the additional machines under the December 30, 2009 contract(representing the $4.1 million commitment fee plus our 25% share of the win perunit per day from the additional machines).

 

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During the fiscal year ended December 31, 2009,we opened three new venues in the Philippines with a total of 344 gamingmachine seats and closed one under-performing venue with a total of 172 gaming machine seats.  Gaming participation performance forour Philippines’ operations was negatively impacted during the second half of2009 due to severe adverse weather, which included Tropical Storm Ondoy thatstruck the Philippines on Saturday, September 26, 2009 and resulted inflooding in areas including Metro-Manila.  Only two of our venues inoperation suffered some water damage and the effect to our machines andequipment was minimal.    As aresult, we recorded a flood damage loss of $83,052 duringthe fiscal year ended December 31, 2009, which represents the deductible forthe insurance claims, and this has been separately presented as part of gamingparticipation operations in the consolidated statement of operations.  While our venues experienced only minordamage as a result of the storm, it took several weeks for our operations togradually resume normal business activities in the affected areas.

 

We anticipate additional machine placements in2010.  From December 31, 2009 to date, wehave added 120 of the contracted 200 gaming machines at NagaWorld pursuant tothe Consolidation Agreement dated December 30, 2009 and we expect to add theremaining 80 seats during the second quarter period of 2010.  In addition, we are actively pursuingpotential new contracts in the Indo-China region, where there is gamingdevelopment and we can take an operator role. However, total company-wide machine placements can fluctuate due to ourstrategic efforts to optimize average daily net wins.  In the event gamingmachine performance at our contracted venues does not meet expectations, we mayin this situation discuss with the relevant venue owner with a view towithdrawing all or a portion of our gaming machines from such venues for futureredeployment in new or existing venues with better performance prospects.

 

**Table Game Products**

 

Table game productsrevenue increased $3,907,137 to $4,515,923 for the fiscal year endedDecember 31, 2009 compared to $608,786 in the prior year.  Theincrease was primarily a result of a large gaming chip order to a new casino inMacau during the three-month period ended June 30, 2009 and greaterreorder contracts from existing customers.

 

Gross profit on gamingchip products increased $1,834,391 to $1,965,199 for the fiscal year endedDecember 31, 2009 compared to a gross profit of $130,808 in the prior yeardue to increased revenue and volume in our RFID gaming chips including inimproved production efficiencies.

 

**Non-Gaming Products**

 

**Non-gaming products revenue, which consists of automotivetooling and parts, decreased $2,962,651 to $4,108,960 for the fiscal year endedDecember 31, 2009 compared to $7,071,611 in the prior year.  Thedecrease was related to sales reductions to our largest customer as theydecreased their production for the year primarily as a result of the suddendecrease in demand for automotive parts as a result of the global economiccrisis.  While the automotive partsindustry has shown signs of stabilization, we believe it will remain volatilethroughout 2010.**

** **

The gross loss from non-gaming sales increased $1,023,533 to a loss of $111,214 for the fiscal year endedDecember 31, 2009 compared to a gross profit of $912,319 in the prior yeardue to the reduction in sales orders from a major customer and the resultingloss of production efficiencies.

 

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**Operating Expenses**

 

The following is aschedule showing expenses on a consolidated basis:

 
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|-------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **from  2008 to 2009**  | ** ** |
| ** **                           | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Dollar Amount**       | ** ** | **%  Amount** | ** ** |
| Selling, general  and administrative |       | $          | 7,953,642  |       | $          | 14,807,772              |       | $ | (6,854,130 | ) | (46 | )% |
| Stock-based  compensation expense    |       | 875,790    |       | 2,593,995  |       | (1,718,205              | )          | (66 | )% |
| Impairment of  assets                |       | 14,686,523 |       | 2,118,660  |       | 12,567,863              |       | 593 | % |
| Flood damage  losses                 |       | 83,052     |       | —     |       | 83,052                  |       | 100 | % |
| Research and  development            |       | 276,781    |       | 678,047    |       | (401,266                | )          | (59 | )% |
| Depreciation and  amortization       |       | 1,036,661  |       | 1,063,728  |       | (27,067                 | )          | (3 | )% |
| Restructuring  charges               |       | 622,935    |       | 549,663    |       | 73,272                  |       | 13 | % |
| Total                                |       | $          | 25,535,384 |       | $          | 21,811,865              |       | $ | 3,723,519 |   | 17 | % |

* *

***Selling,General and Administrative Expenses***

 

Selling, general andadministrative expenses decreased $6,854,130 to $7,953,642 for thefiscal year ended December 31, 2009 compared to $14,807,772 in the prioryear due to our cost reduction initiatives.  Salaries and wages expensedeclined $2.4 million as a result of headcount reductions and voluntary seniormanagement pay reductions.  Legal expense and external consultancy andaccounting fees declined $1.6 million due to greater reliance of relatedprojects on in-house personnel.  Travel decreased by $1.0 million due toconcerted efforts to reduce employee travel to the bare minimum. Rent, officesupplies and other expenses decreased by $1.4 million due to various costreduction initiatives. Bad debt expenses decreased $0.5 million.

 

Based on our costreduction plans and current scale of operations, we anticipate selling, generaland administrative expenses can be maintained in the approximate range of $1.6to $1.8 million per quarter.

 

***Stock-basedCompensation Expense***

 

Stock-based compensationexpense decreased $1,718,205 to $875,790 for the fiscal year endedDecember 31, 2009 compared to $2,593,995 for the prior year primarilydue to re-measurement of non-employee awards at fair market value and seniorexecutives who have departed and their stock options forfeited.

 

***Impairmentof Goodwill, Intangibles and Other Long-Lived Assets***

 

Intangible assets consistof patents, customer relationships, trademarks and goodwill. They are recordedat cost and are amortized, except goodwill, on the straight-line basis over theperiod of time the asset is expected to contribute directly or indirectly tofuture cash flows, which range from 10 to 13 years. The straight-lineamortization method is utilized because we believe there is not a more reliablydeterminable method of reflecting the pattern in which the economic benefits ofthe intangible assets are consumed or otherwise used up.

 

We measure and testgoodwill and intangible assets for impairment in accordance with ASC 350, *Intangibles-Goodwill and Other*, and ASC 360, *Property, Plant, and Equipment*, at least annually onDecember 31, or more often if there are indications of impairment.

 

Duringthe fourth quarter of 2008, we phased out our gaming product manufacturingoperations in China and recorded an impairment charge to the patent forautomated shuffler technology of $695,743 based on the assets’ carrying valueexceeding the projected cash flow at December 31, 2008.

 

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Following the closure ofthe China manufacturing facility, we decided to exit the chip washer businessafter evaluating the market opportunities for this product. Due to lack offuture demand, we determined the carrying value ofrelated patents may not be recoverable. During the three-month period endedSeptember 30, 2009, the Company recorded an impairment loss of $424,500, whichrelates to a write-down of an intangible asset associated with the chip washerpatents.

 

The following tablesummarizes the impairment of goodwill and intangible assets:

 
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **from  2008 to 2009**  | ** ** |
| ** ** | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Dollar Amount**       | ** ** | **%  Amount** | ** ** |
| Patents    |       | $          | 424,500    |       | $          | 695,743                 |       | $ | (271,243 | ) | (39 | )% |
| Total      |       | $          | 424,500    |       | $          | 695,743                 |       | $ | (271,243 | ) | (39 | )% |

 

Long-lived assets anddefinite-life intangible assets are reviewed for impairment quarterly orwhenever events or circumstances indicate that the carrying amounts of assetsmay not be recoverable in accordance with ASC 360.  We evaluate recoverability of assets to beheld and used by comparing the carrying amount of an asset to future netundiscounted cash flows to be generated by the asset. If such assets areconsidered to be impaired, the impairment to be recognized is measured as theamount by which the carrying amount of the assets exceeds the fair value of theassets. Such reviews assess the fair value of the assets based upon ourestimates of the future cash flows we expect the assets to generate. Inresponse to changes in industry and market conditions, we may be required tostrategically realign our resources in the future which, in turn, could resultin impairments of long-lived assets.

 

We recorded an impairmentcharge of $13.7 million for non-performing machines and the Philippineoperations’ gaming assets for the year ended December 31, 2009. A substantialportion of the impairment represents the write-down of the carrying value tofair value of certain non-performing gaming machines in inventory for ourcurrent target markets or customers’ preferences. We identified approximately500 machines as being non-performing based on an in-depth review of machineusability and future deployment plans. These non-performing machines arereflected under current assets as assets held for sale with a total fair valueof $930,000. The impairment also included the write-down of our Philippineoperations’ gaming assets based on the current carrying value of the machinesin operation exceeding the expected cash flows generated from the Philippinesoperations.

 

In addition, we had awrite-off of gaming assets $0.6 million relating to the closure of certainnon-performing venues during the year.

 

The following tablereflects the components of the impairment of assets included in theconsolidated statement of operations:

 
| ** **                       | ** ** | **US$ (millions)** | ** ** |
|----------------------------------|------------|-------------------------|------------|
| Non performing gaming machines   |       | $                       | 8.9        |   |
| Philippine operations            |       | 4.8                     |       |
|                             |       | 13.7                    |       |
| Write-off of other gaming assets |       | 0.6                     |       |
| Total impairment charges         |       | $                       | 14.3       |   |

 

***Researchand Development Expenses***

 

Research and developmentexpenses decreased $401,266 to $276,781 for the fiscal year endedDecember 31, 2009 compared to $678,047 in the prior year as a result ofthe complete closure of our China table game product manufacturing facility andrelated support services in April 2009.

 

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As a result of the sale toShuffle Master of our portfolio of automated card verification machines andelectronic card shuffling systems, all related intellectual property, andcertain inventory of such products pursuant to the Purchase and SettlementAgreement as set out above were written off.

 

Future research anddevelopment will be focused on potential gaming and/or non-gaming productenhancements.

 

***Depreciation and Amortization Expenses***

 

Depreciation andamortization expenses decreased $27,067 to $1,036,661 for the fiscal year endedDecember 31, 2009 compared to $1,063,728 in the prior year.  Thedecrease was a result of reduced depreciation expense from the closure of ourUnited States office and our China table game product manufacturing facility.

 

***Restructuring Charge***

 

During the fiscal year endedDecember 31, 2009, as part of our cost reduction initiatives, we incurredrestructuring charges of $622,935 for severance wages and benefits related tothe termination of employees and vacated facility operating leases.  Theamount represents contractual and other agreements with employees including aformer executive, which only includes charges for termination benefits measuredat the estimated fair value at the termination date and does not includecharges for services yet to be rendered. In 2008, we also incurred restructuring charges of $549,663 relating tothe headcount reduction.

 

**OtherIncome**

** **
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|-------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | **from  2008 to 2009**  | ** ** |
|                                   |       | **2009**   | ** ** | **2008**   |       | **Dollar  Amount**      | ** ** | **%****Amount** | ** ** |
| Interest expense and  finance fees     |       | $          | (536,805   | )          | $          | (737,028                | )          | $ | 200,223 |   | (27 | )% |
| Interest income                        |       | 85,273     |       | 706,552    |       | (621,279                | )          | (88 | )% |
| (Loss)/gain on  dispositions of assets |       | (106,711   | )          | 89,324     |       | (196,035                | )          | (219 | )% |
| Foreign currency  (losses)/gains       |       | (89,533    | )          | 252,568    |       | (342,101                | )          | (135 | )% |
| Legal settlement gain                  |       | 655,506    |       | —     |       | 655,506                 |       | 100 | % |
| Others                                 |       | 368,424    |       | 291,275    |       | 77,149                  |       | 26 | % |
| Total other income                     |       | $          | 376,154    |       | $          | 602,691                 |       | $ | (226,537 | ) | (38 | )% |

 

***Interest Expense and Finance Fees***

 

Interest expense and financefees decreased $200,223 to $536,805 for the fiscal year ended December 31,2009 compared to $737,028 in the prior year principally due to lower debtlevels and the reduced interest rate on the Elixir International notes. In April 2008, we signed a note agreement for $15.0 million with ElixirInternational accruing 8% interest and, in November 2008, the agreementwas amended and the interest rate was reduced to 5%.

 

***Interest Income***

 

Interest income decreased$621,279 to $85,273 for the fiscal year ended December 31, 2009 comparedto $706,552 in the prior year as a result of the decrease in cash and cashequivalents held in overnight money market accounts and the general decrease ininterest rates.  Cash in bank decreased by $10.3 million to $4.2 millionfrom December 31, 2008 to December 31, 2009, respectively, mainly dueto payments for the expansion of our operations at NagaWorld, gaming machinepurchases, repayment of notes payable and operating expenses.

 

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We received funding from theprivate placement of common stock in the fourth quarter of 2007 and, as aresult, the average cash position was significantly higher in 2008 and depletedover the years ending December 31, 2008 and 2009.  The average cashholdings per month were higher during the fiscal year ended December 31,2008 compared to the fiscal year ended December 31, 2009.

 

***Foreign Currency Transactions***

 

Foreign currency lossesincreased $342,101 to losses of $89,533 for the fiscal year ended December 31,2009 compared to gains of $252,568 for the prior year.  In the fiscal yearended December 31, 2009, the losses resulted from the appreciating valueof U.S. dollar denominated payables for our Philippine operations. In thefiscal year ended December 31, 2008, our Philippine operations recordedforeign currency transaction gains mainly due to settlement of U.S. dollardenominated payables as a result of the appreciating value of the Philippinepeso during the first quarter of 2008.

 

***Legal Settlement Gains***

 

We recorded a settlementgain of $655,506 from the Purton litigation during the three-month period endedJune 30, 2009.  On June 17, 2009, we entered into a deed ofrelease with William Purton and the other plaintiffs over which he had controlfor the settlement of all legal claims, disputes and proceedings between theparties.

 

***Others***

 

Other income increased$77,149 to $368,424  for the fiscal year ended December 31, 2009compared to $291,275 in the prior year primarily resulting from the write-offof unclaimed debtor’s credit balance from prior years.

 

***Income Tax Provision***

 

Our effective tax rate forthe fiscal year ended December 31, 2009 was approximately (1.9)% which wassignificantly lower than the federal statutory rate primarily due to thevaluation allowance against the Company’s deferred tax assets.  Wecontinue to review the tax losses and income generated in the future by ourforeign subsidiaries to minimize taxation implication/costs.

 
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|-------------------------|------------|
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **from  2008 to 2009**  | ** ** |
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollar**              | ** ** | **%** | ** ** |
| ** **                    | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Amount**              | ** ** | **Amount** | ** ** |
| Income tax (expense)/ benefit |       | $          | (486,806   | )          | $          | 209,322                 |       | $ | (696,128 | ) | (333 | )% |
|                               |            |            |            |            |            |                         |            |  |  |  |  |  |

 

**FINANCIALCONDITION**

 

**Liquidityand Capital Resources**

 

On April 21, 2008, weentered into a Trade Credit Facility Agreement (the “Facility Agreement”) withElixir International. Upon entering into the Agreement, we immediately issuedthe first note pursuant to the terms of the Facility Agreement in the thenprincipal amount of $15,000,000 (the “Initial Advance”).  The InitialAdvance extinguished a then trade payable of an equivalent amount to ElixirInternational with respect to gaming machines previously acquired.

 

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Under the terms as amendedon November 6, 2008 (the “New Note”), we were obligated to repay the thenprincipal of $12.1 million, plus any accrued interest thereon, in equal monthlyinstallments of approximately $530,000 from January 1, 2009 to December 1,2010.  The advances under the Facility Agreement are subject to demand byElixir International for immediate payment only if there is either an event ofdefault or a change of control defined in the Facility Agreement.

 

We began paying our monthlyinstallments of approximately $530,000 under the New Note on January 1, 2009and paid or settled six installments during the six-month period ended June 30,2009.  As at June 30, 2009, the then unpaid principal balance underthe New Note was approximately $9.2 million (the “Outstanding Principal”). On July 24,2009, with the objective of improving our financial flexibility to enable us tocapitalize on potential growth and investment opportunities such as expansionof slot machine placements and operation of new venues, at our request, ElixirInternational entered into an Amendment No. 2 to the Trade Credit FacilityAgreement and Related Note with us (the “Second Facility Amendment Agreement”). Pursuant to the Second Facility Amendment Agreement, Elixir Internationalagreed to restructure the payment schedule of the Outstanding Principal. Underthe revised payment schedule, we are not required to make any repayments ofprincipal or interest under the Facility Agreement until July 1, 2010provided that interest at the rate of 5% continues to accrue on the OutstandingPrincipal balance. The repayment of the Outstanding Principal balance andinterest accrued thereon shall be repaid in 18 equal monthly installmentscommencing on July 1, 2010.

 

As of December 31,2009, we had total cash and cash equivalents of $4.2 million and a workingcapital balance of $7.4 million.  Our working capital was positivelyimpacted by the repayment deferral of principal and interest on the TradeCredit Facility until July 2010 and the completion of the sale of ourdeckchecker and card shuffler related intellectual property and remaininginventory in April 2009 for $2.8 million.  However, working capitalwas negatively impacted by the repayment of six monthly installments during theJanuary to June 2009 time period under the New Note due to ElixirInternational and the contractual payments made to NagaWorld.  In accordance with our contract dated July 25,2009 with NagaWorld, we paid a commitment fee to NagaWorld of $5.8 million on August 3,2009.  As of December 31, 2009, wehad recouped $3.1 million of this commitment fee.  In accordance with our contract dated December 30,2009 with NagaWorld, we paid NagaWorld a total of $2.7 million, which was thefirst installment or 50% of the total fees under the contract for both aone-time non-refundable contract amendment fee in the amount of $0.7 millionand a commitment fee in the amount of $2.0 million on December 30, 2009.

 

Subsequent to December 31,2009, our working capital has been negatively affected by payment of theremaining installments or 50% of the total fees under the contract dated December 30,2009 with NagaWorld, which totaled $2.7 million.  The $2.7 million payment included theremaining two installments of both the one-time non-refundable contractamendment fee which totaled $0.7 million and the commitment fee which totaled$2.0 million during January 2010. Working capital was also negatively impacted by the purchase of gamingmachines for our expansion at NagaWorld under the contract dated December 30,2009.  Our working capital has beenpositively affected by the cash received from our operations at NagaWorld.

 

During 2010, we expect topurchase additional gaming machines to supplement existing inventory and sourcefuture targeted deployment plans. Given our current and projected future cashflow generation capabilities from our operations at NagaWorld (including therecoupment of commitment fees paid and our share of net wins from our machineinstalled base at NagaWorld), the state of the previously-owned gaming machinemarket, and our strong relationships with gaming equipment manufacturers, weanticipate funding our 2010 gaming machine purchases for our existing projectpipeline from cash on hand and expected net cash flow from operations.  Based on our existing growth plans, weanticipate capital expenditures will be approximately $3 to $5 million for2010.

 

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We anticipate our availableworking capital, along with cash expected to be generated from operations, willallow us to meet our working capital needs to support ongoing futureoperations, based on:

 

·                          under theSecond Facility Amendment Agreement dated July 24, 2009 to the TradeCredit Facility, which became effective July 1, 2009, we can defer therepayment of principal and interest payments on the outstanding principalbalance until July 2010 providing cash flow benefits to us by reducingcash outlays to approximately $1.6 million per quarter until July 2010 andimproved financial flexibility to enable us to pursue growth opportunities inour core electronic gaming machine participation business;

 

·                          our extensivecost cutting measures, which involved, among other initiatives, the closure ofour China factory and Macau office and significant reductions in traveling andentertainment expenses and based on our current quarterly run-rate, shouldenable us to contain annualized selling, general and administrative cashexpenses to approximately $6.4 to $7.2 million, a decline of 5% to 16% comparedto 2009 levels;

 

·                          our ability tocollect on a daily basis 100% of the win per unit from NagaWorld for both the additional200 gaming machines under our contract dated July 25, 2009 until such timeas the commitment fee of $5.84 million plus Elixir Gaming’s 25% share of thewin per day on these machines are recouped; and the gaming machines under ourcontract dated December 30, 2009 until such time as the commitment fee of$4.1 million plus Elixir Gaming’s 25% share of the win per day on thesemachines are recouped; and

 

·                          our assumptionthat we will be successful in our endeavors to ramp up the revenue base byfocusing our placements of gaming machines in strong performing venues andplans to provide value-added services, such as promotion and marketing advisoryservices, to certain venues with a goal to improving net win per machine.

 

However, should we endeavorto commit to any future large projects to expand our gaming participationoperations, we may require additional funding at such time. In this case, wewill look into the options for raising additional funds through variousfinancing sources, including the procurement of commercial debt financingand/or vendor financing and/or the sale of debt or equity securities. However, there can be no guarantees that such funds will be available oncommercially reasonable terms, if at all. If such financing is not available onsatisfactory terms, we may be unable to expand or continue our business asdesired and operating results may be adversely affected.  Any debt financingwill increase expenses and must be repaid regardless of operating results andmay involve restrictions limiting our operating flexibility and any equityfinancing will be dilutive to our present stockholders.

 

**Cash FlowSummaries**

** **
| ** **                               | ** ** | **2009**   | ** **  | **2008**    | ** ** | **Increase/(Decrease)  from 2008 to 2009** | ** ** |
|------------------------------------------|------------|------------|-------------|-------------|------------|--------------------------------------------|------------|
| Cash provided by/ (used  in):            |       |       |        |        |       |                                       |       |
| Operations                               |       | $          | (6,955,397  | )           | $          | (30,096,613                                | )          | $ | (23,141,216 | ) |
| Investing                                |       | (761,004   | )           | (19,999,590 | )          | (19,238,586                                | )          |
| Financing                                |       | (3,184,202 | )           | (3,440,858  | )          | (256,656                                   | )          |
| Effect of exchange rate  changes on cash |       | 585,910    |        | (245,326    | )          | (831,236                                   | )          |
| Net change                               |       | $          | (10,314,693 | )           | $          | (53,782,387                                | )          | $ | (43,467,694 | ) |

 

***Operations***

 

Cash used in operationsdecreased $23,141,216 to $6,955,397 for the fiscal year ended December 31,2009 compared to $30,096,613 in the prior year as a result of the decrease inour net loss (after giving affect to non-cash charges which primarily includeddepreciation of gaming machines and impairment of gaming machines assets).  In addition, the decrease incash used in operating activities as compared with the prior year was due to asignificant increase in working capital in 2008 which primarily related fromthe settlement of related party payable balance in 2008.  Cash used in operations included prepaidcommitment fees and the one-time contract amendment fee paid to NagaWorld.

 

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***Investing***

 

Cash used in investingactivities decreased $19,238,586 to $761,004 for the fiscal year ended December 31,2009 compared to $19,999,590 in the prior year as a result of significantreductions in the purchase of electronic gaming machines and property, plantand equipment and the sale of assets to Shuffle Master during the fiscal yearended December 31, 2009.  Wepurchased electronic gaming machines and property, plant and equipment in thenet amount of $3.7 million in the fiscal year ended December 31, 2009compared to $20.1 million in the fiscal year ended December 31, 2008.

 

***Financing***

 

Cash used in financingactivities decreased $256,656 to $3,184,202 for the fiscal year ended December 31,2009 compared to $3,440,858 in the prior year as a result of the reduction inrepayments of leases as the principal balances were fully paid off in early2008.

 

**FinancialCondition**

** **
| ** **                       | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Increase/(Decrease)********from 2008 to 2009** | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|--------------------------------------------------|------------|
| Total assets                     |       | $          | 48,456,510 |       | $          | 76,413,722                                       |       | $ | (27,957,212 | ) |
| Total liabilities                |       | 15,049,165 |       | 18,930,387 |       | 3,881,222                                        |       |
| Total stockholders’  equity |       | $          | 33,407,345 |       | $          | 57,483,335                                       |       | $ | (24,075,990 | ) |

 

Changes from December 31,2009 to December 31, 2008 are due to the following:

 

·                  Cash decreased$10.3 million primarily due to the payment of commitment fees and the one-timecontract amendment fee to NagaWorld as well as notes repayment to ElixirInternational Inc.

 

·                  Gamingequipment and systems, net of depreciation, decreased $21.8 million primarilydue to the write-down of gaming assets and depreciation charges for the fiscalyear ended December 31, 2009.

 

·                  The increase inreceivables during the same period was attributable to revenue growth from theparticipation business and an increase in sales of gaming chips.

 

·                  As of December 31,2009, the allowance for doubtful accounts decreased as a result of thewrite-off of uncollectible receivables and the related allowance for doubtfulaccount balances.

 

·                  Inventorydecreased due to lower production as a result of lower market demand forautomotive parts and the closure of the China manufacturing facility.

 

·                  Deposits andother assets decreased mainly due to the refund of deposits used in our venueoperations in Cambodia and the additional allowance provided on the sales taxreceivable.

 

·                  Stockholders’equity decreased primarily as a result of operating losses incurred during thefiscal year ended December 31, 2009.

 

**ContractualCash Obligations and Off Balance Sheet Arrangements**

 

Our contractual cashobligations under debt agreements, capital leases and operating leasesincluding interest payments, for the next five years as of December 31,2009 are as follows:

 

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| ** **                   | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|------------------------------|------------|------------|------------|----------------------------|------------|
| **Contractual  Obligations** | ** ** | **Total**  | ** ** | **1  Year**                | ** ** | **2-3  Years** | ** ** | **4-5  Years** | ** ** | **After  5 Years** | ** ** |
| Debt agreements              |       | $          | 9,621,999  |                       | $          | 3,127,657 |   | $ | 6,494,342 |   | $ | — |   | $ | — |   |
| Capital leases               |       | 601,238    |       | 187,637                    |       | 413,601 |   | — |   | — |   |
| Operating leases             |       | 2,368,734  |       | 669,655                    |       | 1,128,805 |   | 570,274 |   | — |   |
| Interest expense             |       | 516,239    |       | 268,009                    |       | 248,230 |   | — |   | — |   |
| Total                        |       | $          | 13,108,210 |                       | $          | 4,252,958 |   | $ | 8,284,978 |   | $ | 570,274 |   | $ | — |   |

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our consolidated financialstatements were prepared in conformity with accounting principles generallyaccepted in the United States. Accordingly, we are required to make estimates incorporating judgmentsand assumptions we believe are reasonable based on our historical experience,contract terms, observance of known trends in our Company and the industry as awhole, as well as information available from other outside sources.  Our estimates affect amounts recorded in thefinancial statements and actual results may differ from initial estimates.

 

We consider the followingaccounting estimates to be the most critical to fully understanding andevaluating our reported financial results. They require us to make subjective or complex judgments about mattersthat are inherently uncertain or variable. Senior management has discussed the development, selection and disclosureof the following accounting estimates, considered most sensitive to changesfrom external factors, with the audit committee of our board of directors.

 

*IntangibleAssets, including Goodwill*

 

Intangible assets consist ofpatents, customer relationships, trademarks and goodwill. Intangible assets,other than goodwill, are recorded at cost and are amortized on thestraight-line basis over the period of time the asset is expected to contributedirectly or indirectly to future cash flows, which range from 10 to13 years.  The straight-lineamortization method is utilized because we believe there is not a more reliablydeterminable method of reflecting the pattern in which the economic benefits ofthe intangible assets are consumed or otherwise used up.

 

We adopted ASC 350,*Intangible-Goodwill and Other*, wherebygoodwill is no longer amortized but is subject to periodic impairment tests.Other intangible assets with finite lives, such as patents, customerrelationships and trademarks will continue to be amortized over their usefullives.

 

Impairment testing forgoodwill and other intangibles requires judgment, including the identificationof reporting units, allocation of related goodwill, assignment of corporateshared assets and liabilities to reporting units, estimated future cash flows,and determinations of fair value.  Whilewe believe our estimates of future revenues and future cash flows arereasonable, different assumptions could materially affect the assessment ofuseful lives, recoverability and fair value. If actual future cash flows fall below initial forecasts, we may need torecord additional amortization and/or impairment charges.

 

*Inventory*

 

The determination ofobsolete or excess inventory requires us to estimate the future demand for ourproducts within specific time horizons, generally one year or less.  If we experience a significant unexpecteddecrease in demand for our products or a higher occurrence of inventoryobsolescence because of changes in technology or customer requirements, we couldbe required to increase our inventory provisions.  Our inventories totaled $0.6 million and$1.1 million at December 31, 2009 and 2008, respectively, after givingeffect to inventory provisions.

 

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** **

*Gaming Equipment and Systems*

 

Gaming equipment and systemsare stated at cost.  We depreciate electronic gaming machines and systems purchasednew over a five-year useful life and electronic gaming machines and systemspurchased used over a three-year useful life to a minimal salvage value, onceplaced in service.

 

*Property and Equipment*

 

We are also required toestimate salvage values and useful lives for our property and equipment,including electronic gaming machines.  Trends in market demand andtechnological obsolescence may require us to record impairment charges. No impairments to property and equipment were recorded in 2009.

 

*Revenue Recognition*

 

We recognize revenue whenall of the following have been satisfied:

 

·                  persuasiveevidence of an arrangement exists;

 

·                  the price tothe customer is fixed and determinable;

 

·                  delivery hasoccurred and any acceptance terms have been fulfilled;

 

·                  no significantcontractual obligations remain; and

 

·                  collection isreasonably assured.

 

*Gaming Machine ParticipationRevenue*

 

We earn recurring revenue byproviding customers with electronic gaming machines and casino managementsystems which track game performance and provide statistics on installedelectronic gaming machines owned by us and leased to venue owners. Revenues are recognized on the contractual terms of the participationagreements between us and the venue owners and are based on our share of netwinnings.

 

Commitment fees paid to thevenue operator where the agreement stipulates that the fees will be recoveredfrom the daily net win sharing are capitalized as assets. As required by ASC605-50, *Customer Payments and Incentives*, thecash consideration received for the portion of net winnings relating to thecommitment fees is amortized as a reduction of revenue if the expected benefitfrom commitment fees cannot be separately identified or reasonably estimated.We had prepaid commitment fees $4,838,151 and $NIL as of December 31, 2009and 2008, respectively.

 

Commitment fees paid to thevenue operators relating to contract amendments are also capitalized as assetsand amortized as a reduction of revenue fee over the term of the amendedcontracts. We had contract amendment fees of $687,500 and NIL as of December 31,2009 and 2008, respectively.

 

*Gaming and Non-Gaming ProductSales*

 

We recognize revenue fromthe sale of our products to end users based on shipments against customercontracts or purchase orders.  Revenuefrom shuffler rentals, which were sold to Shuffle Master in April 2009,was recorded at the first of each month in accordance with rental contractterms.  We completed our transition to outsourcing all future sales tothird-party distributors during the fourth quarter 2007 and, thereafter, nolonger recorded rentals on our table game products.

 

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We recognize revenue fromour sales to independent distributors based on shipments against distributorcontracts or purchase orders.  We recognize revenue on consignmentinventory when ownership of the product and title passes to the distributorwhich occurs when the distributor uses the product in its service organizationor sells to an end user.

 

The maintenance componentsthat are part of long-term sales contracts are recorded as deferred revenue andamortized over the remaining lives of the sales agreements after the initial90-day warranty as required by the Emerging Issues Task Force Issue No. 00-21,*Revenue Arrangements with Multiple Deliverables*.  We provide for estimated warranty repaircosts associated with sales contracts. Although there are no extended warranties offered for our products, weprovide for maintenance contracts that are billed and recognized on a monthlybasis.  As noted above, future sales willbe through our third-party distributors and we will no longer directly offerlong-term sales contracts or service to customers. Therefore, as of December 31,2009, we had no remaining obligations to perform maintenance on gaming andnon-gaming products sold to end users.

 

*Stock-Based Compensation*

 

We adopted ASC 718, *Compensation-Stock Compensation*, to account for allstock-based compensation beginning January 1, 2006, and elected themodified prospective method of transition. Under the fair value recognitionprovisions of ASC 718, for stock-based compensation accrued to employees andnon employee directors, we recognize stock-based compensation expense for allservice-based awards with graded vesting schedules on the straight-line basisover the requisite service period for the entire award.  Initial accruals of compensation expense arebased on the estimated number of shares for which requisite service is expectedto be rendered.  Estimates are revised ifsubsequent information indicates that forfeitures will differ from previousestimates, and the cumulative effect on compensation cost of a change in theestimated forfeitures is recognized in the period of the change.  For non-employee awards, we remeasurecompensation cost each period until the service condition is complete andrecognize compensation cost on the straight-line basis over the requisiteservice period.  Option valuation modelsrequire the input of highly subjective assumptions, and changes in theassumptions can materially affect fair value estimates. Judgment is required inestimating stock price volatility, forfeiture rates, expected dividends, andexpected terms that options remain outstanding. Stock-based compensation expense totaled $875,790 and $2,593,995 for thefiscal years ended December 31, 2009 and 2008, respectively, and isincluded in selling, general and administrative expense in the consolidatedstatements of operations.

 

*Income Taxes*

 

We are subject to incometaxes in the United States (including federal and state) and several foreignjurisdictions in which we operate. Deferred income tax balances reflect the effects of temporarydifferences between the carrying amounts of assets and liabilities and theirtax bases and are stated at enacted tax rates expected to be in effect whentaxes are actually paid or recovered.  ASC740, *Income Taxes,* requires that deferred taxassets be evaluated for future realization and reduced by a valuation allowanceto the extent it is believed a portion will not be realized in the future.  Many factors are considered when assessingthe likelihood of future realizations of deferred tax assets, including recentcumulative earnings experience and expectations of future taxable income by theappropriate taxing jurisdiction, the carry-forward periods available for taxreporting purposes, and other relevant factors.

 

Significant judgment isrequired in evaluating tax positions and determining the provision for incometaxes. During the ordinary course of business, there are many transactions andcalculations for which the ultimate tax determination is uncertain.  Effective January 1, 2007, we adoptedthe provisions of FIN No. 48, *Accounting**for Uncertainty in Income Taxes and Interpretation of ASC 740*,which contains a two-step approach to recognizing and measuring uncertain taxpositions accounted for in accordance with ASC 740.  The first step is to evaluate the taxposition for recognition by determining if the weight of available evidenceindicates it is more likely than not that the position will be sustained onaudit, including resolution of related appeals or litigation processes, ifany.  The second step is to measure thetax benefit as the largest amount which is more than 50% likely to be realizedupon ultimate settlement.  Many factors are considered when evaluating andestimating tax positions and tax benefits which may require periodicadjustments and which may not accurately anticipate actual outcomes.

 

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We are subject to income taxexamination by tax authorities in jurisdictions in which we operate. There arecurrently no income tax returns under examination by the Internal RevenueService or any other major tax authorities.

 

*Recently Issued AccountingStandards*

 

The Financial Accounting Standards Board (FASB) issued FASB AccountingStandards Codification (ASC) effective for financial statements issued forinterim and annual periods ending after September 15, 2009. The ASC is anaggregation of previously issued authoritative U.S. generally acceptedaccounting principles (GAAP) in one comprehensive set of guidances organized bysubject area. In accordance with the ASC, references to previously issuedaccounting standards have been replaced by ASC references. Subsequent revisionsto GAAP will be incorporated into the ASC through Accounting Standards Updates(ASU).

 

In April 2009, the FASB amended ASC 820, *Fair ValueMeasurements and Disclosures*, in which, if an entity determines thatthe level of activity for an asset or liability has significantly decreased andthat a transaction is not orderly, further analysis of transactions or quotedprices is needed, and a significant adjustment to the transaction or quotedprices may be necessary to estimate fair value in accordance with ASC 820.  We adopted this amendment and there were nomaterial impacts on the financial position, results of operations or cashflows.

 

In April 2009, the FASB amended ASC 825, *FinancialInstruments*, and ASC 270, *Interim Reporting.*The amendment requires an entity to provide disclosures about fair value offinancial instruments in interim financial information. This amendment is to beapplied prospectively and is effective for interim and annual periods endingafter June 15, 2009 with early adoption being permitted for periods endingafter March 15, 2009. We adopted this amendment and there were no impactson the financial position, results of operations or cash flows.

 

In May 2009, the FASBissued ASC 855, *Subsequent Events.*  ThisStandard sets forth: 1) the period after the balance sheet date during whichmanagement of a reporting entity should evaluate events or transactions thatmay occur for potential recognition or disclosure in the financial statements;2) the circumstances under which an entity should recognize events ortransactions occurring after the balance sheet date in its financial statements;and 3) the disclosures that an entity should make about events or transactionsthat occurred after the balance sheet date. This Statement is effective forinterim and annual periods ending after June 15, 2009. We adopted thisstatement and there were no impacts on the financial position, results ofoperations or cash flows.

 

**Item7A.                 Quantitative andQualitative Disclosures About Market Risk**

 

Not applicable.

 

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**Item 8.****                   ****FinancialStatements and Supplementary Data**

 

**Index To Financial Statements**

** **
|                                                                                                     | **Page** |
|----------------------------------------------------------------------------------------------------------|----------|
|                                                                                                     |     |
| Report of Independent  Registered Public Accounting Firm                                                 | 39       |
|                                                                                                     |     |
| Balance Sheets at December 31,  2009 and 2008                                                       | 40       |
|                                                                                                     |     |
| Statements of Operations for  the Years Ended December 31, 2009 and 2008                            | 41       |
|                                                                                                     |     |
| Statements  of Changes In Stockholders’ Equity for the Years Ended December 31, 2009  and 2008 | 42       |
|                                                                                                     |     |
| Statements  of Cash Flows for the Years Ended December 31, 2009 and 2008                            | 43       |
|                                                                                                     |     |
| Notes to  Financial Statements                                                                           | 44       |

 

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**REPORT OF ERNST & YOUNG, INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders of Elixir Gaming Technologies, Inc.:

 

We have audited theaccompanying consolidated balance sheet of Elixir Gaming Technologies, Inc.and Subsidiaries (the “Company”) as of December 31, 2009 and 2008, and therelated consolidated statements of operations, stockholders’ equity and cashflows for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  We were not engaged to perform an audit of theCompany’s internal control over financial reporting. Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting.  Accordingly, we express nosuch opinion.  An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Elixir Gaming Technologies, Inc.and subsidiaries as of December 31, 2009 and 2008 and the consolidated resultsof its operations and its cash flows for the years then ended, in conformitywith U.S. generally accepted accounting principles..

 

 

/s/ERNST & YOUNG

Hong Kong SAR

March 30, 2010

 

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**ELIXIR GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

 
| ** **                                                                                                | ** ** | **As of December 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Current assets:                                                                                           |       |                       |       |   |   |
| Cash  and cash equivalents                                                                                |       | $                          | 4,189,740  |   | $ | 14,504,433 |   |
| Accounts  receivable, trade, net                                                                          |       | 2,670,056                  |       | 1,336,261 |   |
| Due  from a related party                                                                                 |       | 12,286                     |       | 531,109 |   |
| Other  receivables                                                                                        |       | 194,812                    |       | 78,082 |   |
| Inventories                                                                                               |       | 621,074                    |       | 1,096,046 |   |
| Assets  held for sale                                                                                     |       | 930,000                    |       | — |   |
| Prepaid  commitment fees                                                                                  |       | 4,838,151                  |       | — |   |
| Deferred  tax assets                                                                                      |       | 89,789                     |       | — |   |
| Prepaid  expenses and other current assets                                                                |       | 770,125                    |       | 1,299,487 |   |
| Total  current assets                                                                                     |       | 14,316,033                 |       | 18,845,418 |   |
|                                                                                                      |       |                       |       |   |   |
| Accounts  receivable, trade, net of current portion                                                       |       | 105,689                    |       | — |   |
| Gaming  equipment and systems, net                                                                        |       | 26,506,966                 |       | 48,351,545 |   |
| Property  and equipment, net                                                                              |       | 3,322,092                  |       | 3,724,467 |   |
| Prepaids,  deposits and other assets                                                                      |       | 407,824                    |       | 1,284,679 |   |
| Intangible  assets, net                                                                                   |       | 3,026,196                  |       | 4,123,403 |   |
| Goodwill                                                                                                  |       | 84,210                     |       | 84,210 |   |
| Contract  amendment fee                                                                                   |       | 687,500                    |       | — |   |
| Total  assets                                                                                             |       | $                          | 48,456,510 |   | $ | 76,413,722 |   |
|                                                                                                      |       |                       |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                            |       |                       |       |   |   |
| Current liabilities:                                                                                      |       |                       |       |   |   |
| Accounts  payable                                                                                         |       | $                          | 1,125,204  |   | $ | 806,538 |   |
| Amount  due to a related party                                                                            |       | 45,558                     |       | 27,672 |   |
| Accrued  expenses                                                                                         |       | 2,325,030                  |       | 2,712,758 |   |
| Short-term  debt                                                                                          |       | —                     |       | 29,372 |   |
| Notes  payable to a related party, current portion                                                        |       | 3,127,657                  |       | 5,884,049 |   |
| Capital  lease obligations, current portion                                                               |       | 187,637                    |       | 269,371 |   |
| Customer  deposits and others                                                                             |       | 77,962                     |       | 1,525,569 |   |
| Total  current liabilities                                                                                |       | 6,889,048                  |       | 11,255,329 |   |
|                                                                                                      |       |                       |       |   |   |
| Notes  payable to a related party, net of current portion                                                 |       | 6,265,247                  |       | 6,185,088 |   |
| Capital  lease obligations, net of current portion                                                        |       | 413,601                    |       | 468,424 |   |
| Other  liabilities                                                                                        |       | 603,913                    |       | 525,986 |   |
| Deferred  tax liabilities                                                                                 |       | 877,356                    |       | 495,560 |   |
| Total  liabilities                                                                                        |       | 15,049,165                 |       | 18,930,387 |   |
|                                                                                                      |       |                       |       |   |   |
| Stockholders’ equity:                                                                                |       |                       |       |   |   |
| Common  stock, $.001 par value, 300,000,000 shares authorized; 114,956,667 shares  issued and outstanding |       | 114,958                    |       | 114,958 |   |
| Additional  paid-in-capital                                                                               |       | 414,863,618                |       | 413,987,828 |   |
| Accumulated  other comprehensive loss                                                                     |       | (645,124                   | )          | (2,107,842 | ) |
| Accumulated  deficit                                                                                      |       | (380,926,107               | )          | (354,511,609 | ) |
| Total  stockholders’ equity                                                                          |       | 33,407,345                 |       | 57,483,335 |   |
| Total  liabilities and stockholders’ equity                                                          |       | $                          | 48,456,510 |   | $ | 76,413,722 |   |

##  

The notes to consolidated financial statements are an integral part ofthese consolidated statements.

 

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**ELIXIR GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

**Consolidated Statements ofOperations**

 
| ** **                                                  | ** ** | **Years Ended December 31,** | ** **  |
|-------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                  | ** ** | **2009**                          | ** **  | **2008** | ** ** |
| Revenues:                                                   |       |                              |        |   |   |
| Gaming  machine participation                               |       | $                                 | 6,997,776   |   | $ | 3,433,096 |   |
| Table  game products                                        |       |                              |        |   |   |
| Related  party                                              |       | 3,240,742                         |        | 396,762 |   |
| Third  parties                                              |       | 1,275,181                         |        | 212,024 |   |
|                                                        |       | 4,515,923                         |        | 608,786 |   |
| Non-gaming  products                                        |       | 4,108,960                         |        | 7,071,611 |   |
|                                                        |       | 15,622,659                        |        | 11,113,493 |   |
|                                                        |       |                              |        |   |   |
| Operating costs and expenses:                               |       |                              |        |   |   |
| Cost  of gaming machine participation                       |       |                              |        |   |   |
| Machine  depreciation                                       |       | 10,054,265                        |        | 8,292,582 |   |
| Other  operating costs                                      |       | 1,051,161                         |        | 778,857 |   |
| Cost  of table game products                                |       | 2,550,724                         |        | 477,978 |   |
| Cost  of non-gaming products                                |       | 4,220,174                         |        | 6,159,292 |   |
| Selling,  general and administrative                        |       | 8,829,432                         |        | 17,401,767 |   |
| Impairment  of assets                                       |       |                              |        |   |   |
| Gaming  equipment and systems                               |       | 14,262,023                        |        | — |   |
| Intangibles  and others                                     |       | 424,500                           |        | 2,118,660 |   |
| Flood  damage losses                                        |       | 83,052                            |        | — |   |
| Research  and development                                   |       | 276,781                           |        | 678,047 |   |
| Depreciation  and amortization                              |       | 1,036,661                         |        | 1,063,728 |   |
| Restructuring  charges                                      |       | 622,935                           |        | 549,663 |   |
| Total  operating costs and expense                          |       | 43,411,708                        |        | 37,520,574 |   |
|                                                        |       |                              |        |   |   |
| Loss  from operations                                       |       | (27,789,049                       | )           | (26,407,081 | ) |
|                                                        |       |                              |        |   |   |
| Other  income:                                              |       |                              |        |   |   |
| Interest  expense and finance fees                          |       | (536,805                          | )           | (737,028 | ) |
| Interest  income                                            |       | 85,273                            |        | 706,552 |   |
| Foreign  currency (losses)/gains                            |       | (89,533                           | )           | 252,568 |   |
| (Loss)/gain  on dispositions of assets                      |       | (106,711                          | )           | 89,324 |   |
| Legal  settlement gain                                      |       | 655,506                           |        | — |   |
| Other                                                       |       | 368,424                           |        | 291,275 |   |
| Total  other income                                         |       | 376,154                           |        | 602,691 |   |
|                                                        |       |                              |        |   |   |
| Loss  before income tax and discontinued operations         |       | (27,412,895                       | )           | (25,804,390 | ) |
|                                                        |       |                              |        |   |   |
| Income  tax (expense)/benefit                               |       | (486,806                          | )           | 209,322 |   |
|                                                        |       |                              |        |   |   |
| Net  loss from continuing operations                        |       | (27,899,701                       | )           | (25,595,068 | ) |
| Net  profit/(loss) from discontinued operations, net of tax |       | 1,540,251                         |        | (1,360,128 | ) |
|                                                        |       |                              |        |   |   |
| Net  loss                                                   |       | $                                 | (26,359,450 | ) | $ | (26,955,196 | ) |
| Loss  per share:                                            |       |                              |        |   |   |
| Loss  from continuing operations                            |       | (0.24                             | )           | (0.22 | ) |
| Income/(loss)  from discontinued operations                 |       | 0.01                              |        | (0.01 | ) |
| Basic  and diluted loss per share                           |       | $                                 | (0.23       | ) | $ | (0.23 | ) |

##  

Thenotes to consolidated financial statements are an integral part of theseconsolidated statements.

 

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**ELIXIR GAMING TECHNOLOGIES, INC.AND SUBSIDIARIES**

**Consolidated Statements ofChanges in Stockholders’ Equity**

**Years Ended December 31, 2009 and 2008**

 
| ** **                             | ** ** | ** **       | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**   | ** **   | ** **  | ** ** |
|----------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|-------------------|------------|-------------------|--------------|-------------|------------|
| ** **                             | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**         | ** **   | ** **  | ** ** |
| ** **                             | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** **        | ** **   |
| ** **                             | ** ** | **Shares**       | ** ** | **Dollars** | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **Income/(Loss)** | ** **   | **Total**   | ** ** |
| Balances, January 1, 2008         |       | 114,914,930      |       | $           | 114,916    |            | $          | 411,323,072       |       | $                 | (327,556,413 | )           | $          | 406,358 |   | $ | 84,287,933 |   |
|                                   |       |             |       |        |       |            |       |              |       |              |         |        |       |
| Comprehensive loss                     |       |             |       |        |       |            |       |              |       |              |         |        |       |
| Net Loss                               |       |             |       |        |       |            |       | (26,955,196       | )          |              |         | (26,955,196 | )          |
| Other Comprehensive loss, net of tax   |       |             |       |        |       |            |       |              |       |              |         |        |       |
| Unrealized actuarial loss              |       |             |       |        |       |            |       |              |       | (8,995            | )            | (8,995      | )          |
| Foreign currency translation           |       |             |       |        |       |            |       |              |       | (2,505,205        | )            | (2,505,205  | )          |
| Other comprehensive loss               |       |             |       |        |       |            |       |              |       | (2,514,200        | )            |        |       |
| Comprehensive loss                     |       |             |       |        |       |            |       |              |       |              |         | (29,469,396 | )          |
| Exercise of employee options           |       | 41,737           |       | 42          |       | 70,761          |       |              |       |              |         | 70,803      |       |
| Stock based compensation               |       |             |       |        |       | 2,593,995       |       |              |       |              |         | 2,593,995   |       |
|                                   |       |             |       |        |       |            |       |              |       |              |         |        |       |
| Balances, December 31, 2008       |       | 114,956,667      |       | $           | 114,958    |            | $          | 413,987,828       |       | $                 | (354,511,609 | )           | $          | (2,107,842 | ) | $ | 57,483,335 |   |
|                                   |       |             |       |        |       |            |       |              |       |              |         |        |       |
| Balances, January 1, 2009         |       | 114,956,667      |       | 114,958     |       | 413,987,828     |       | (354,511,609      | )          | (2,107,842        | )            | 57,483,335  |       |
| Comprehensive income                   |       |             |       |        |       |            |       |              |       |              |         |        |       |
| Net loss                               |       |             |       |        |       |            |       | (26,359,450       | )          |              |         | (26,359,450 | )          |
| Other comprehensive income, net of tax |       |             |       |        |       |            |       |              |       |              |         |        |       |
| Unrealized actuarial gain              |       |             |       |        |       |            |       |              |       | 17,132            |         | 17,132      |       |
| Foreign currency translation           |       |             |       |        |       |            |       | (55,048           | )          | 1,445,586         |         | 1,390,538   |       |
| Other comprehensive income             |       |             |       |        |       |            |       |              |       | 1,462,718         |         |        |       |
| Comprehensive loss                     |       |             |       |        |       |            |       |              |       |              |         | (24,951,780 | )          |
| Stock based compensation               |       |             |       |        |       | 875,790         |       |              |       |              |         | 875,790     |       |
|                                   |       |             |       |        |       |            |       |              |       |              |         |        |       |
| Balances, December 31, 2009       |       | 144,956,667      |       | $           | 114,958    |            | $          | 414,863,618       |       | $                 | (380,926,107 | )           | $          | (645,124 | ) | $ | 33,407,345 |   |

##  

Thenotes to consolidated financial statements are an integral part of theseconsolidated statements.

 

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**ELIXIR GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

**Consolidated Statements of CashFlows**

 
| ** **                                                                    | ** ** | **Years Ended December 31** | ** **  |
|-------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                    | ** ** | **2009**                         | ** **  | **2008** | ** ** |
| Cash flows used in operating activities:                                      |       |                             |        |   |   |
| Net loss                                                                      |       | $                                | (26,359,450 | ) | $ | (26,955,196 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:  |       |                             |        |   |   |
| Impairment of intangibles and others                                          |       | 424,500                          |        | 2,118,660 |   |
| Impairment of gaming equipment and systems                                    |       | 14,262,023                       |        | — |   |
| Income tax expense/(benefit)                                                  |       | 486,806                          |        | (209,322 | ) |
| Foreign currency losses/(gains)                                               |       | 87,685                           |        | (252,554 | ) |
| Depreciation of gaming machines and systems and  property and equipment       |       | 10,931,773                       |        | 9,087,606 |   |
| Amortization of intangible assets                                             |       | 477,705                          |        | 667,175 |   |
| Amortization of prepaid sales commissions                                     |       | —                           |        | 29,971 |   |
| Stock-based compensation                                                      |       | 875,790                          |        | 2,593,995 |   |
| Provision for obsolete inventory                                              | ** ** | —                           |        | 447,894 |   |
| Provision for bad debt expenses, net of recoveries                            |       | (251,010                         | )           | 887,650 |   |
| Provision for tax receivables                                                 |       | 594,224                          |        | (345,058 | ) |
| Loss/(gain) on disposal of assets                                             |       | 106,711                          |        | (89,324 | ) |
| Provision for pension/ retirement benefits                                    |       | 9,235                            |        | — |   |
| Flood damage losses                                                           |       | 83,052                           |        | — |   |
| Restructuring charges                                                         |       | 38,525                           |        | — |   |
| Gain on sale of shuffler business                                             |       | (1,962,016                       | )           | — |   |
| Changes in operating assets and liabilities:                                  |       |                             |        |   |   |
| Accounts receivable and other receivables                                     |       | (392,811                         | )           | (71,893 | ) |
| Inventories                                                                   |       | 70,392                           |        | 863 |   |
| Customer deposits and others                                                  |       | (1,311,185                       | )           | — |   |
| Prepaid expenses and other current assets                                     |       | 151,336                          |        | (431,662 | ) |
| Prepaids, deposits and other assets                                           |       | 479,548                          |        | (726,969 | ) |
| Contract amendment fee                                                        |       | (687,500                         | )           | — | ** ** |
| Prepaid commitment fees                                                       |       | (4,838,151                       | )           | — | ** ** |
| Accounts payable                                                              |       | 123,074                          |        | (804,690 | ) |
| Amount due to related parties                                                 |       | 91,378                           |        | (15,079,627 | ) |
| Accrued expenses and other liabilities                                        |       | (447,031                         | )           | (964,132 | ) |
| Net cash used in operating activities                                         |       | (6,955,397                       | )           | (30,096,613 | ) |
|                                                                          |       |                             |        |   |   |
| Cash flows used in investing activities:                                      |       |                             |        |   |   |
| Sale of shuffler business                                                     |       | 2,800,000                        |        | — |   |
| Acquisition of gaming equipment and systems                                   |       | (3,450,010                       | )           | (18,798,273 | ) |
| Acquisition of plant and equipment                                            |       | (204,627                         | )           | (1,351,726 | ) |
| Proceeds from disposition of property and  equipment                          |       | 93,633                           |        | 150,409 |   |
| Net cash used in investing activities                                         |       | (761,004                         | )           | (19,999,590 | ) |
| Cash flows used in financing activities:                                      |       |                             |        |   |   |
| Proceeds from exercise of options                                             |       | —                           |        | 70,803 |   |
| Repayment of short-term debt and leases                                       |       | (278,875                         | )           | (543,426 | ) |
| Repayment of notes payable                                                    |       | (2,905,327                       | )           | (2,968,235 | ) |
| Net cash used in financing activities                                         |       | (3,184,202                       | )           | (3,440,858 | ) |
| Effect of exchange rate changes on cash                                       |       | 585,910                          |        | (245,326 | ) |
| Decrease in cash and cash equivalents                                         |       | (10,314,693                      | )           | (53,782,387 | ) |
| Cash and cash equivalents at beginning of year                                |       | 14,504,433                       |        | 68,286,820 |   |
| Cash and cash equivalents at end of year                                      |       | $                                | 4,189,740   |   | $ | 14,504,433 |   |
| Supplemental cash flow information:                                           |       |                             |        |   |   |
| Cash paid for interest                                                        |       | $                                | 335,550     |   | $ | 461,181 |   |
| Cash paid for taxes                                                           |       | $                                | —      |   | $ | 6,144 |   |
| Non-cash investing and operating activities:                                  |       |                             |        |   |   |
| Electronic gaming machines returned to related  party as reversal of payables |       | $                                | —      |   | $ | (13,915,499 | ) |

##  

Thenotes to consolidated financial statements are an integral part of theseconsolidated statements.

 

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**ELIXIR GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

**Notes to Consolidated FinancialStatements**

 

**1.     Description of Business and Significant Accounting Policies**

 

The principal businessactivities of Elixir Gaming Technologies, Inc. and its subsidiaries (the “Company”)are the owning and leasing of electronic gaming machines placed in resorts,hotels, and other venues across certain countries in Asia and the developingand distributing of products related to the gaming and automotive industries.These products include RFID casino chips and component parts for the automotiveindustry.

 

***Basis of Presentation***

 

These consolidated financialstatements are prepared pursuant to generally accepted accounting principles inthe United States. Certain previously reported amounts have been reclassifiedto conform to the current period presentation.

 

***Principles ofConsolidation***

 

These consolidated financialstatements include the accounts of Elixir Gaming Technologies, Inc. andall its subsidiaries. All intercompany balances and transactions have beeneliminated in consolidation.

 

***Use of Estimates***

 

The Company is required tomake estimates, judgments and assumptions that it believes are reasonable basedon its historical experience, contract terms, observance of known trends in theCompany and the industry as a whole, and information available from otheroutside sources.  These estimates affect the reported amounts of assets,liabilities, revenues and expenses and related disclosures of contingent assetsand liabilities.  On a regular basis, the Company evaluates its estimates,including those related to revenue recognition, product returns, long-livedassets, inventory obsolescence, stock-based compensation, income taxes, baddebts, warranty obligations, long-term contracts, contingencies andlitigation.  Actual results may differ from those estimates.

 

***Cash and Cash Equivalents***

 

All highly liquidinstruments with original maturities of three months or less are consideredcash equivalents.  The Company places its cash and temporary investmentswith financial institutions.  At December 31, 2009, the Company haddeposits with financial institutions in excess of Federal Deposit InsuranceCorporation (FDIC) insured limits by $3.94 million.

 

***Accounts Receivable andAllowance for Doubtful Accounts***

 

Accounts receivable arestated at face value less any allowances for doubtful accounts. Allowances for doubtful accounts are maintained at levels determined by Companymanagement to adequately provide for uncollectible amounts.  In determiningthe estimated uncollected amounts, the Company evaluates a combination offactors, including, but not limited to, activity in the related market,financial condition of customers, specific customer collection experience andhistory of write-offs and collections.

 

***Inventories***

 

Inventories are stated atthe lower of cost, determined using the first-in, first-out method, ormarket.  Cost elements included in work-in-process and finished goodsinclude raw materials, direct labor, and manufacturing overheads.  TheCompany reviews inventory quantities regularly and records charges for excessand obsolete products.  Inventory provisions of $NIL and $447,894 wererecorded in cost of table game products in the consolidated statements ofoperations for the fiscal years ended December 31, 2009 and 2008,respectively.

 

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***Long-Lived Assets***

 

The Company accounts forimpairment of long-lived assets in accordance with Financial Accounting StandardsBoard (FASB) Accounting Standards Codification (ASC) 360, *Property,Plan and Equipment*. Long-lived assets are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable.  In such instances, theCompany estimates the undiscounted future cash flows that result from the useof the asset and its ultimate disposition. If the sum of the undiscounted cash flows is less than the carryingvalue, the Company recognizes an impairment loss, measured as the amount bywhich the carrying value exceeds the fair value of the asset, determinedprincipally using discounted cash flows. The Company recorded an impairment charge of $14.3 million during theyear ended December 31, 2009 relating to non-performing electronic gaming machinesand systems, and Philippine operation gaming assets.

 

***Prepaids, Deposits andOther Assets***

 

Prepaids, deposits and otherassets consist primarily of prepaid value-added taxes in foreign countries,sales tax in dispute, restricted cash for treasury operations and depositsrelated to gaming machine orders.  TheCompany has restricted deposits in the amount of $100,000 at December 31,2009 and 2008, in the form of a certificate of deposit as security on alease.  This certificate of deposit has been recorded in deposits andother assets in the consolidated balance sheets.  The restriction will be removed in February 2012upon termination of the lease.  The Company had restricted deposits of $NILat December 31, 2009 compared to $310,557 at December 31, 2008, whichwere restricted for use in treasury management in Cambodia venues.  The amount which was recorded in deposits andother assets in the consolidated balance sheet was released in February 2009due to the closure of certain Cambodia venues.

 

***Consignment Inventory***

 

At December 31, 2009,the Company had consignment inventory of service supplies and parts of $NIL(2008: $235,318). Revenue is not recognized, and the title to the inventoryremains with the Company, until ownership of a product and title passes to thedistributor, which occurs upon the distributor’s use of the products or salesto third-party customers.

 

***Electronic Gaming Machinesand Systems***

 

Electronic gaming machines(EGMs) and systems are stated at cost. The Company depreciates EGMs and systems purchased new over a five-yearuseful life and electronic gaming machine and systems purchased used over athree-year useful life to a minimal salvage value, once placed in service.  Depreciation of EGMs and systems of $10,054,265and $8,292,582 were included in cost of gaming machine participation in theconsolidated statements of operations for the years ended December 31,2009 and 2008, respectively.

 

***Property and Equipment***

 

Property and equipment andequipment rented to customers are stated at cost (Note 7). Depreciation iscomputed using the straight-line method over the useful lives of the assetscurrently estimated to be 3 to 5 years. Leasehold improvements are depreciated over the shorter of the useful lifeor the lease term including the renewal period so long as renewal isintended.  Depreciation of property and equipmentof $816,888 and $712,027 are included in the consolidated statements ofoperations for the years ended December 31, 2009 and 2008, respectively.

 

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***Goodwill and Intangible Assets***

 

Goodwill primarily resultedfrom a business combination. The Company adopted ASC 350,*Intangibles-Goodwilland Other,*effective January 1, 2002.  Under ASC 350,goodwill is no longer amortized but is subject to periodic impairment tests.

 

The Company measures andtests goodwill for impairment using the two-step approach under ASC 350, atleast annually on December 31 or more often if there are indicators ofimpairment.  If the carrying amount ofgoodwill exceeds its implied fair value, an impairment loss is recognized equalto that excess.

 

Intangible assets consist ofpatents, customer relationships and trademarks. They are recorded at cost and are amortized, on the straight-line basisover the period of time the asset is expected to contribute directly orindirectly to future cash flows, which range from 10 to 13 years.  The straight-line amortization method isutilized because the Company believes there is not a more reliably determinablemethod of reflecting the pattern in which the economic benefits of theintangible assets are consumed or otherwise used up.

 

The amortization expenseswere $477,705 and $667,175 for the years ended December 31, 2009 and 2008,respectively.

 

Impairment testing forgoodwill and other intangibles requires judgment, including the identificationof reporting units, allocation of related goodwill, assignment of corporateshared assets and liabilities to reporting units, estimated future cash flows,and determinations of fair values.  Whilethe Company believes its estimates of future revenues and future cash flows arereasonable, different assumptions could materially affect the assessment ofuseful lives, recoverability and fair values. If actual future cash flows fall below initial forecasts, the Companymay need to record additional amortization and/or impairment charges.

 

Impairment expense relatingto goodwill and intangible assets totaled $424,500, and $695,743 for the yearsended December 31, 2009 and 2008, respectively.

 

***Litigation and OtherContingencies***

 

The Company is involved invarious legal matters, litigation and claims of various types in the ordinarycourse of its business operations.  TheCompany has regular litigation reviews, including updates from corporate and outsidecounsel, to assess the need for accounting recognition or disclosure of thesecontingencies.  The status of significantclaims is summarized in Note 19.

 

ASC 450, *Contingencies,* requires that liabilities for contingenciesbe recorded when it is probable that a liability has been incurred and that theamount can be reasonably estimated. Significant management judgment is required related to contingentliabilities and the outcome of litigation because both are difficult topredict.  For a contingency where anunfavorable outcome is reasonably possible and which is significant, theCompany discloses the nature of the contingency and, where feasible, anestimate of the possible loss.

 

***Revenue Recognition***

 

The Company recognizesrevenue when all of the following have been satisfied:

 

·                  persuasiveevidence of an arrangement exists;

 

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·                  the price tothe customer is fixed and determinable;

 

·                  delivery has occurredand any acceptance terms have been fulfilled;

 

·                  no significantcontractual obligations remain; and 

 

·                  collection is reasonably assured.

 

***Participation Revenue***

 

The Company earns recurringrevenue by providing customers with electronic gaming machines and casinomanagement systems which track game performance and provide statistic oninstalled electronic gaming machines owned by the Company and leased to venueowners. Revenues are recognized on the contractual terms of the participationagreements between the Company and the venue owners and are based on theCompany’s share of net winnings.

 

Commitment fees paid to thevenue operator where the agreement stipulates that the fees will be recoveredfrom the daily net win sharing are capitalized as assets. As required by ASC605-50, *Customer Payments and Incentives*, thecash consideration received for the portion of net winnings relating to thecommitment fees is amortized as a reduction of revenue if the expected benefitfrom commitment fees cannot be separately identified or reasonably estimated.The Company had prepaid commitment fees $4,838,151 and $NIL as of December 31,2009 and 2008, respectively.

 

Commitment fees paid to thevenue operators relating to contract amendments are also capitalized as assetsand amortized as a reduction of revenue fee over the term of the amendedcontracts. The Company had contract amendment fees of $687,500 and NIL as of December 31,2009 and 2008, respectively.

 

***Gaming and Non-GamingProduct Sales***

 

The Company recognizesrevenue from the sale of its products to end users upon shipment againstcustomer contracts or purchase orders. Revenue from shuffler rentals is recorded at the first of each month inaccordance with rental contract terms.

 

The Company recognizes revenuefrom its sales to independent distributors upon shipment to the distributorsagainst distributor contracts or product purchase orders.  The Companyrecognizes revenue on consignment inventory when ownership of the product andtitle passes to the distributor which occurs upon the distributor’s use of theproduct in its service organization or to an end user.

 

The maintenance componentsthat are part of long-term sales contracts are recorded as deferred revenue andare amortized over the remaining life of the sales agreement after the initial90-day warranty as required by ASC 605-25, *Multiple-ElementArrangements*.  The Companyprovides for estimated warranty repair costs associated with salescontracts.  Although there are noextended warranties offered for its products, the Company provides formaintenance contracts that are billed and recognized on a monthly basis.  As noted above, the Company’s future sales werethrough its third-party distributors and it no longer offers long-term salescontracts or service to customers.  Therefore, as of December 31, 2009,the Company had no remaining obligations to perform maintenance on gaming andnon-gaming products sold to end users.

 

***Advertising Expense***

 

The cost of advertising is chargedto expense as incurred.  The cost of advertising was $72,926 and $114,009for the years ended December 31, 2009 and 2008, respectively.

 

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***Stock-Based Compensation***

 

The Company adopted ASC 718,*Compensation-Stock Compensation*,to account for all stock-based compensation beginning January 1, 2006, andelected the modified prospective method of transition.  Under the fair value recognition provisionsof ASC 718, for stock-based compensation accrued to employees and non employeedirectors, the Company recognizes stock-based compensation expense for all service-basedawards with graded vesting schedules on the straight-line basis over therequisite service period for the entire award. Initial accruals of compensation expense are based on the estimatednumber of shares for which requisite service is expected to be rendered.  Estimates are revised if subsequentinformation indicates that forfeitures will differ from previous estimates, andthe cumulative effect on compensation cost of a change in the estimatedforfeitures is recognized in the period of the change.  For non-employee awards, the Companyremeasures compensation cost each period until the service condition iscomplete and recognizes compensation cost on the straight-line basis over therequisite service period.  Optionvaluation models require the input of highly subjective assumptions, andchanges in the assumptions can materially affect the fair value estimates.  Judgment is required in estimating stockprice volatility, forfeiture rates, expected dividends, and expected terms thatoptions remain outstanding.  See Note 13for additional information regarding these assumptions.

 

Stock-based compensationexpense totaled $875,790 and $2,593,995 for the years ended December 31,2009 and 2008, respectively, and is included in selling, general and administrativeexpense in the consolidated statements of operations.

 

***Research and Development***

 

Research and developmentcosts are charged to expense as incurred.  Employee related costsassociated with product development are included in research and developmentcosts. The Company incurred $276,781 and $678,047 for the years endedDecember 31, 2009 and 2008, respectively.

 

***Income Taxes***

 

The Company is subject toincome taxes in the U.S. (including federal and state) and several foreignjurisdictions in which it operates. Deferred income tax balances reflect the effects of temporarydifferences between the carrying amounts of assets and liabilities and theirtax basis and are stated at enacted tax rates expected to be in effect whentaxes are actually paid or recovered. ASC 740, *Income Taxes,*requires that deferred tax assets be evaluated for future realization andreduced by a valuation allowance to the extent the Company believes a portionwill not be realized.  The Companyconsiders many factors when assessing the likelihood of future realization ofits deferred tax assets, including its recent cumulative earnings experienceand expectations of future taxable income by taxing jurisdiction, thecarry-forward periods available to the Company for tax reporting purposes, andother relevant factors.

 

The Company accounts foruncertain tax positions in accordance with ASC 740, which contains a two-stepapproach to recognizing and measuring uncertain tax positions.  The first step is to evaluate the taxposition for recognition by determining if the weight of available evidenceindicates it is more likely than not that the position will be sustained onaudit, including resolution of related appeals or litigation processes, ifany.  The second step is to measure thetax benefit as the largest amount which is more than 50% likely to be realizedupon ultimate settlement.  The Companyconsiders many factors when evaluating and estimating its tax positions and taxbenefits, which may require periodic adjustments and which may not accuratelyanticipate actual outcomes.

 

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***Loss Per Share***

 

Basic loss per share iscomputed by dividing the reported net loss by the weighted average number ofshares of common stock outstanding during the year.  There is no difference in diluted loss pershare from basic loss per share as the assumed exercise of common stockequivalents would have an anti-dilutive effect due to losses.

 

***Foreign Currency Translationsand Transactions***

 

The functional currency ofthe Company’s international subsidiaries is generally the local currency.  For these subsidiaries, the Companytranslates the assets and liabilities at exchange rates in effect at thebalance sheet date and income and expense accounts at average exchange ratesduring the year.  Resulting currencytranslation adjustments are recorded directly to accumulated other comprehensiveincome within stockholders’ equity. Gains and losses resulting from transactions in non-functionalcurrencies are recorded in operations.

 

***Fair Value Measurements***

 

Fair value is defined under ASC 820 as the exchangeprice that would be received for an asset or paid to transfer a liability (anexit price) in the principal or most advantageous market for the asset orliability in an orderly transaction between market participants on themeasurement date. Valuation techniques used to measure fair value under ASC 820must maximize the use of observable inputs and minimize the use of unobservableinputs. The standard establishes a fair value hierarchy based on three levelsof input, of which the first two are considered observable and the lastunobservable.

 

·                  Level 1 — Quoted prices in active markets foridentical assets or liabilities. These are typically obtained from real-timequotes for transactions in active exchange markets involving identical assets.

 

·                  Level 2 — Input, other than quoted prices includedwithin Level 1, which are observable for the asset or liability, eitherdirectly or indirectly. These are typically obtained from readily-availablepricing sources for comparable instruments.

 

·                  Level 3 — Unobservable input, where there is little orno market activity for the asset or liability. This input reflects thereporting entity’s own assumptions of the data that participants would use inpricing the asset or liability, based on the best information available under thecircumstances.

 

At December 31, 2009 cash and cash equivalentsincluded $556,277  in bank deposits,which are reported at fair value.  Thefair values of cash and cash equivalents, restricted cash, accounts receivableand accounts payable approximate carrying values due to the short maturity ofthese items.

 

***Recently Issued AccountingStandards***

 

The Financial AccountingStandards Board (FASB) issued FASB Accounting Standards Codification (ASC)effective for financial statements issued for interim and annual periods endingafter September 15, 2009. The ASC is an aggregation of previously issuedauthoritative U.S. generally accepted accounting principles (GAAP) in onecomprehensive set of guidance organized by subject area. In accordance with theASC, references to previously issued accounting standards have been replaced byASC references. Subsequent revisions to GAAP will be incorporated into the ASCthrough Accounting Standards Updates (ASU).

 

In December 2007, theFASB issued ASC 805, *Business Combinations,*which expands on the required disclosures, better defines the acquirer and theacquisition date in a business combination, and establishes principles forrecognizing and measuring the assets acquired (including goodwill), theliabilities assumed and any non-controlling interests in the acquired business.ASC 805 also requires an acquirer to record an adjustment to income taxexpense for changes in valuation allowances or uncertain tax positions relatedto acquired businesses. ASC 805 is effective for all business combinationswith an acquisition date in the first annual period following December 15,2008; early adoption is not permitted. The Company adopted this statement as ofJanuary 1, 2009 and the adoption has had no impact to the consolidatedfinancial statements.

 

In February 2008, theFASB amended ASC 820, *Fair ValueMeasurements and Disclosures*,**whichdeferred the effective date of ASC 820 for one year for certain non-financialassets and non-financial liabilities. The Company adopted this statement as ofJanuary 1, 2009 and the adoption has had no impact on the Company’sfinancial position and results of operations.

 

In April 2009, the FASBamended ASC 820, in which, if an entity determines that the level of activityfor an asset or liability has significantly decreased and that a transaction isnot orderly, further analysis of transactions or quoted prices is needed, and asignificant adjustment to the transaction or quoted prices may be necessary toestimate fair value in accordance with FASB ASC 820. The Company adopted thisamendment and there was no material impact on the financial position, resultsof operations or cash flows.

 

In April 2009, the FASBamended ASC 825, *Financial Instruments*,and ASC 270, *Interim Reporting.*The amendment requires an entity to provide disclosures about fair value offinancial instruments in interim financial information. This amendment is to beapplied prospectively and is effective for interim and annual periods endingafter June 15, 2009 with early adoption being permitted for periods endingafter March 15, 2009. The Company adopted this amendment and there was noimpact on the financial position, results of operations or cash flows.

 

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In May 2009, the FASBissued ASC 855, *Subsequent Events.* This Standard sets forth: 1) the period after the balance sheet date duringwhich management of a reporting entity should evaluate events or transactionsthat may occur for potential recognition or disclosure in the financialstatements; 2) the circumstances under which an entity should recognize eventsor transactions occurring after the balance sheet date in its financialstatements; and 3) the disclosures that an entity should make about events ortransactions that occurred after the balance sheet date. This Statement iseffective for interim and annual periods ending after June 15, 2009. TheCompany adopted this statement and there was no impact on the financialposition, results of operations or cash flows.

 

**2.****                         ****Segments**

 

The Company currentlyoperates in three operating segments: (i) table game products operations,(ii) gaming machine participation operations and (iii) non-gamingproducts operations, consisting primarily of the Dolphin automotivesector.  The accounting policies of thesesegments are consistent with the Company’s policies for the consolidatedfinancial statements.  The followingtable presents financial information for each of the Company’s operatingsegments.

 
| ** **                                       | ** ** | **Year Ended December 31** | ** **  |
|--------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                       | ** ** | **2009**                        | ** **  | **2008** | ** ** |
| Revenues:                                        |       |                            |        |   |   |
| Gaming machine participation operations          |       | $                               | 6,997,776   |   | $ | 3,433,096 |   |
| Table game product operations                    |       | 4,515,923                       |        | 608,786 |   |
| Non-gaming product operations                    |       | 4,108,960                       |        | 7,071,611 |   |
| Total revenues                                   |       | $                               | 15,622,659  |   | $ | 11,113,493 |   |
|                                             |       |                            |        |   |   |
| Profit/(loss) from operations:                   |       |                            |        |   |   |
| Gaming machine participation operations          |       | $                               | (4,107,650  | ) | $ | (5,638,343 | ) |
| Table game product operations                    |       | 1,965,199                       |        | 130,808 |   |
| Non-gaming product operations                    |       | (111,214                        | )           | 912,319 |   |
| Corporate and other operating costs and expenses |       | (25,535,384                     | )           | (21,811,865 | ) |
| Total operating loss                             |       | $                               | (27,789,049 | ) | $ | (26,407,081 | ) |
|                                             |       |                            |        |   |   |
| Identifiable assets:                             |       |                            |        |   |   |
| Gaming machine participation operations          |       | $                               | 34,881,415  |   | $ | 54,923,865 |   |
| Table game product operations                    |       | 4,515,285                       |        | 5,981,913 |   |
| Non-gaming product operations                    |       | 5,269,163                       |        | 4,873,469 |   |
| Corporate                                        |       | 3,790,647                       |        | 10,634,475 |   |
| Total identifiable assets                        |       | $                               | 48,456,510  |   | $ | 76,413,722 |   |
|                                             |       |                            |        |   |   |
| Goodwill:                                        |       |                            |        |   |   |
| Gaming machine participation operations          |       | $                               | —      |   | $ | — |   |
| Table game product operations                    |       | 84,210                          |        | 84,210 |   |
| Non-gaming product operations                    |       | —                          |        | — |   |
| Corporate                                        |       | —                          |        | — |   |
| Total goodwill                                   |       | $                               | 84,210      |   | $ | 84,210 |   |
|                                             |       |                            |        |   |   |
| Capital expenditures:                            |       |                            |        |   |   |
| Gaming machine participation operations          |       | $                               | 3,450,010   |   | $ | 32,713,772 |   |
| Table game product operations                    |       | 62,021                          |        | 21,347 |   |
| Non-gaming product operations                    |       | 6,722                           |        | 42,030 |   |
| Corporate                                        |       | 135,884                         |        | 1,288,349 |   |
| Total capital expenditures                       |       | $                               | 3,654,637   |   | $ | 34,065,498 |   |
|                                             |       |                            |        |   |   |
| Depreciation and amortization:                   |       |                            |        |   |   |
| Gaming machine participation operations          |       | $                               | 10,054,265  |   | $ | 8,292,582 |   |
| Table game product operations                    |       | 728,167                         |        | 732,969 |   |
| Non-gaming product operations                    |       | 130,145                         |        | 270,327 |   |
| Corporate                                        |       | 436,281                         |        | 375,906 |   |
| Total depreciation and amortization(1)           |       | $                               | 11,348,858  |   | $ | 9,671,784 |   |
|                                             | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Interest expenses:                               | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Gaming machine participation operations          |       | $                               | 473,449     |   | $ | 652,593 |   |
| Table game product operations                    |       | —                          |        | — |   |
| Non-gaming product operations                    |       | 62,571                          |        | 78,778 |   |
| Corporate                                        |       | 785                             |        | 5,657 |   |
| Total interest expenses                          |       | $                               | 536,805     |   | $ | 737,028 |   |
|                                             |       |                            |        |   |   |
| Income taxes (expense)/benefit:                  |       |                            |        |   |   |
| Gaming machine participation operations          |       | $                               | (131,755    | ) | $ | 112,602 |   |
| Table game product operations                    |       | (355,051                        | )           | — |   |
| Non-gaming product operations                    |       | —                          |        | 96,720 |   |
| Corporate                                        |       | —                          |        | — |   |
| Total income tax expenses                        |       | $                               | (486,806    | ) | $ | 209,320 |   |

 

----

(1)         Includes$10,312,220 and $8,609,710 for the fiscal years ended December 31, 2009and 2008, respectively, which were reported in the respective cost ofoperations in the consolidated statements of operations (see Note 1).

 

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Geographic segment revenuesfor the years ended December 31, 2009 and 2008 are as follows:

 
| ** **            | ** ** | **Year Ended  December 31** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Cambodia              |       | $                                | 3,911,572  |   | $ | 1,178,846 |   |
| Macau                 |       | 3,654,554                        |       | 418,318 |   |
| Philippines           |       | 3,086,204                        |       | 2,259,338 |   |
| Other Asian Countries |       | 281,827                          |       | 403,053 |   |
| Australia             |       | 4,403,717                        |       | 6,823,927 |   |
| Europe                |       | 139,859                          |       | — |   |
| Others                |       | 144,926                          |       | 30,011 |   |
|                  |       | $                                | 15,622,659 |   | $ | 11,113,493 |   |

 

During the year endedDecember 31, 2009, one customer represented 45% of total gaming machineparticipation revenue; one customer represented 66% of total table gameproducts sales; and one customer represented 30% of total non-gaming productsales.

 

Long-lived assets andgoodwill identified by geographic segments are as follows:

 
| ** **            | ** ** | **Year Ended  December 31** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Cambodia              |       | $                                | 11,150,105 |   | $ | 28,349,335 |   |
| Philippines           |       | 15,851,402                       |       | 20,706,455 |   |
| Other Asian Countries |       | 640,135                          |       | 442,931 |   |
| Australia             |       | 2,187,416                        |       | 1,946,434 |   |
| United States         |       | 3,110,406                        |       | 4,838,470 |   |
|                  |       | $                                | 32,939,464 |   | $ | 56,283,625 |   |

 

Duringthe year ended December 31, 2009, approximately $7.6 million electronicgaming machines were transferred from Cambodia to Philippines for redeployment.

 

**3.****                         ****Inventories**

 

Inventories atDecember 31, 2009 and 2008 consisted of the following:

 
| ** **                           | ** ** | **Year Ended  December 31** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Raw materials                        |       | $                                | 369,301    |   | $ | 1,309,765 |   |
| Work-in-progress                     |       | —                           |       | 202,837 |   |
| Finished goods                       |       | 251,773                          |       | 1,278,123 |   |
|                                 |       | 621,074                          |       | 2,790,725 |   |
| Less: allowances and other  reserves |       | —                           |       | (1,694,679 | ) |
|                                 |       | $                                | 621,074    |   | $ | 1,096,046 |   |

 

During the years endedDecember 31, 2009 and 2008, the Company recorded provisions for obsoleteinventory of $NIL and $447,894, respectively. In 2009, the Company sold theshuffler business and closed down the China manufacturing facility whichresulted in reductions in inventory balances and related allowances.

 

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**4.****                         ****Prepaid Expenses and OtherCurrent Assets**

 

Prepaid expenses and other current assets at December 31, 2009 and2008 consisted of the following:

 
| ** **                         | ** ** | **December 31** | ** ** |
|------------------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Prepaid taxes                      |       | $                    | 374,540    |   | $ | 276,042 |   |
| Prepayments to suppliers           |       | 354,799              |       | 172,500 |   |
| Deposits on gaming machine  orders |       | 31,270               |       | 740,209 |   |
| Other                              |       | 9,516                |       | 110,736 |   |
|                               |       | $                    | 770,125    |   | $ | 1,299,487 |   |

 

**5.****                         ****Receivables**

 

Receivables atDecember 31, 2009 and 2008 consisted of the following:

 
| ** **                             | ** ** | **December 31** | ** ** |
|----------------------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Trade accounts                         |       | $                    | 2,783,666  |   | $ | 2,259,864 |   |
| Less: allowance for  doubtful accounts |       | (7,921               | )          | (923,603 | ) |
| Net                                    |       | $                    | 2,775,745  |   | $ | 1,336,261 |   |
| Current portion                        |       | 2,670,056            |       | 1,336,261 |   |
| Non-current portion                    |       | $                    | 105,689    |   | $ | — |   |

 

Other receivables atDecember 31, 2009 and 2008 consisted of the following:

 
| ** **                            | ** ** | **December 31** | ** ** |
|---------------------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Contract sales and notes  receivables |       | $                    | 7,800      |   | $ | 20,713 |   |
| Expenses paid on behalf  customers    |       | 67,736               |       | — |   |
| Sale of office equipment              |       | 19,350               |       | — |   |
| Other                                 |       | 99,926               |       | 57,369 |   |
| Total                                 |       | $                    | 194,812    |   | $ | 78,082 |   |

 

Changes in the allowance fordoubtful accounts consisted of the following:

 
| ** **                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Balance at January 1    |       | $        | 923,603    |     | $          | 176,666 |   |
| Provision for bad debts      |       | 39,713   |       | 887,650  |       |
| Recoveries                   |       | (290,723 | )          | —   |       |
| Write-offs                   |       | (664,672 | )          | (140,713 | )          |
| Balance at  December 31 |       | $        | 7,921      |     | $          | 923,603 |   |

 

Bad debt expenses, net ofrecoveries for the years ended December 31, 2009 and 2008 were ($251,010)and $887,650, respectively, which were recorded in selling, general andadministrative expenses in the consolidated statements of operations.

 

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**6.****                         ****Gaming Equipment and Systems**

 

The major categories of gaming equipment and systemsand accumulated depreciation are presented below:

 
| ** **                     | ** ** | **Useful  Life** | ** ** | **December 31** | ** ** |
|--------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                     | ** ** | **(years)**      | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Electronic gaming machines     |       | 3-5              |       | $                    | 39,730,296 |   | $ | 49,282,197 |   |
| Systems                        |       | 5                |       | 3,519,380            |       | 6,151,165 |   |
|                           |       |             |       | 43,249,676           |       | 55,433,362 |   |
| Less: accumulated depreciation |       |             |       | (16,742,710          | )          | (7,081,817 | ) |
|                           |       |             |       | $                    | 26,506,966 |   | $ | 48,351,545 |   |

 

Depreciation expenses for the years endedDecember 31, 2009 and 2008 were $10,054,265 and $8,292,582, respectively,which were recorded in cost of gaming machine participation in the consolidatedstatements of operations.

 

The Company recorded an impairment charge of $13.7million, relating to non-performing machines and the Philippines operationsgaming assets, during the year ended December 31, 2009. In addition, theCompany also had write-offs of gaming assets of $0.6 million relating to theclosure of certain non-performing venues during the year. See Note 14 foradditional Information.

 

**7.****                         ****Property and Equipment**

 

Property and equipment consisted of the following atDecember 31, 2009 and 2008:

 
| ** **                                  | ** ** | **Useful  Life** | ** ** | **December 31** | ** ** |
|---------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **(years)**      | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Equipment rented by customers               |       | 3 - 5            |       | $                    | —     |   | $ | 14,606 |   |
| Vehicles, furniture, fixtures and equipment |       | 3 - 5            |       | 6,348,896            |       | 5,789,631 |   |
| Leasehold improvements                      |       | 5                |       | 814,514              |       | 837,383 |   |
|                                        |       |             |       | 7,163,410            |       | 6,641,620 |   |
| Less: accumulated depreciation              |       |             |       | (3,841,318           | )          | (2,917,153 | ) |
|                                        |       |             |       | $                    | 3,322,092  |   | $ | 3,724,467 |   |

 

**8.****                         ****Goodwill and Intangible Assets**

 

*Definite-LifeIntangible Assets*

 

All of the Company’sdefinite-life intangible assets are subject to amortization.  Definite-life intangible assets are comprisedof the following:

** **
| ** **                           | ** ** | **Useful  Life** | ** ** | **December 31** | ** ** |
|--------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                           | ** ** | **(years)**      | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Definite-life intangible assets:     |       |             |       |                 |       |   |   |
| Patents                              |       | 10               |       | $                    | 2,577,500  |   | $ | 4,986,316 |   |
| Less: Impairment provision           |       |             |       | —               |       | (695,743 | ) |
| Less:  accumulated amortization |       |             |       | (902,125             | )          | (1,666,533 | ) |
|                                 |       |             |       |                 |       |   |   |
| Customer relationships               |       | 10-13            |       | 1,684,101            |       | 1,684,101 |   |
| Less:  accumulated amortization |       |             |       | (697,873             | )          | (588,292 | ) |
|                                 |       |             |       |                 |       |   |   |
| Trademarks                           |       | 10-13            |       | 505,000              |       | 505,000 |   |
| Less: accumulated amortization  |       |             |       | (140,407             | )          | (101,446 | ) |
| Totals                               |       |             |       | $                    | 3,026,196  |   | $ | 4,123,403 |   |

 

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The Company amortizesdefinite-life intangible assets, such as customer relationships, patents andtrademarks on the straight-line method over their estimated useful lives. The Company assessed the potential impairment of intangible assets subject toamortization.  Amortization expense fordefinite-life intangible assets was $477,705 and $667,175 for the fiscal yearsended December 31, 2009 and 2008, respectively.  Annual estimated amortization expense foreach of the five succeeding fiscal years is as follows:

 
| 2010  |   | $       | 504,366   |   |
|-------|--------|---------|-----------|--------|
| 2011  |   | 504,366 |      |
| 2012  |   | 504,366 |      |
| 2013  |   | 504,366 |      |
| 2014  |   | 504,366 |      |
| 2015  |   | 504,366 |      |
| Total |   | $       | 3,026,196 |   |

 

*Impairmentof Intangible Assets and Goodwill*

 

In accordance with ASC 350, *Property, Plant, and Equipment*, and ASC360, *Intangible-Goodwill and Other*,the Company reviews goodwill and intangible assets for impairment on an annualbasis at December 31 or more frequently if events or circumstancesindicate that the carrying values may not be recoverable.

 

The Company phased out itsgaming product manufacturing operations in China.  During the fourth quarter of 2008, theCompany recorded an impairment charge to the patent for automated shufflertechnology of $695,743, based upon the Company’s calculation of the assets’fair value based on the discounted projected net cash flows expected to resultfrom those assets, including any eventual disposition, to reduce its carryingvalue to the estimated fair value at December 31, 2008.  On March 16, 2009, the Company enteredinto a Purchase and Settlement Agreement with Shuffle Master, Inc. and,thereby, sold its portfolio of automated card verification machines andelectronic card shuffling system and all related intellectual property (seeNote 19).

 

Following the closure of theChina manufacturing facility, the Company decided to exit the chip washerbusiness after evaluating the market opportunities for this product. Due tolack of future demand, the Company determined the carrying value of relatedpatents may not be recoverable. During the three-month period endedSeptember 30, 2009, the Company recorded an impairment loss of $424,500,which relates to the write-down of the intangible asset associated with thechip washer patents.

 

**9.****                         ****Prepaids, Deposits and OtherAssets**

 

*PrepaidCommissions*

 

In May 2008, theCompany had a prepaid commission balance of $1.37 million from transactionsunder the Participation Agreement with Elixir Group in September 2007.

 

The estimated fair value wasdetermined using present value techniques based on estimates of cashflows.  In accordance with ASC 360, *Property, Plant and Equipment*, animpairment loss is to be recognized if the carrying amount of an intangibleasset is not recoverable and its carrying amount exceeds its fair value.  After an impairment loss is recognized, theadjusted carrying amount of the intangible asset shall be its new accounting basis.

 

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Duringthe first half of 2008, table game revenues had not met the Company’sexpectations and the future order placements indicated the remaining value ofthe prepaid commissions was not recoverable, as a result, the Company recordedan impairment loss of $1,368,829 to the asset and charged this amount to theconsolidated statement of operations.

 

*Deposits and other Assets*

 

Depositsand other assets at December 31, 2009 and 2008 consisted of the following:

 
| ** **                            | ** ** | **December 31** | ** ** |
|---------------------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Office  and equipment rental deposits |       | $                    | 73,841     |   | $ | 83,613 |   |
| Sales  tax in dispute (Note 19)       |       | 83,324               |       | 433,513 |   |
| Restricted  cash                      |       | 113,213              |       | 419,256 |   |
| Prepaid  value-added tax              |       | 136,157              |       | 346,213 |   |
| Other                                 |       | 1,289                |       | 2,084 |   |
| Totals                                |       | $                    | 407,824    |   | $ | 1,284,679 |   |

 

**10****.****                  ****A****ccrued Expenses**

 

Accruedexpenses at December 31, 2009 and 2008 consisted of the following:

 
| ** **                 | ** ** | **December 31** | ** ** |
|----------------------------|------------|----------------------|------------|
| ** **                 | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Payroll  and related costs |       | $                    | 599,360    |   | $ | 724,450 |   |
| Interest                   |       | 128,015              |       | 150,864 |   |
| Legal,  accounting and tax |       | 146,499              |       | 23,141 |   |
| Deposits  from customers   |       | 27,945               |       | 117,834 |   |
| Accrued  tax expenses      |       | 746,613              |       | 9,518 |   |
| Deferred  rent             |       | 45,396               |       | 47,790 |   |
| Litigation  (Note 19)      |       | —               |       | 1,066,190 |   |
| Other                      |       | 631,202              |       | 572,971 |   |
| Totals                     |       | $                    | 2,325,030  |   | $ | 2,712,758 |   |

 

Included in accruedliabilities at December 31, 2008 was $1.1 million related to potentialcharges in relation to a lawsuit with the former owner of Dolphin (Note19).  Refer to notes on restructuring andseverance costs in Note 17.

 

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**11.****                  ****Notes Payable and Capital LeaseObligations**

 

Asof December 31, 2009 and 2008, notes payable to a related party andcapital lease obligations were as follows:

 
| ** **                                                                                                  | ** ** | **December 31** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                  | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Notes payable to  a related party at interest of 5%                                                         |       | $                    | 9,392,904  |   | $ | 12,069,137 |   |
| Short-term line  of credit at an Australian bank                                                            | ** ** | **—**           |       | 29,372 |   |
| Capital lease  obligations to an Australian bank at various interest rates and  collateralized by equipment |       | 598,716              |       | 663,400 |   |
| Capital lease  obligations for furniture, tooling and equipment                                             |       | 2,522                |       | 74,395 |   |
| Totals                                                                                                      |       | $                    | 9,994,142  |   | $ | 12,836,304 |   |
| Current portion                                                                                             |       | $                    | 3,315,294  |   | $ | 6,182,792 |   |
| Non-current  portion                                                                                        |       | $                    | 6,678,848  |   | $ | 6,653,512 |   |

 

On September 30, 2008,in accordance with the amended Trade Credit Facility Agreement, ElixirInternational surrendered the initial advance of $15.0 million to the Companyin exchange for a new promissory note for the outstanding principal amount of$12.1 million. The outstanding principal and the interest accrued (revised from8% to 5%) thereon is to be repaid in 24 equal monthly installments reset from January 1,2009.

 

On July 24, 2009, the Company entered into another agreement withElixir International pursuant to which the parties amended the terms of thisTrade Credit Facility Agreement to restructure the payment schedule on theoutstanding principal balance of approximately $9.2 million under the FacilityAgreement. Under the revised payment schedule, the Company is not required tomake any repayments of principal or interest under the Facility Agreement untilJuly 1, 2010 provided that interest at the rate of 5% will continue toaccrue on the outstanding principal balance. The repayment of the outstandingprincipal balance and interest accrued thereon is to be repaid in 18 equalmonthly installments commencing on July 1, 2010 (Note 15).

 

Scheduled maturities ofnotes payable, short-term debt and capital lease obligations as of December 31,2009, are summarized as follows:

 
| ** **              | ** ** | **Note  Payable** | ** ** | **Capital  Leases** | ** ** | **Total**  | ** ** |
|-------------------------|------------|-------------------|------------|---------------------|------------|------------|------------|
| 2010                    |       | $                 | 3,127,657  |                | $          | 247,203    |       | $ | 3,374,860 |   |
| 2011                    |       | 6,494,342         |       | 191,550             |       | 6,685,892  |       |
| 2012                    |       | —            |       | 293,366             |       | 293,366    |       |
| 2013                    |       | —            |       | —              |       | —     |       |
| Future minimum payments |       | 9,621,999         |       | 732,119             |       | 10,354,118 |       |
| Less interest component |       | (229,095          | )          | (130,881            | )          | (359,976   | )          |
|                    |       | 9,392,904         |       | 601,238             |       | 9,994,142  |       |
| Current portion         |       | (3,127,657        | )          | (187,637            | )          | (3,315,294 | )          |
| Non-current portion     |       | $                 | 6,265,247  |                | $          | 413,601    |       | $ | 6,678,848 |   |

 

**12.****                  ****Securities Purchase and Product Participation Agreement**

 

On June 12, 2007 (as amended by an amendment dated October 21,2007), the Company entered into the Securities Purchase and ProductParticipation Agreement (“Product Participation Agreement”) with Elixir GroupLimited (“Elixir Group”), a wholly-owned subsidiary of Melco International Development Limited. Pursuant tothe Product Participation Agreement, Elixir Group became the principal shareholder and astrategic partner in the electronic gaming machine participation business inthat the Company****agreed toissue to Elixir Group its common shares and warrants to purchase its commonshares, subject to Elixir Group’s identification of venues located in thegeneral Asia region for the placement of electronic gaming machines with venueowners on the Company’s behalf.

 

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OnNovember 6, 2008, the Company entered an agreement with Elixir Group toterminate the Product Participation Agreement and the amendments thereto (the“Termination Agreement”).  Pursuant tothe termination agreement, Elixir Group and the Company agreed to terminate,with immediate effect upon signing, the Product Participation Agreement saveand except for certain provisions therein regarding board representation.  With such termination, Elixir Group ceased tohave rights to identify suitable gaming venues for the Company and exclusiverights to supply electronic gaming machines and related equipment and systemsfor the participation business and, as a result, Elixir Group was no longerentitled to earn an aggregate of 41.4 million additional shares of the Company.  In addition, Elixir Group agreed to cancelwarrants to purchase 66 million shares of common stock, representing all of theoutstanding warrants issued to Elixir Group pursuant to the ProductParticipation Agreement, which were subject to the Exchange Agreement betweenthe parties dated October 21, 2007. (Refer to Part III Item 13.Certain Relationships and Related Transactions and Director Independence ofthis filing for more details.)

 

**13.****                  ****Stock-BasedCompensation**

 

*Options*

 

Atthe annual shareholders meeting on September 8, 2008, a new stock optionplan, the “2008 Stock Incentive Plan” (the “2008 Plan”), was voted on andbecame effective on January 1, 2009, which replaced two previous plans,the Amended and Restated 1999 Stock Option Plan and the Amended and Restated1999 Directors’ Stock Option Plan (the “Stock Option Plans”), therebyterminating both of the Stock Option Plans on December 31, 2008.

 

The2008 Plan allows for incentive awards to eligible recipients consisting of:

 
| · | Options  to purchase shares of common stock that qualify as incentive stock options  within the meaning of the Internal Revenue Code; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                  |
| · | Non-statutory  stock options that do not qualify as incentive options;                                                                |
|   |                                                                                                                                  |
| · | Restricted  stock awards; and                                                                                                         |
|   |                                                                                                                                  |
| · | Performance  stock awards which are subject to future achievement of performance criteria  or be free of any performance or vesting.  |

 

Themaximum number of shares reserved for issuance under the 2008 Plan is5,000,000, the exercise price shall not be less than 100% of the fair marketvalue of one share of common stock on the date of grant, unless the participantowns more than 10% of the total combined voting power of all classes of stockof the Company or any parent or subsidiary corporation of the Company, in whichcase the exercise price shall then be 110% of the fair market value.

 

Duringthe fiscal year ended December 31, 2009, stock options for the purchase of500,000 shares of common stock were granted with a weighted average exerciseprice of $0.13 and will vest over a six months and one day period.  As of December 31, 2009, there wereoptions for the purchase of 10,737,065 shares of common stock issued andoutstanding under the Stock Option Plans and stock options for purchases ofcommon stock granted under the Product Participation Agreement.

 

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A summary of the StockOption Plans as of December 31, 2009 and 2008, and changes during the yearthen ended, is presented in the following table:

 
| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------|------------|
| Outstanding as of December 31, 2007 |       | 8,218,369             |       | $                                    | 2.56       |                                                         | —     |                           | —     |   |
| Granted                                  |       | 11,073,539            |       | $                                    | 2.94       |                                                         | —     |                           | $          | 94,500 |   |
| Exercised                                |       | (41,737               | )          | $                                    | 1.70       |                                                         | —     |                           | $          | 54,419 |   |
| Forfeited or expired                     |       | (4,003,904            | )          | $                                    | 4.68       |                                                         | —     |                           | —     |   |
| Outstanding as of December 31, 2008 |       | 15,246,267            |       | $                                    | 2.28       |                                                         | 5.09       |                           | $          | 94,500 |   |
| Exercisable as of December 31, 2008 |       | 5,175,499             |       | $                                    | 2.65       |                                                         | 3.34       |                           | —     |   |

 
| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted Average Exercise Price** | ** ** | **Weighted Average  Remaining Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------|------------|
| Outstanding as of December 31, 2008 |       | 15,246,267            |       | $                                   | 2.28       |                                                         | —     |                           | $          | 481,300 |   |
| Granted                                  |       | 500,000               |       | $                                   | 0.13       |                                                         | —     |                           | $          | 60,000 |   |
| Exercised                                |       | —                |       | —                              |       | —                                                       |       | —                         |       |
| Forfeited or expired                     |       | (5,009,202            | )          | $                                   | 3.02       |                                                         | —     |                           | —     |   |
| Outstanding as of December 31, 2009 |       | 10,737,065            |       | $                                   | 1.84       |                                                         | 4.32       |                           | $          | 502,200 |   |
| Exercisable as of December 31, 2009 |       | 8,198,710             |       | $                                   | 1.73       |                                                         | 4.09       |                           | $          | 399,066 |   |

 

Outstanding stock optionshad an aggregate intrinsic value of $502,200 and exercisable stock options hadan aggregate intrinsic value of $399,066 as of December 31, 2009.

 

During the year endedDecember 31, 2009, no options were exercised.

 

The weighted average fairvalue at the date of grant for options granted during the years ended December 31,2009 and 2008 as described above was $0.11 per share in 2009 and $1.02 pershare in 2008.

 

The total fair value of shares vested during the yearsended December 31, 2009 and 2008 were $1,291,219 and $2,726,274 respectively.

 

*Recognitionand Measurement*

 

The fair value of eachstock-based award to employees and non-employee directors is estimated on themeasurement date which generally is the grant date while awards tonon-employees are measured at the earlier of the performance commitment date orthe service completion date using the Black-Scholes-Merton option-pricingmodel.  Option valuation models requirethe input of highly subjective assumptions, and changes in assumptions used canmaterially affect the fair value estimates. The Company estimates the expected life of the award by taking intoconsideration the vesting period, contractual term, historical exercise data,expected volatility, blackout periods and other relevant factors. Volatility isestimated by evaluating the Company’s historical volatility data.  The risk-free interest rate on themeasurement date is based on U.S. Treasury constant maturity rates for a periodapproximating the expected life of the award. The Company historically has not paid dividends, nor does it expect topay dividends in the foreseeable future and, therefore, the expected dividendrate is zero.

 

The following tablesummarizes the range of assumptions utilized in the Black-Scholes-Mertonoption-pricing model for the valuation of stock options granted during the yearsended December 31, 2009 and 2008:

 
| ** **               | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| **Range of values:**     | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** |
| Expected volatility      |       | 303.32   | %          | 303.32   | %          | 60.00 | % | 214.79 | % |
| Expected dividends       |       | —   |       | —   |       | — |   | — |   |
| Expected term (in years) |       | 3.73     |       | 3.73     |       | 3.00 |   | 10.00 |   |
| Risk free rate           |       | 2.75     | %          | 2.75     | %          | 1.45 | % | 4.01 | % |

 

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For stock-based compensationaccrued to employees and non-employee directors, the Company recognizesstock-based compensation expense for all service-based awards with gradedvesting schedules on the straight-line basis over the requisite service periodfor the entire award.  Initial accrualsof compensation expense are based on the estimated number of shares for whichrequisite service is expected to be rendered. Estimates are revised if subsequent information indicates thatforfeitures will differ from previous estimates, and the cumulative effect oncompensation cost of a change in the estimated forfeitures is recognized in theperiod of the change.

 

For non-employee awards, theCompany remeasures compensation cost each period until the service condition iscomplete and recognizes compensation cost on the straight-line basis over therequisite service period.

 

The Company estimatesforfeitures and recognizes compensation cost only for those awards expected tovest assuming all awards would vest and reverses recognized compensation costfor forfeited awards when the awards are actually forfeited.  During the second half of 2008 and first halfof 2009, the Company experienced significant staff turnover including thedeparture of key executives, therefore, the actual forfeitures were higher thanthe initial estimates.  Accordingly, theCompany recorded cumulative adjustments of approximately $2.0 million and $0.3million to the stock compensation expense based on the actual forfeitures forthe year ended December 31, 2008 and 2009, respectively.

 

For awards with serviceconditions and graded vesting that were granted prior to the adoption of ASC718, the Company estimates the requisite service period and the number ofshares expected to vest, and recognizes compensation expense for each trancheon the straight-line basis over the estimated requisite service period.

 

*Warrants*

 

A summary of the status ofthe Company’s warrants outstanding at December 31, 2009 and 2008 andchanges during the years then ended are presented in the following table.

 

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| ** **                               | ** ** | **Warrants** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life********(in years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------|------------|--------------|------------|---------------------------------------|------------|---------------------------------------------------------------------|------------|--------------------------------|------------|
| Warrants, as of December 31, 2007   |       | 79,761,375   |       | $                                     | 2.51       |                                                                | 4.76       |                           | $          | 142,505,069 |   |
| Cancelled                                |       | (66,636,375  | )          | $                                     | 2.64       |                                                                | —     |                           | —     |   |
| Warrants, as of December 31, 2008   |       | 13,125,000   |       | $                                     | 1.86       |                                                                | 2.12       |                           | —     |   |
| Exercisable as of December 31, 2008 |       | 13,125,000   |       | $                                     | 1.86       |                                                                | 2.12       |                           | —     |   |
|                                          |            |              |            |                                       |            |                                                                     |            |                                |            |  |  |

 
| ** **                               | ** ** | **Warrants** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life********(in years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------|------------|--------------|------------|---------------------------------------|------------|---------------------------------------------------------------------|------------|--------------------------------|------------|
| Warrants, as of December 31, 2008   |       | 13,125,000   |       | $                                     | 1.86       |                                                                | 2.12       |                           | $          | — |   |
| Cancelled                                |       | —       |       | —                                |       | —                                                              |       | —                         |       |
| Warrants, as of December 31, 2009   |       | 13,125,000   |       | $                                     | 1.86       |                                                                | 1.12       |                           | —     |   |
| Exercisable as of December 31, 2009 |       | 13,125,000   |       | $                                     | 1.86       |                                                                | 1.12       |                           | —     |   |
|                                          |            |              |            |                                       |            |                                                                     |            |                                |            |  |  |

 

Outstanding and exercisablewarrants have no aggregate intrinsic value as of December 31, 2009 and2008 due to the fair market value of the Company’s stock as of these dates.

 

There were no warrantsgranted during the year ended December 31, 2009.

 

**14.****                  ****Accounting for Impairment ofLong-Lived Assets**

 

The Company reviewslong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. In suchinstance, the Company estimates the undiscounted future cash flows (excludinginterest) resulting from the use of the asset and its ultimate disposition. Ifthe sum of the undiscounted cash flows (excluding interest) is less than thecarrying value, the Company recognizes an impairment loss, measured as theamount by which the carrying value exceeds the fair value of the assets.

 

The Company recorded animpairment charge of $13.7 million for non-performing machines and the Philippineoperations’ gaming assets for the year ended December 31, 2009. Asubstantial portion of the impairment represents the write-down of the carryingvalue to the fair value of certain non-performing gaming machines in inventoryfor the current target markets or customer preferences. The Company identifiedapproximately 500 machines as being non-performing based on an in-depth reviewof machine usability and future deployment plans. These non-performing machinesmeet the criteria of ASC 360, *Intangible-Goodwill andOther*, to be classified as assets held for sale with a total fairvalue of $930,000. The impairment also included the write-down of thePhilippine operations’ gaming assets based on the current carrying value of themachines in operation exceeding the expected cash flows projected to begenerated from the Philippines operations.

 

In addition, the Company hada write-off of gaming assets of $0.6 million relating to the closure of certainnon-performing venues during the year.

 

The following table reflectsthe components of the impairment of assets included in the consolidatedstatement of operations:

** **
| ** **                       | ** ** | **US$ (millions)** | ** ** |
|----------------------------------|------------|-------------------------|------------|
| Non performing gaming machines   |       | $                       | 8.9        |   |
| Philippine operations            |       | 4.8                     |       |
|                             |       | 13.7                    |       |
| Write-off of other gaming assets |       | 0.6                     |       |
| Total impairment charges         |       | $                       | 14.3       |   |

 

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**15.****                  ****Related Party Transactions**

 

On April 21, 2008, theCompany entered into a Trade Credit Facility Agreement (the “FacilityAgreement”) with Elixir International, a wholly-owned subsidiary of ElixirGroup.  Pursuant to the FacilityAgreement, Elixir International provided trade credits to the Company for itspurchase of electronic gaming machines from Elixir International in exchangefor the Company’s issuance of unsecured notes to Elixir International bearinginterest at a fixed rate of eight percent (8.0%) per annum.  Title of any gaming machines offered inexchange for the notes passed to the Company upon issuance of the notes.

 

Upon entering into theFacility Agreement, the Company immediately issued the first note pursuant tothe terms of the Facility Agreement in the principal amount of $15.0 million(the “Initial Advance”),  thereby extinguishingthe payable of an equivalent amount due to Elixir International in respect togaming machines previously acquired.  TheCompany was obligated to repay the principal, plus any accrued interestthereon, of the Initial Advance in 24 equal monthly installments.  The Initial Advance was subject to demand byElixir International for immediate payment only if there was either an event ofdefault or a change of control as defined in the Facility Agreement.

 

During the year endedDecember 31, 2008, the Company purchased electronic gaming machines,casino management systems and other peripherals via Elixir International in theamount of $32.6 million.

 

On November 6, 2008,the Company entered into a Machines Disposal Agreement (the “DisposalAgreement”) with Elixir International. On the same day, the Company entered into an agreement to terminate theSecurities Purchase and Product Participation Agreement and the amendmentsthereto (“the “Product Participation Agreement”) with Elixir Group (the“Termination Agreement”) and an Amendment of the Trade Credit FacilityAgreement and Related Note with Elixir International (the “Facility AmendmentAgreement”).

 

Pursuant to the DisposalAgreement, the Company agreed to return 715 electronic gaming machines toElixir International, which as consideration for such sale and return, agreedto extinguish an existing current trade payable of approximately $13.9 millionof the Company due to Elixir International.

 

Pursuant to the TerminationAgreement, Elixir Group and the Company agreed to terminate, with immediateeffect upon signing, the Product Participation Agreement save and except forcertain provisions therein regarding board representation, which included butnot limited to, the continued presence until September 10, 2009 of atleast two independent directors who served on the board since prior to theSeptember 2007 close of the Product Participation Agreement.  With such termination, Elixir Group ceased tohave the rights to identify suitable gaming venues for the Company andexclusive rights to supply electronic gaming machines and related equipment andsystems for the Company’s participation business and, as a result, Elixir Grouprelinquished its entitlement to earn an aggregate of 41.4 million additionalshares of the Company.  In addition,Elixir Group agreed to cancel warrants to purchase 66 million shares of theCompany’s common stock, representing all the remaining outstanding warrantsissued to Elixir Group pursuant to the Participation Agreement.  (For further information regarding thewarrants held by Elixir Group, please see Item 13 titled Certain Relationshipsand Related Transactions and Director Independence of Part III this filing.)  Meanwhile, as a result of the re-election ofthe board members at our annual shareholders meeting on October 30, 2009,our current board of directors was reduced to five from nine members and onlyone independent director who served on the board since prior toSeptember 2007 remains present on our board. For more information on ourboard members,  refer to Part III ofthis annual report.

 

Pursuant to the FacilityAmendment Agreement, Elixir International surrendered the Initial Advance tothe Company in exchange for the issuance of a new promissory note for $12.1million (the “Outstanding Principal”), the outstanding principal at the time ofthe exchange, with the following new repayment terms:  (a) the New Note and the interestaccrued thereon shall be repaid in 24 equal monthly installments reset fromJanuary 1, 2009; (b) interest shall be accrued on the outstandingprincipal at the rate of five percent (5.0%) (instead of 8.0%) per annumstarting from January 1, 2009; and no monthly repayments under the InitialAdvance were required for the months of October, November and December 2008.

 

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After the return of $13.9million of electronic gaming machines, the Company had a receivable balance of$0.5 million and a note payable of $12.1 million as of December 31,2008.  In addition, at December 31, 2008, the Company had deposits onorders with Elixir International totaling $348,232 for gaming machines, whichwere subsequently delivered in early 2009.

 

OnJuly 24, 2009, the Company entered into an agreement (“the SecondAmendment”) with Elixir International pursuant to which the parties amended theterms of the Trade Credit Facility Agreement between them dated April 21,2008 as amended by an Amendment to Trade Credit Facility Agreement and RelatedNote dated November 6, 2008. Pursuant to the Second Amendment, ElixirInternational agreed to restructure the payment schedule in respect of theoutstanding principal balance of approximately $9.2 million under the FacilityAgreement. Under the revised payment schedule, the Company is not required tomake any repayments of principal or interest under the Facility Agreement untilJuly 1, 2010 provided that interest at the rate of 5% will continue toaccrue on the outstanding principal balance. The repayment of the outstandingprincipal balance and interest accrued thereon is to be repaid in 18 equalmonthly installments commencing on July 1, 2010.

 

Effective January 1,2010, the Company sub-leases office space from Melco Services Limited, awholly-owned subsidiary of Melco International Development Limited, which isalso the parent of our principal shareholder, Elixir Group Limited. 

 

Significant revenues,purchases and expenses arising from transactions with related parties foreach  fiscal year ended December 31are as follows:

 
| ** **                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| **Elixir International Limited**             |       |     |       |     |       |
| Purchase of fixed assets, net of return      |       | $        | —     |     | $          | 19,333,565 |   |
| Other purchases                              |       | $        | —     |     | $          | 216,498 |   |
| Trade sales of gaming products               |       | $        | —     |     | $          | 536,421 |   |
| Office rental                                |       | $        | —     |     | $          | 205,553 |   |
| Expenses paid on behalf of the Company       |       | $        | —     |     | $          | 177,762 |   |
| Interest payments                            |       | $        | 500,706    |     | $          | 612,046 |   |
| Commission fees                              |       | $        | 26,935     |     | $          | — |   |
|                                         |       |     |       |     |       |
| **Melco Crown Entertainment**                |       |     |       |     |       |
| Deposit received on sales orders             |       | $        | —     |     | $          | 1,364,564 |   |
| Purchase of fixed assets                     |       | $        | —     |     | $          | 27,672 |   |
| Expenses paid on behalf of the Company       |       | $        | 1,103      |     | $          | — |   |
|                                         |       |     |       |     |       |
| **Melco Crown (COD) Development  Ltd**       |       |     |       |     |       |
| Sales orders from Melco                      |       | $        | 2,999,787  |     | —     |   |
|                                         |       |     |       |     |       |
| **Melco Crown COD (GH) Hotel Ltd**           |       |     |       |     |       |
| Expenses paid on behalf of the Company       |       | $        | 754        |     | —     |   |
|                                         |       |     |       |     |       |
| **Melco Services Limited**                   |       |     |       |     |       |
| Technical services                           |       | $        | 43,553     |     | —     |   |
| Purchases of fixed asset                     |       | $        | 23,997     |     | —     |   |
| Expenses paid on behalf of the Company (net) |       | $        | (39,592    | )        | —     |   |
|                                         |       |     |       |     |       |
| **Melco Crown Gaming (Macau) Ltd**           |       |     |       |     |       |
| Sales orders from Melco                      |       | $        | 240,955    |     | —     |   |

 

Theboard of directors has established a committee of the board, known as theconflicts committee which reviews and approves all material related partytransactions. (Please see Part III Item 13. Certain Relationships andRelated Transactions and Director Independence of this filing for moredetails.)

 

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**16.      Income Taxes**

 

The components of theprovision for income taxes are as follows:

 
| ** **                   | ** ** | **Year ended December 31** | ** ** |
|------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| Federal                      |       | $                               | —     |   | $ | — |   |
| State                        |       | —                          |       | — |   |
| Foreign                      |       |                            |       |   |   |
| Current                      |       | $                               | (175,007   | ) | $ | (165,848 | ) |
| Deferred                     |       | (311,799                        | )          | 375,170 |   |
| Total tax  (expense)/benefit |       | $                               | (486,806   | ) | $ | 209,322 |   |

 

The reconciliation of thestatutory federal income tax rate and the Company’s effective tax rate is asfollows:

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Federal benefit  at statutory rates             |       | $                     | 8,796,699  |   | 34.0 | % | $ | 9,235,941 |   | 34.0 | % |
| Difference in  jurisdictional tax rates         |       | (385,897              | )          | (1.5 | )% | (884,869 | ) | (3.3 | )% |
| Prepaid  distribution agreement warrant expense |       | (32,595               | )          | (0.1 | )% | (470,330 | ) | (1.7 | )% |
| Change in  valuation allowances                 |       | (7,717,940            | )          | (29.8 | )% | (7,474,316 | ) | (27.5 | )% |
| Other                                           |       | (1,147,073            | )          | (4.5 | )% | (197,104 | ) | (0.7 | )% |
| Total tax  (expense)/benefit                    |       | $                     | (486,806   | ) | (1.9 | )% | $ | 209,322 |   | 0.8 | % |

 

The effective tax rate forthe year was significantly lower than the federal statutory rate due primarilyto the valuation allowances against the Company’s deferred tax assets. Some prior year amounts in the table above have been reclassified betweenindividual lines to appropriately reflect the Company’s income taxexpense/benefit.

 

Consolidated losses beforetaxes for domestic and international operations are as follows:

 
| ** **    | ** ** | **December 31,** | ** **  |
|---------------|------------|-----------------------|-------------|
| ** **    | ** ** | **2009**              | ** **  | **2008** | ** ** |
| Domestic      |       | $                     | (17,851,751 | ) | $ | (18,263,943 | ) |
| International |       | (9,561,144            | )           | (7,540,447 | ) |
| Total         |       | $                     | (27,412,895 | ) | $ | (25,804,390 | ) |

 

The primary tax affectedcomponents of the Company’s deferred tax assets/(liabilities) are as follows:

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Deferred tax assets:          |       |                  |       |   |   |
| Prepaid commission  agreement |       | $                     | 1,297,246  |   | $ | 1,935,766 |   |
| Net operating losses          |       | 57,339,681            |       | 54,645,703 |   |
| Stock options                 |       | 2,843,659             |       | 2,545,890 |   |
| Depreciation and  impairment  |       | 5,285,120             |       | 880,308 |   |
| Other                         |       | 644,352               |       | 1,549,135 |   |
| Valuation allowances          |       | (67,124,730           | )          | (61,196,267 | ) |
| Deferred tax  liabilities:    |       |                  |       |   |   |
| Goodwill                      |       | (405,246              | )          | (449,808 | ) |
| Other                         |       | (667,649              | )          | (406,287 | ) |
| Net deferred tax  liabilities |       | $                     | (787,567   | ) | $ | (495,560 | ) |

 

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Some prior year amounts inthe table above have been reclassified between individual lines toappropriately reflect the Company’s deferred tax assets and liabilities.

 

The Company accounts foruncertain tax positions in accordance with ASC 740, which contains a two-stepapproach to recognizing and measuring uncertain tax positions. The first stepis to evaluate the tax position for recognition by determining if the weight ofavailable evidence indicates it is more likely than not that the position willbe sustained on audit, including resolution of related appeals or litigationprocesses, if any. The second step is to measure the tax benefit as the largestamount, which is more than 50% likely of being realized upon ultimatesettlement. The Company considers many factors when evaluating and estimatingits tax positions and tax benefits, which may require periodic adjustments andwhich may not accurately anticipate actual outcomes.

 

A reconciliation of thebeginning and ending amounts of unrecognized tax benefits is as follows:

 
| **Balance  at January 1, 2008**           |   | $         | —    |   |
|------------------------------------------------|--------|-----------|-----------|--------|
| Increases in tax  positions from prior years   |   | 1,211,607 |      |
| Increases in tax  positions from current years |   | 767,492   |      |
| **Balance  at December 31, 2008**         |   | $         | 1,979,099 |   |
| Increases in tax  positions from current years |   | 1,378,847 |      |
| **Balance  at December 31, 2009**         |   | $         | 3,357,946 |   |

 

The amount of uncertain taxbenefits at December 31, 2009 that would affect the effective income taxrate if recognized is $334,225.

 

The Company recognizesinterest and penalties, if any, related to unrecognized tax benefits in theprovision for income taxes in the statements of operations.  At December 31, 2009, the Company hasinterest and penalties of $106,604 accrued in the balance sheet. It is possiblethat the amount of unrecognized tax benefits will change in the next twelvemonths. However, as estimate of the range of the possible change cannot be madeat this time.

 

The Company files income taxreturns in the U.S. and in various states and foreign jurisdictions. TheCompany is subject to federal, state and local, or foreign income taxexaminations by tax authorities in jurisdictions which it operates. The Companyis not presently under examination by any major tax jurisdiction. The Company’s2003 to 2008 U.S. income tax returns remain subject to examination by the IRSand the Company’s 2003 to 2008 Australian income tax returns remain subject toexamination by the Australian Tax Office.

 

Domestic operating losscarryforwards were $180.6 million and $170.9 million for the fiscal years endedDecember 31, 2009 and 2008, respectively, which are subject to limitationsunder Section 382 of the Internal Revenue Code.  These domestic operating losses begin toexpire in 2016.  During 2007, the Companywrote off $41.6 million of domestic operating losses that it determined wouldexpire as a result of limitations under Section 382 of the InternalRevenue Code.  Operating losscarryforwards of foreign subsidiaries were $6.9 million and $3.9 million forthe years ended December 31, 2009 and 2008, respectively.

 

At December 31, 2009and 2008, there were valuation allowances of $67.1 million and $61.2 million,respectively, provided on the domestic and foreign operating loss carryforwards and other deferred tax assets because management believe these assetsdid not meet the “more likely than not” criteria for recognition under ASC 740.

 

As of December 31, 2009there were no material undistributed earnings of subsidiaries.

 

**17.      RestructuringCharges**

 

In accordance with ASC 420, *Exit and Disposal Cost Obligations*, in 2009,as part of its cost reduction initiatives, the Company incurred restructuringcharges of $622,935 for severance wages and benefits related to the terminationof employees and vacated facility operating leases. The amount representscontractual and other agreements with employees including a former executive,which only includes charges for termination benefits measured at estimated fairvalue at the termination date and does not include charges for services yet tobe rendered. All restructuring expenses and related charges incurred were fullypaid or settled during 2009. In 2008 the Company also incurred restructuringcharges of $549,663 relating to the headcount reduction.

 

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**18.      DiscontinuedOperations**

 

OnMarch 16, 2009, the Company entered into a Purchase and SettlementAgreement with Shuffle Master, Inc. (the “Purchase and SettlementAgreement”) pursuant to which it sold to Shuffle Master its portfolio ofautomated card verification machines and electronic card shuffling systems, allrelated intellectual property, including but not limited to, the trademarks ofRandom PlusTM, ShuffleProTM and Deck CheckerTM, and certain inventory of suchproducts. The total consideration paid by Shuffle Master under the Purchase andSettlement Agreement was a base amount of $2.4 million with an additional$400,000 related to the purchase of inventories.  In April 2009, the Company delivered theinventory items and concluded the transaction, and this resulted in a gain onthe asset disposals of approximately $2.0 million.

 

In relation to this Purchase and Settlement Agreement, the Companyterminated a distributorship arrangement of the relevant products with adistributor in Europe and pursuant to the termination arrangement, the Companywas required to buy back certain inventories of the relevant products kept bythe distributor. The Company incurred a liability of $247,609 which is includedin the loss from operations.

 

As a result of the sale to Shuffle Master, the China facility became redundantand, therefore, was closed at the end of April 2009. This operation waspart of the table game segment and the Company classified the China facility asdiscontinued operations.

 

The following table details selected financial information for the discontinuedoperations in the consolidated statements of operations:

** **
| ** **                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Loss from operations                                   |       | $                     | (421,765   | ) | $ | (1,360,128 | ) |
| Gain on disposal                                       |       | 1,962,016             |       | — |   |
| Income tax benefit/(expense)                           |       | —                |       | — |   |
| Income/(loss) from discontinued operations, net of tax |       | $                     | 1,540,251  |   | $ | (1,360,128 | ) |

 

Theestimated effective tax for discontinued operations is zero. Therefore, thereis no income tax expense associated with the gain on disposalandincome/(loss) from operations.

 

**19.      Commitments andContingencies**

 

*Leases*

 

The Company is obligatedunder non-cancelable leases for office space expiring in 2012.  The Company also leases office space andwarehouse facilities in other locations including Australia, Philippines, HongKong and Cambodia and certain office equipment under non-cancelable operatingleases with remaining terms in excess of one year.

 

In March 2008, theCompany moved its United States office and entered into a new non-cancelablelease for new office space.  In February 2008, the Company enteredinto a sublease for the balance of the remaining term on the previous officespace.  The proceeds from the sublease have been netted against the futureminimum lease payments.

 

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Future minimum lease paymentcommitments, net of sublease proceeds and including scheduled escalationprovisions as of December 31, 2009, under the leases are as follows:

 
| ** ** | ** ** | ** **          | ** ** | **Operating  Leases** | ** ** |
|------------|------------|---------------------|------------|-----------------------|------------|
| ** ** | ** ** | **Capital  Leases** | ** ** | **Total  Payments**   | ** ** | **Sublease Proceeds** | ** ** | **Net  Payments** | ** ** |
| 2010       |       | $                   | 187,637    |                  | $          | 984,905 |   | $ | (315,250 | ) | $ | 669,655 |   |
| 2011       |       | 144,218             |       | 891,377               |       | (315,717 | ) | 575,660 |   |
| 2012       |       | 269,383             |       | 569,607               |       | (16,462 | ) | 553,145 |   |
| 2013       |       | —              |       | 547,686               |       | — |   | 547,686 |   |
| 2014       |       | —              |       | 22,588                |       | — |   | 22,588 |   |
| Thereafter |       | —              | ** ** | **—**            |       | — |   | — |   |
|            |            |                     |            |                       |            |  |  |  |  |  |  |  |  |

 

Rent expenses on alloperating leases were $841,300 and $1,299,808 for the fiscal years ended December 31,2009 and 2008, respectively.

 

*LegalMatters*

 

The Company is a party tocertain claims, legal actions, and complaints, including a patent infringementaction between the Company and one of its main competitors and the sales taxdispute described below.

 

*Shuffle Master Litigation*

 

OnOctober 5, 2004, Shuffle Master filed a patent infringement action in theUnited States District Court, District of Nevada (Case No. CV-S-04-1373-JCM-LRL)claiming that the use, importation and offering for sale of the PokerOneshuffler infringed Shuffle Master’s United States Patent, No. 6,655,684.The Company responded by denying Shuffle Master’s claim of patentinfringement.  On February 1, 2008,the District Court granted the Company’s motion for summary judgment on allpatent infringement claims.  On February 15, 2008, the Companydelivered a demand to Shuffle Master for $3.0 million in damages for thewrongful injunction it obtained in 2004. The Company also filed a motion in District Court to recover itsattorneys’ fees in the litigation.  While Shuffle Master initially filedan appeal, this was subsequently withdrawn .

 

Whileoriginally the case would have gone back to the District Court to resolveclaims for damages and attorneys’ fees, on March 16, 2009, the Companyentered into a Purchase and Settlement Agreement with Shuffle Master (the “Purchaseand Settlement Agreement”), pursuant to which the Company sold to ShuffleMaster the portfolio of automated card verification machines and electroniccard shuffling systems, all related intellectual property, including but notlimited to, the trademarks of Random PlusTM, ShuffleProTM and Deck CheckerTM, andcertain inventory of such products.  Inaddition, Shuffle Master and the Company settled all outstanding patentinfringement litigation with respect to U.S. Patent No. 6,655,684 dealingwith automated shuffler technology.  Thetotal consideration paid by Shuffle Master to the Company under the Purchaseand Settlement Agreement was a base amount of $2.4 million plus $400,000 forrelated inventory, or $2.8 million in total.

 

*PurtonLitigation*

 

On October 5, 2007,William Purton filed an action against the Company in the Supreme Court ofVictoria at Melbourne, Australia claiming he was owed monies under the July 2006share sale agreement by which the Company acquired Dolphin.  In addition, Mr. Purtonclaimed he was owed money for an independent contractor agreement that heclaims he was offered.  The Company subsequently filed acounterclaim.  After considering external legal counsel’s advice onan amicable settlement of this litigation, on June 17, 2009, the Companyentered into a deed of release with William Purton and the other plaintiffsover which he had control (collectively, the “Purton Parties”), for thesettlement of all legal claims, disputes and proceedings between the parties.Pursuant to the terms of the release, on a without admission basis, the Companypaid to the Purton Parties a lump sum of $550,000. The remaining reserve forthe Purton litigation of $655,506 was reversed from accrued expenses andreported as other income in the consolidated statements of operations. With thenotification of discontinuance of litigation filed with the Supreme Court ofVictoria at Melbourne, Australia on June 24, 2009, this litigation matterhas been settled.

 

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*Incometaxes*

 

As of December 31,2009, the Company recognized US$334,225 of liabilities of unrecognized taxbenefits and, in addition, US$106,604 of related interest and penalties. Thefinal outcome of these tax uncertainties is dependent upon various mattersincluding tax examinations, legal proceedings, certain authority proceedings,changes in regulatory tax laws and interpretations of those tax laws, orexpiration of status of limitation. However, due to the uncertaintiesassociated with litigation, and the status of examinations, including theprotocol of finalizing audits by the relevant tax authorities, which couldinclude formal legal proceedings, there is a high degree of uncertaintyregarding the future cash outflows associated with these tax uncertainties.

 

*Sales TaxAudit*

 

In February 2004, theState of Nevada initiated a sales/use tax audit of the Company’s equipmentlessors. As of the date of this filing, the State of Nevada has not made adetermination if there has been a double tax payment of the sales/use tax.Based on ongoing correspondence with the Nevada Department of Tax, the Companybelieves certain payments made to State of Nevada and other states may not berecoverable and, therefore, the Company provided an additional allowance forthe receivable balance. As of December 31, 2009, the Company had a taxrefund receivable balance of $83,324, net of an allowance of $350,189. TheCompany will continue to assess the collectability of this receivable balanceand make appropriate adjustments when necessary.

 

*Risk and Uncertainties*

 

Please see Part I, Item 1A,Risk factors for description on risk and uncertainties.

 

**20.      Loss Per Share**

 

Thefollowing table provides a reconciliation of basic and diluted loss per sharefor the fiscal years ended December 31, 2009 and 2008:

 
| ** **                                                  | ** ** | **December 31,** | ** **  |
|-------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                  | ** ** | **2009**              | ** **  | **2008** | ** ** |
| Net loss from continuing operations                         |       | (27,899,701           | )           | (25,595,068 | ) |
| Net profit/(loss) from discontinued operations, net  of tax |       | 1,540,251             |        | (1,360,128 | ) |
| Net loss                                                    |       | $                     | (26,359,450 | ) | $ | (26,955,196 | ) |
|                                                        |       |                  |        |   |   |
| Weighted average  common shares outstanding                 |       | 114,956,667           |        | 114,948,384 |   |
|                                                        |       |                  |        |   |   |
| Loss per share:                                             |       |                  |        |   |   |
| Loss from  continuing operations                            |       | (0.24                 | )           | (0.22 | ) |
| Income/(loss)  from discounted operations                   |       | 0.01                  |        | (0.01 | ) |
| Basic and  diluted loss per share                           |       | (0.23                 | )           | (0.23 | ) |
|                                                             |            |                       |             |  |  |  |  |

 

Dilutive stock options andwarrants of 4,026,667 and nil for the fiscal years ended December 31, 2009and 2008, respectively, have not been included in the computation of dilutedloss per share as their effect would be anti-dilutive.

 

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**21.      ComprehensiveIncome/(Loss)**

 

The following table reflectsthe accumulated balances in respect of other comprehensive income/(loss):

 
| ** **                        | ** ** | **Unrealized  Actuarial  Income/(Loss)** | ** ** | **Foreign  Currency  Translation** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss)** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|------------------------------------|------------|------------------------------------------------------|------------|
| Balances,  January 1, 2008   |       | $                                        | **—** |                               | $          | 406,358                                              |       | $ | 406,358 |   |
| Other comprehensive  loss         |       | (8,995                                   | )          | (2,505,205                         | )          | (2,514,200                                           | )          |
| Balances,  December 31, 2008 |       | (8,995                                   | )          | (2,098,847                         | )          | (2,107,842                                           | )          |
| Other comprehensive  income       |       | 17,132                                   |       | 1,445,586                          |       | 1,462,718                                            |       |
| Balances,  December 31, 2009 |       | $                                        | 8,137      |                               | $          | (653,261                                             | )          | $ | (645,124 | ) |

 

**Item 9.****                                                          ****Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

 

Not applicable.

 

**Item 9A(T).****                                 ****Controlsand Procedures**

 

(a)  *Evaluation of Disclosure Controls and Procedures*.

 

Our management, with theparticipation of our chief executive officer and chief accounting officerevaluated the effectiveness of our disclosure controls and procedures pursuantto Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”).  Based upon that evaluation andfor the reasons stated in section (c) below, our management, including ourchief executive officer and chief accounting officer concluded that ourdisclosure controls and procedures were effective as of December 31, 2009in ensuring all material information required to be filed has been made knownin a timely manner.

 

(b)  *Changes in internal control over financial reporting.*

 

As previously reported inour 2008 Form 10-K, management identified four material weaknesses (i) trackingand accounting of electronic gaming machines (EGMs), (ii) foreign currencytransaction and translation, (iii) calculation and recording of stock-basedcompensation, and (iv) valuation of inventory, receivables and intangibleassets, in our internal controls over financial reporting as of December 31,2008. During the fourth quarter of 2009, the Company completed implementationof the following additional control procedures to rectify the materialweaknesses as identified at December 31, 2008.

 

·                          Managementconducted periodic physical counts of EGMs with no material discrepanciesnoted.

 

·                          Managementperformed a thorough review of the re-measurement of foreign currency balancesduring each reporting period.

 

·                          Managementperformed a thorough review of the calculation and recording of stock-basedcompensation during each reporting period.

 

·                          Managementperformed thorough reviews of and more robust analyses on certain criticalestimates and account balances during each reporting period.

 

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Except as indicated above,there were no changes in our internal controls over financial reporting thatoccurred during the fourth quarter of 2009 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

(c)  *Management’s report on internal controls overfinancial reporting.*

 

Our management isresponsible for establishing and maintaining adequate internal controls overfinancial reporting, as defined under Rule 13a-15(f) under theSecurities Exchange Act of 1934. Management has assessed the effectiveness of our internal controls overfinancial reporting as of December 31, 2009 based on the frameworkestablished in Internal Control — Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (“COSO”). During thefourth quarter of 2009, management completed testing to assess theeffectiveness of its internal controls over financial reporting and relatedremediation. Based on that evaluation, management concluded thatour internal control over financial reporting was effective as of December 31,2009.

 

This annual report does notinclude an attestation report of our registered public accounting firmregarding internal control over financial reporting.  Management’s reportwas not subject to attestation by our registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit us to provide only managements report in this annual report.

 

**Item 9B.                 Other Information**

 

Notapplicable.

 

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**PART III**

 

**Item 10.                 Directors,Executive Officers and Corporate Governance**

 

The names of our executive officers and directors andtheir ages, titles and biographies as of March 15, 2010 are set forthbelow:

 
| **Name**                     | ** ** | **Age** | ** ** | **Position**                                                               |
|------------------------------|------------|---------|------------|----------------------------------------------------------------------------|
| Clarence (Yuk Man) Chung     |       | 47      |       | Chairman of the Board of Directors, President and  Chief Executive Officer |
| Andy (Kin Ming) Tsui         |       | 40      |       | Chief Accounting Officer                                                   |
| Vincent L. DiVito            |       | 50      |       | Director                                                                   |
| John W. Crawford, J.P.       |       | 67      |       | Director                                                                   |
| Samuel (Yuen Wai) Tsang      |       | 55      |       | Director                                                                   |
| Anthony (Kanhee) Tyen, Ph.D. |       | 53      |       | Director                                                                   |

 

Our executive officers areappointed by, and serve at the discretion of, our board of directors. Eachexecutive officer is a full time employee although our chief executive officer,Mr. Clarence Chung, also serves as an executive director of MelcoInternational Development Limited, the parent corporation of our principalshareholder, Elixir Group Limited. There is no family relationship between anyof our executive officers or directors.

 

**Clarence(Yuk Man) Chung:**  Mr. Chungjoined our board in October 2007 and has served as our chairman of theboard since August 2008 and was appointed chief executive officer in October 2008.Mr. Chung is also a director of Melco International Development Limitedand joined Melco in December 2003. Mr. Chung has many years offinancial experience working in the financial industry in various capacities asa chief financial officer, an investment banker and a merger and acquisitionspecialist. He is also currently a director of Melco Crown EntertainmentLimited, a company listed on the Nasdaq Global Market. Mr. Chung was namedone of the “Asian Gaming 50 - 2009” by Inside Asian Gaming magazine. He holds amaster degree in business administration from the Kellogg School of Managementat Northwestern University and is a member of the Hong Kong Institute ofCertified Public Accountants and the Institute of Chartered Accountants inEngland and Wales.

 

**Andy (KinMing) Tsui:**  Mr. Tsuihas served as chief accounting officer since April 2009 and as vicepresident of finance since July 2008. Prior to joining our company, Mr. Tsuihad been the regional finance controller-Asia for Minteq International Inc., awholly-owned subsidiary of Minerals Technologies Inc. (NYSE: MTX) based inShanghai since June 2005.  From March 2003to May 2005, he served as manager of financial analysis at the corporateoffice of Minteq International Inc. in New York. Mr. Tsui holds a Masterof Business Administration degree from Baruch College, City University of NewYork and is a certified public accountant in the United States.

 

**Vincent L.DiVito:**  Mr. DiVito joined ourboard in October 2005 and chairs our Audit Committee. Mr. DiVito hasserved as chief financial officer and treasurer of Lonza America, Inc., aglobal life sciences chemical business headquartered in Allendale, New Jersey,since September 2000 and as president of Lonza America, Inc. since January 2008.  Lonza America, Inc. is part of LonzaGroup, whose stock is traded on the Swiss Stock Exchange. From 1990 to September 2000,Mr. DiVito was employed by Algroup Wheaton, a global pharmaceutical andcosmetics packaging company, first as its director of business development andlater as its vice president and chief financial officer. Mr. DiVito is acertified public accountant and certified management accountant. Mr. DiVitois a member of the board of directors of Riviera Holdings Corporation, apublicly held company.

 

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**John W.Crawford, J.P.:**  Mr. Crawfordjoined our board in November 2007 and chairs our Nominating Committee andConflicts Committee.  Mr. Crawfordhas been the chairman of International Quality Education Limited since February 2002.Since 1997, Mr. Crawford has been the managing director of CrawfordConsultants Limited, a company he founded which helps companies in theidentification of acquisition opportunities and provides corporate supportassistance. Prior to that, Mr. Crawford was a founding partner of the HongKong office of Ernst & Young, set up in 1973, where he acted as chairmanof the audit practice and engagement or review partner for many publiccompanies and banks before he retired in 1997. Mr. Crawford is a member ofthe Hong Kong Institute of Certified Public Accountants, a member and honorarypresident of the Macau Society of Certified Practising Accountants, and amember of the Canadian Institute of Chartered Accountants. Mr. Crawfordalso serves on the boards of directors and is chairman of the audit committeesof e-Kong Group Limited and Titan Petrochemicals Group Limited, both of whichare listed on the Hong Kong Stock Exchange. He is also on the board ofdirectors and chairman of the audit committee of Regal Portfolio ManagementLimited, which manages the Regal Real Estate Investment Trust, the units ofwhich are listed on the Hong Kong Stock Exchange.

 

**Samuel(Yuen Wai) Tsang:**  Mr. Tsangjoined our board in September 2008. Mr. Tsang is a solicitor admittedin Hong Kong, England and Australia. As group legal counsel and companysecretary of Melco since 2001, Mr. Tsang oversees the legal, corporate andcompliance matters of Melco, which holds significant interests in a total offour listed companies in Hong Kong, the United States and Canada. Mr. Tsanghas worked as a lawyer with major law firms and listed conglomerates in HongKong for over 20 years. He holds a master of laws degree from University ofHong Kong and a master of business administration degree from the AustralianGraduate School of Management. He is a director of Melco China Resorts(Holding) Limited, a company listed on the TSX Venture Exchange of Canada.

 

**Anthony(Kanhee) Tyen, Ph.D.:** Dr. Tyen joined our board in September 2008and chairs our Compensation Committee. During the past five years, Dr. Tyenhas his own accountancy and consulting practice, Anthony Tyen & Co.,which he founded in 1985. Dr. Tyen is a certified public accountant inHong Kong and has over 30 years’ experience in auditing, accounting, managementand company secretarial practice. He holds a doctoral degree in philosophy anda master degree in business administration, both from the Chinese University ofHong Kong. He is an associate member of the Hong Kong Institute of CertifiedPublic Accountants, and a fellow member of both the Association of CharteredCertified Accountants and the Institute of Chartered Secretaries andAdministrators.

 

***Additional Information About our Board and its Committees***

 

We continue to monitor the rules andregulations of the SEC and the NYSE Amex to ensure that a majority of our boardremains composed of “independent” directors. All of our director nomineesexcept Clarence Chung and Samuel Tsang are considered by our board of directorsto be “independent” as defined in Section 803A(2) of the NYSE AmexCompany Guide.

 

Our board met six times in2009. During the fiscal year ended December 31, 2009, all of our directorsattended at least 75% of all meetings during the periods for which they servedon our board, and at least 75% of all of the meetings held by committees of theboard on which they serve. The board of directors has formed an auditcommittee, a nominating committee, a conflicts committee, and a compensationcommittee, all of which operate under written charters.  Our board ofdirectors does not have a policy regarding board member attendance at meetingsof our stockholders.

 

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***Audit Committee***

 

During the fiscal year endedDecember 31, 2009, our audit committee was initially comprised of Mr. VincentDiVito, Maj. Gen. Paul Harvey, Mr. John Crawford and Mr. Daniel Sham.The respective terms of Maj. Gen. Paul Harvey and Mr. Daniel Sham expiredat the time of the 2009 Annual Meeting held in October 2009. After the 2009Annual Meeting, Mr. Vincent DiVito, Mr. John Crawford and Dr.AnthonyTyen were appointed to serve on the audit committee. Mr. DiVito currentlyserves as the audit committee chair.

 

Our audit committeegenerally meets at least once a quarter, and in 2009 our audit committee heldfour meetings. Our audit committee has the responsibility of selecting the firmthat will serve as our independent public accountants, approving and reviewingthe scope and results of the audit and any non-audit services provided by theindependent public accountants and meeting with our financial staff to reviewinternal controls, procedures and policies.

 

We have identified Mr. DiVitoas the audit committee financial expert. Mr. DiVito is the president andchief financial officer of Lonza America, Inc., a global life scienceschemical company, and he is also a certified public accountant and a certifiedmanagement accountant. All members of our audit committee are independent, asindependence for audit committee members is defined in Section 803A(2) ofthe NYSE Amex Company Guide. In addition, Mr. Crawford and Dr. AnthonyTyen each meet the definition of “financially sophisticated” as defined in Section 803B(2) ofthe NYSE Amex Company Guide.

 

***Nominating Committee***

 

During the fiscal year endedDecember 31, 2009, our nominating committee was initially comprised of Ms. LornaKapunan, Maj. Gen. Paul Harvey and Mr. Vincent DiVito and Ms. LornaKapunan was the chairperson. The respective terms of Ms. Lorna Kapunan andMaj. Gen. Paul Harvey expired at the time of the 2009 Annual Meeting, held in October 2009.After the 2009 Annual Meeting, Mr. Vincent DiVito, Mr. John Crawfordand Dr. Anthony Tyen were appointed to serve on the nominatingcommittee.  Our nominating committee heldfour meetings in 2009.  Mr. JohnCrawford currently serves as the nominating committee chair.

 

The nominating committee isresponsible for assisting our board with respect to the appropriate size andcomposition of our board and monitoring and making recommendations regardingthe performance of our board. In this regard, our nominating committeeevaluates the qualifications of all proposed candidates for election to ourboard, including capabilities, availability to serve, conflicts of interest andother relevant factors, and makes recommendations to our board concerning thesize and composition of our board of directors.

 

The members of ournominating committee are considered by our board of directors to be “independent”as defined in Section 803A(2) of the NYSE Amex Company Guide.

 

The charter of ournominating committee allows the nominating committee to consider fordirectorship candidates nominated by third parties, including stockholders. Fora third party to suggest a candidate, one must provide our legal departmentwith the name of the candidate, together with a brief biographical sketch and adocument indicating the candidate’s willingness to serve if elected.

 

***Compensation Committee***

 

During the fiscal year endedDecember 31, 2009, our compensation committee was initially comprised ofMaj. Gen. Paul Harvey, Mr. Vincent DiVito, Ms. Lorna Kapunan and Dr. AnthonyTyen and Maj. Gen. Paul Harvey was the chairperson. The respective terms of Ms. LornaKapunan and Maj. Gen. Paul Harvey expired at the time of the 2009 AnnualMeeting held in October 2009. After the 2009 Annual Meeting, Mr. VincentDiVito, Mr. John Crawford and Dr. Anthony Tyen were appointed toserve on the compensation committee. Dr. Anthony Tyen currently serves asthe compensation committee chair.

 

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Our compensation committeeheld seven meetings in 2009. Our compensation committee has the responsibilityof setting executive compensation guidelines, administering our stock incentiveplans, and approving compensation of our executive officers and members ofthe board of directors.  In determining the compensation to be paid to ourexecutive officers, our compensation committee took into consideration therecommendations of Pure Compensation LLC, an independent compensationconsulting firm retained directly by the compensation committee.

 

***Director Compensation***

 

*Non-EmployeeDirector Compensation*.  Non-employee members of ourboard of directors received an initial grant of 100,000 options and, effectiveas of January 2009, an annual grant of 50,000 options. The exercise priceof such options is the market price of our common stock on the date of grant.Our directors are reimbursed for their out-of-pocket expenses related to theirservices as directors or meeting attendances. Commencing January 2009,members of our board of directors that are not employees receive a quarterlyfee of $12,000. The chairman of our audit committee receives an additional$6,000 per quarter.

 

As determined by ourcompensation committee in December  2009,effective January 1, 2010, the annual grant of options to our directors shallbe made on the second trading day of every calendar year with the use of themean between the high and low sales prices of the shares of our common stock asreported of the NYSE Amex on the first trading day of that year as the relevantoption strike price save and except if our Company has any material non-publicinformation pending disclosure at the relevant time, then the annual grantshall be postponed to the second trading day after the date of publicdisclosure of the relevant information.

 

Since both Mr. ClarenceChung and Mr. Samuel Tsang also serve as employees of Melco InternationalDevelopment Limited and, in accordance with Melco’s policy, they haveunconditionally waived all their entitlements to the aforesaid quarterly fees.

 

*EmployeeDirector Compensation. *Directors who are employeesof the Company receive no compensation for services provided in that capacity,but are reimbursed for out-of-pocket expenses in connection with attendance atmeetings of our board and its committees.

 

***Committee Interlocks and Insider Participation***

 

No member of our board ofdirectors is employed by us or our subsidiaries except for Mr. ClarenceChung, who is presently employed as our president and chief executiveofficer.  None of our executive officers serve on the board of directorsof another entity, whose executive officers serves on the compensationcommittee of our board of directors.  No officer or employee of theCompany participated in deliberations of our compensation committee concerningexecutive officer compensation.

 

***Code of Ethics***

 

We have adopted a code ofethics for our chief executive officer, principal financial officer andprincipal accounting officer or controller, and/or persons performing similarfunctions, which is available on our website, under the link entitled “Code ofEthics”.

 

Information concerning ourexecutive officers is set forth In “Item 1, Business” above in this annualreport.

 

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**Item 11.                 ExecutiveCompensation**

 

***Summary Compensation Table***

 

The following table setsforth the compensation awarded to, earned by or paid to, our chief executiveofficer during the fiscal year ended December 31, 2009 and our other twothen highest paid executive officers earning in excess of $100,000 for servicesrendered in all capacities at the end of the fiscal year ended December 31,2009.  Mr. Chung has served as our chief executive officer since October 1,2008.  Mr. Pisano served as our executive vice president from September 2007to March 31, 2009.  Mr. Tsuihas served as our chief accounting officer since April 2009.

 
| **Name and  Principal  Position(a)** | ** ** | **Year  (b)** | ** ** | **Salary  (c)** | ** ** | **Bonus  (d)** | ** ** | **Option  Awards  (e)** | ** ** | **All Other  Compensation  (f)** | ** ** | **Total  (g)** | ** ** |
|--------------------------------------|------------|---------------|------------|-----------------|------------|----------------|------------|-------------------------|------------|----------------------------------|------------|----------------|------------|
| Clarence Chung, CEO                  |       | 2009          |       | $               | 1          |           | $          | —                  | (1)        | $                                | 287,871    |           | $          | — |   | $ | 287,872 |   |
|                                 |       | 2008          |       | $               | —     |           | $          | —                  |       | $                                | 254,901    |           | $          | — |   | $ | 254,901 |   |
| Joe Pisano, Executive  VP (former)   |       | 2009          |       | $               | 72,795     |           | $          | —                  |       | $                                | 5,980      |           | $          | 330,194 |   | $ | 408,969 |   |
|                                 |       | 2008          |       | $               | 295,000    |           | $          | —                  |       | $                                | 970,442    |           | $          | 119,750 |   | $ | 1,385,192 |   |
| Andy Tsui, CAO                       |       | 2009          |       | $               | 179,613    |           | $          | —                  |       | $                                | 5,680      |           | $          | — |   | $ | 185,293 |   |
|                                 |       | 2008          |       | $               | 90,731     |           | $          | —                  |       | $                                | 3,893      |           | $          | — |   | $ | 94,624 |   |

 

The dollar amounts in column(e) reflect the dollar amounts recognized for financial statementreporting purposes for the fiscal years ended December 31, 2009 and 2008,in accordance with ASC 718, *Compensation-StockCompensation*, and therefore, do not necessarily reflect actualbenefits received by the individuals.  Assumptions used in the calculationof these amounts are included in footnote (1) to our audited financialstatements for the fiscal year ended December 31, 2009.

 

----

(1)   On March 12, 2010, based onthe resolutions of our compensation committee passed on March 1, 2010, ourCompany granted 450,000 shares of performance common stock, pursuant to our2008 Stock Incentive Plan, to Mr. Chung as a discretionary reward for hisachievement of certain financial and non-financial performance targets for thefiscal year ended December 31, 2009. All 450,000 shares of performance commonstock were immediately vested on the date of grant and the related stock-basedcompensation was recognized on the same date. 

 

***Narrative Disclosure to Summary Compensation Table***

 

***Mr. Clarence Chung***

 

The options awarded to Mr. Chung,our chief executive officer, during 2009 include 50,000 options to purchaseshares of our common stock as set forth in the table, “Outstanding EquityAwards at Fiscal Year-End,” below.  In March 2009, the compensationcommittee of our board of directors approved the following compensation for Mr. Chung,the terms of which were included in a written employment agreement entered intobetween us and Mr. Chung on April 20, 2009:

 

·                          a term commencing from October 1,2008 to December 31, 2009 and may be renewed thereafter subject to furtheragreement between the parties;

 

·                          an annual salary of $1; and

 

·                          a discretionary performancebonus of such amount and form (whether in cash or in kind) to be determined byour compensation committee payable upon achievement of certain objectives setby our compensation committee and at such time as may be deemed appropriate byour compensation committee.

 

On November 10, 2009, Mr. Chungrenewed his employment contract for the position of chief executive officer forthe following terms:

 

·                          a term of three yearscommencing from January 1, 2010 to December 31, 2012 and may berenewed thereafter subject to further agreement between the parties;

 

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| · | an annual salary of $1.00;  and                                                                                                                                                                                                                                                                                        |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                   |
| · | a discretionary  performance bonus of such amount and form (whether in cash or in kind) to be  determined by the Company’s compensation committee payable upon achievement of  certain objectives set by the compensation committee and at such time as may  be deemed appropriate by the compensation committee. |

 

On January 22, 2010,the compensation committee of the board of directors resolved to grant to Mr. Chung,on that day, as part of his compensation package under the November 10,2009 employment agreement: (a) options to purchase 500,000 shares of our$.001 par value common stock at an exercise price of $0.275 per share providedthat all these options will only be vested and become exercisable on January 1,2011; and (b) 472,727 shares of restricted common stock, pursuant to our2008 Stock Incentive Plan. All 472,727 restricted common shares are subject tovesting and risk of forfeiture based on our ability to meet certain financialand non-financial performance targets as of and for the fiscal year ending December 31,2010. The determination of the vesting or forfeiture of the shares shall bymade by the compensation committee of our board of directors on or before April 30,2011.

 

On March 12, 2010,based on the resolutions of our compensation committee passed on March 1,2010, our Company granted 450,000 shares of performance common stock, pursuantto our 2008 Stock Incentive Plan, to Mr. Chung as a discretionary rewardfor his achievement of certain financial and non-financial performance targetsfor the fiscal year ended December 31, 2009. All 450,000 shares ofperformance common stock were immediately vested on the date of grant.

 

Mr. Chung also servesas an executive director of Melco International Development Limited, the parentcorporation of our principal shareholder, Elixir Group Limited, and receives asalary from Melco for his services rendered to Melco.

 

***Mr. Joe Pisano***

 

The options awarded to Mr. Pisano,our former executive vice president, during 2009 included options to purchase50,000 shares of our common stock as set forth in the table, “OutstandingEquity Awards at Fiscal Year-End,” below.  In January 2008, thecompensation committee of our board of directors approved the followingcompensation for Mr. Pisano, the terms of which were included in a writtenemployment agreement entered into with Mr. Pisano:

 
| · | an annual salary of  $300,000;                                                                                                                                                                                         |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                   |
| · | an annual cash bonus of up  to $87,500 payable upon the achievement of certain objectives set by our  compensation committee;                                                                                          |
|   |                                                                                                                                                                                                                   |
| · | a housing allowance of  $5,000 per month for so long as Mr. Pisano maintained a home in the  Philippines and an education allowance of $2,500 per child for up to two  children until the child reaches grade 12; |
|   |                                                                                                                                                                                                                   |
| · | options to purchase up to  336,135 shares at an exercise price of $4.59 which were to vest in three  equal annual installments commencing on November 14, 2008; and                                               |
|   |                                                                                                                                                                                                                   |
| · | options  to purchase up to one million shares of common stock at exercise prices  ranging from $3.50 to $7.50 per share and vesting in three equal annual  installments commencing on February 12, 2009.          |

 

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Mr. Pisano resigned asour executive vice president on March 31, 2009.  Pursuant to aseverance agreement dated March 31, 2009, Mr. Pisano agreed that allrights and compensation under his employment agreement with us, other thanobligations of confidentiality and the like, would expire. According to theterms of the employment agreement, we were contractually obliged to pay Mr. Pisanoa payment in lieu of notice of $300,000. Also, we agreed to waive the vestingrequirements and an extension of the termination date to January 1, 2011with respect to 100,000 options granted to Mr. Pisano on December 12,2008 and 50,000 options granted to Mr. Pisano on February 12, 2009(with all other options previously granted to Mr. Pisano to expire on June 1,2009).

 

*Outstanding Equity Awards at FiscalYear-End 2009*

 
| **Option Awards** | ** ** |
|------------------------|------------|
| **Name (a)**      | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable  (b)** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable  (c)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options (#)  (d)** | ** ** | **Option  Exercise  Price  (e)** | ** ** | **Option  Expiration  Date  (mm/dd/yy)  (f)** | ** ** |
|                   |       |   |   |   |   |   |   |   |   |   |   |
| **Clarence  Chung**    |       | 133,332 | (1) | 66,668 | (1) | — |   | $ | 2.90 |   | 05/17/2012 |   |
| ** **             |       | 30,000 | (2) | — |   | — |   | $ | 3.62 |   | 01/22/2018 |   |
| ** **             |       | 100,000 | (3) | — |   | — |   | $ | 4.59 |   | 11/14/2017 |   |
| ** **             |       | 2,000,000 | (4) | — |   | — |   | $ | 0.17 |   | 12/29/2013 |   |
| ** **             |       | 50,000 | (5) | — |   | — |   | $ | 0.13 |   | 02/12/2019 |   |
| ** **             |       |   |   |   |   |   |   |   |   |   |   |
| **Joe  Pisano**        |       | 100,000 | (6) | — |   | — |   | $ | 0.08 |   | 01/01/2011 |   |
| ** **             |       | 50,000 | (7) | — |   | — |   | $ | 0.13 |   | 01/01/2011 |   |
| ** **             |       |   |   |   |   |   |   |   |   |   |   |
| **Andy  Tsui**         |       | 66,666 | (8) | 133,334 | (8) | — |   | $ | 0.08 |   | 12/11/2018 |   |

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| (1)    |   | We  granted Mr. Chung 200,000 options as of September 10, 2007. Such  options vest and become exercisable as follows: 66,666 options vested on  May 17, 2008; 66,666 options vested on May 17, 2009; and the final  66,668 options will vest on May 17, 2010.                                                                                                                                                                                                                                                                                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)    |   | We  granted Mr. Chung 30,000 options as of January 22, 2008. Such  options vested and became exercisable on July 23, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (3)    |   | We  granted Mr. Chung 100,000 options as of February 12, 2008. Such  options vested and became exercisable on May 15, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)    |   | We granted  Mr. Chung 2,000,000 options as of December 29, 2008. Such options  vested and became exercisable on December 29, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (5)    |   | We  granted Mr. Chung 50,000 options as of February 12, 2009. Such  options vested and became exercisable on August 13, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (6)    |   | We  granted Mr. Pisano 100,000 options as of December 11, 2008. Such  options vest and become exercisable as follows: 33,333 options will vest on  December 11, 2009; 33,333 options will vest on December 11, 2010;  and 33,334 options will vest on December 11, 2011. Pursuant to the  severance agreement with Mr. Pisano entered into in March 2009, we  agreed to waive all vesting conditions and early termination provisions  relating to these options. All such options are exercisable until  December 31, 2010 and expire on January 1, 2011. |

 

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| (7)    |   | We  granted Mr. Pisano 50,000 options as of February 12, 2009. Pursuant to  the severance agreement with Mr. Pisano entered into in March 2009; we agreed  to waive all vesting conditions and early termination provisions relating to  these options.  All such options are  exercisable until December 31, 2010 and expire on January 1, 2011. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                        |
| (8)    |   | We  granted Mr. Tsui 200,000 options as of December 11, 2008.  Such options vest and become exercisable as  follows: 66,666 options vested on December 11, 2009; 66,667 options vest on  December 11, 2010; and the final 66,668 options will vest on December 11,  2011.                                                                         |

 

*2009 Director Compensation Table*

 
| **Name**              | ** ** | **Fees  Earned  (b)** | ** ** | **Stock  Awards  (c)** | ** ** | **Option  Awards  (d)** | ** ** | **Non-Equity  Incentive Plan  Compensation  (e)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings  (f)** | ** ** | **All Other  Compensation  (g)** | ** ** | **Total  (h)** | ** ** |
|-----------------------|------------|-----------------------|------------|------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------|------------|
| Vincent DiVito        |       | $                     | 72,000     |                   | $          | —                  |       | $                                                 | 5,980      |                                                                                   | $          | —                           |       | $              | —     |   | $ | — |   | $ | 77,980 |   |
| Paul Harvey           |       | $                     | 40,000     |                   | $          | —                  |       | $                                                 | 5,980      |                                                                                   | $          | —                           |       | $              | —     |   | $ | — |   | $ | 45,980 |   |
| Lorna  Patajo-Kapunan |       | $                     | 40,000     |                   | $          | —                  |       | $                                                 | 5,980      |                                                                                   | $          | —                           |       | $              | —     |   | $ | — |   | $ | 45,980 |   |
| John Crawford         |       | $                     | 48,000     |                   | $          | —                  |       | $                                                 | 5,980      |                                                                                   | $          | —                           |       | $              | —     |   | $ | — |   | $ | 53,980 |   |
| Daniel Sham           |       | $                     | 40,000     |                   | $          | —                  |       | $                                                 | 9,887      |                                                                                   | $          | —                           |       | $              | —     |   | $ | — |   | $ | 49,887 |   |
| Anthony Tyen          |       | $                     | 48,000     |                   | $          | —                  |       | $                                                 | 9,887      |                                                                                   | $          | —                           |       | $              | —     |   | $ | — |   | $ | 57,887 |   |
| Ted Chan              |       | $                     | 40,000     |                   | $          | —                  |       | $                                                 | 9,887      |                                                                                   | $          | —                           |       | $              | —     |   | $ | — |   | $ | 49,887 |   |
| Samuel Tsang          |       | $                     | —     |                   | $          | —                  |       | $                                                 | 25,145     |                                                                                   | $          | —                           |       | $              | —     |   | $ | — |   | $ | 25,145 |   |

 

The dollar amounts in column (d) reflect thevalues recognized for financial statement reporting purposes for the fiscalyear ended December 31, 2009, in accordance with ASC 718, *Compensation-Stock Compensation*, and, therefore, do notnecessarily reflect actual benefits received by the individuals. Assumptionsused in the calculation of these amounts are included in footnote (1) toour audited financial statements for the fiscal year ended December 31,2009.

 

Non-employee members of our board of directorsreceived an initial grant of 100,000 options and, effective as ofJanuary 1, 2009, an annual grant of 50,000 options. The exercise price ofsuch options is the market price of our common stock on the date of grant. Ourdirectors are reimbursed for their out-of-pocket expenses related to theirservices as directors or meeting attendances. Commencing January 1, 2009,members of our board of directors that are not employees receive a quarterlyfee of $12,000. The chairman of our audit committee receives an additional$6,000 per quarter.

 

Since both Mr. Clarence Chung and Mr. SamuelTsang also serve as employees of Melco International Development Limited and,in accordance with Melco’s policy, they have unconditionally waived all theirentitlements to the aforesaid quarterly fees.

 

*SECPosition on Certain Indemnification Arrangements*

 

Our articles of incorporation obligate us to indemnifyour directors and officers to the fullest extent permitted under Nevada law.Chapter 78 of the Nevada Revised Statutes provides for indemnification by acorporation of costs incurred by directors, employees, and agents in connectionwith an action, suit, or proceeding brought by reason of their position as adirector, employee, or agent. The person being indemnified must have acted ingood faith and in a manner he reasonably believed to be in or not opposed tothe best interests of the corporation.

 

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Insofar as indemnification for liabilities arisingunder the Securities Act may be permitted to our directors, officers or personscontrolling us pursuant to the provisions contained in our amended and restatedarticles of incorporation, our amended and restated bylaws, Nevada law orotherwise, we have been informed that, in the opinion of the SEC, suchindemnification is against public policy as expressed in the Securities Act andis therefore unenforceable. If a claim for indemnification against suchliabilities, other than the payment by us of expenses incurred or paid by oneof our directors, officers or controlling persons in the successful defense ofany action, suit, or proceeding, is asserted by such director, officer orcontrolling person, we will, unless in the opinion of our counsel the matterhas been settled by controlling precedent, submit to a court of appropriatejurisdiction the question of whether such indemnification by us is againstpublic policy as expressed in the Securities Act and will be governed by thefinal adjudication of this issue.

 

***IndemnificationAgreements***

 

We have entered into indemnification agreements withmembers of our board of directors and certain other employees in which weagreed to hold harmless and indemnify such directors, officers and employees tothe fullest extent authorized under Nevada law, and to pay any and all relatedexpenses reasonably incurred by the indemnitee. The relevant members of ourboard of directors are Mr. Clarence Chung, Mr. Vincent L. DiVito, Mr. JohnCrawford, Mr. Samuel Tsang, and Dr. Anthony Tyen.

 

***Section 16(A) BeneficialOwnership Reporting Compliance***

 

Rules adopted by theSEC under Section 16(a) of the Securities Exchange Act of 1934, orthe Exchange Act, require our officers and directors, and persons who own morethan 10% of the issued and outstanding shares of our equity securities, to filereports of their ownership, and changes in ownership, of such securities withthe SEC on Forms 3, 4 or 5, as appropriate. Such persons are required by theregulations of the SEC to furnish us with copies of all forms they filepursuant to Section 16(a).

 

Based solely upon a reviewof Forms 3, 4 and 5 and amendments thereto furnished to us during our mostrecent fiscal year, and any written representations provided to us, we believethat all of the officers, directors, and owners of more than ten percent of theoutstanding shares of our common stock complied with Section 16(a) ofthe Exchange Act for the fiscal year ended December 31, 2009.

 

Information relating tosecurities authorized for issuance under our equity compensation plans is setforth in “Item 5, Market for Registrant’s Common Stock, Related StockholderMatters and Issuer Purchases of Equity Securities” above in this annual report.

 

**Item 12.                 Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters**

 

The table below sets forth the beneficial ownership ofour common stock, as of March 15, 2010, by:

 

·                          All of our then current directors andexecutive officers, individually;

 

·                          All of our then current directors andexecutive officers, as a group; and

 

·                          All persons who beneficially owned morethan 5% of our outstanding common stock.

 

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The beneficial ownership of each person was calculatedbased on 114,956,667 shares of our common stock outstanding as of March 15,2010, according to the record ownership listings as of that date, the beneficialownership reports filed by 5% beneficial owners with the SEC and theverifications we solicited and received from each director and executiveofficer. The SEC has defined “beneficial ownership” to mean more than ownershipin the usual sense. For example, a person has beneficial ownership of a sharenot only if he owns it in the usual sense, but also if he has the power (solelyor shared) to vote, sell or otherwise dispose of the share. Beneficialownership also includes the number of shares that a person has the right toacquire within 60 days of March 15, 2010, pursuant to the exercise ofoptions or warrants or the conversion of notes, debentures or otherindebtedness, but excludes stock appreciation rights. Two or more persons mightcount as beneficial owners of the same share. Unless otherwise noted, theaddress of the following persons listed below is c/o Elixir Gaming Technologies, Inc.,Unit 3705, 37/F., The Centrium, 60 Wyndham Street, Central, Hong Kong.

 
| **Name of  Director, Executive Officer or Nominee**          | ** ** | **Shares(1)** | ** ** | **Percentage** | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| Clarence (Yuk Man)  Chung                                    |       | 3,020,041     | (2)        | 2.6            | %          |
|                                                         |       |          |       |           |       |
| Andy (Kin Ming) Tsui                                         |       | 66,666        | (2)        | *              |       |
|                                                         |       |          |       |           |       |
| Vincent L. DiVito                                            |       | 254,000       | (4)        | *              |       |
|                                                         |       |          |       |           |       |
| John W. Crawford                                             |       | 180,000       | (3)        | *              |       |
|                                                         |       |          |       |           |       |
| Anthony (Kanhee) Tyen                                        |       | 150,000       | (3)        | *              |       |
|                                                         |       |          |       |           |       |
| Samuel (Yuen Wai) Tsang                                      |       | 616,666       | (3)        | *              |       |
|                                                         |       |          |       |           |       |
| All directors and  executive officers as a group (6 persons) |       | 4,278,373     |       | 3.7            | %          |

 

----

* Less than one percent

 
| **Name and Address of 5% Holders**                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Elixir Group Limited  38/F, The Centrium  60 Wyndham Street  Central, Hong Kong |       | 55,800,000 | (5)        | 48.5       | %          |
|                                                                            |       |       |       |       |       |
| James E. Crabbe  Portland, Oregon                                               |       | 8,046,600  | (6)        | 7.0        | %          |

 

----

| (1)    | Unless otherwise noted, the persons identified in  this table have sole voting and sole investment power with regard to the  shares beneficially owned by them.                                                                                                                                            |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                       |
| (2)    | Includes 175,000 shares held directly, 450,000  performance shares, and 2,395,041 shares issuable upon the exercise of stock options.                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                       |
| (3)    | Represents common shares issuable upon the exercise  of stock options.                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                       |
| (4)    | Includes 50,000 shares held directly and 195,000  shares issuable upon the exercise of stock options.                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                       |
| (5)    | Includes 10 million shares underlying vested and immediately  exercisable warrants. The shares are owned directly by Elixir Group Limited,  which is the indirect wholly-owned subsidiary of Melco International  Development Limited. Melco is the indirect beneficial owner of the reported  securities. |
|   |                                                                                                                                                                                                                                                                                                       |
| (6)    | Includes 40,600 shares issuable upon the exercise of  stock options.                                                                                                                                                                                                                                       |

 

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***Equity CompensationPlan Information***

 

At our annual shareholders meeting on September 8,2008, our stockholders approved our newly adopted 2008 Stock Incentive Plan(the “2008 Plan”).  The 2008 Plan became effective on January 1,2009, and replaced two previous plans, the Amended and Restated 1999 StockOption Plan and the Amended and Restated 1999 Directors’ Stock Option Plan (the“Previous Stock Option Plans”), both of which expired on December 31,2008.

 

The 2008 Plan allows for incentive awards to eligiblerecipients consisting of:

 

·                          Options to purchase shares of commonstock, that qualify as incentive stock options within the meaning of theInternal Revenue Code;

 

·                          Non-statutory stock options that do notqualify as incentive options;

 

·                          Restricted stock awards; and

 

·                          Performance stock awards, which may besubject to future achievement of performance criteria or free of anyperformance or vesting conditions.

 

The maximum number of shares reserved for issuanceunder the 2008 Plan is 5,000,000.  The exercise price of options granted underthe 2008 Plan shall not be less than 100% of the fair market value of one shareof common stock on the date of grant, unless the participant owns more than 10%of the total combined voting power of all classes of our stock or any parent orsubsidiary corporation of ours, in which case the exercise price shall then be110% of the fair market value.

 

Although the Previous Stock Option Plans have expired,options granted under those plans and outstanding as of the expiration of theplans remain outstanding and exercisable according to their terms.  As of December 31,2009, there were options outstanding under Previous Stock Option Plans andnon-plan options to purchase 10,737,065 shares of our common stock with aweighted average exercise price per share of $1.84.  Part of theaforesaid outstanding options include the issuance of non-plan options topurchase five million shares of our common stock to certain employees andnon-employees of Elixir Group as approved by our stockholders in September 2007pursuant to the initial closing of the transactions under the SecuritiesPurchase and Product Participation Agreement dated June 12, 2007 betweenus and Elixir Group. Each of such non-plan options had an exercise price of$2.90 per share and will vest over a three-year period and have a five-yearterm (save and except for certain modifications made pursuant to the severanceagreements of certain of the relevant former officers or former employees).

 

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The following table sets forth certain information asof December 31, 2009 about our stock option plans and our non-plan optionsunder which our equity securities are authorized for issuance.

 
| **Plan  Category**                                          | ** ** | **(a)  Number of Securities  to be Issued Upon  Exercise of  Outstanding  Options** | ** ** | **(b)  Weighted-Average  Exercise Price of  Outstanding  Options** | ** ** | **(c)  Number of Securities  Remaining Available  for  Future Issuance  Under  Equity Compensation  Plans  (Excluding Securities  Reflected In Column  (a))** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by security holders     |       | 10,737,065                                                                          |       | $                                                                  | 1.84       |                                                                                                                                                          | 4,500,000  |   |
| Equity compensation  plans not approved by security holders |       | —                                                                              |       | —                                                             |       | —                                                                                                                                                        |       |
| Total                                                       |       | 10,737,065                                                                          |       | $                                                                  | 1.84       |                                                                                                                                                          | 4,500,000  |   |

 

The first column reflects outstanding stock options topurchase (i) 6,074,465 shares of common stock pursuant to our Amended andRestated 1999 Stock Option Plan, (ii) 92,600 shares of common stockpursuant to our Amended and Restated 1999 Directors’ Stock Option Plan, (iii) 4,070,000shares of common stock pursuant to the options approved by our stockholders in September 2007and (iv) 500,000 shares of common stock pursuant to our 2008 StockIncentive Plan.

 

The third column reflects 4,500,000 shares availablefor issuance under our 2008 Stock Incentive Plan as of December 31, 2009.

 

**Item 13.                 Certain Relationships and Related Transactions andDirector Independence**

 

***Transaction Review***

 

We have adopted a policy that any transactions withdirectors, officers or entities of which they are also officers or directors orin which they have a financial interest, will only be on terms consistent withindustry standards and approved by a majority of the disinterested directors ofour board. Our bylaws provide that no such transactions by us shall be eithervoid or voidable solely because of such relationship or interest of directorsor officers or solely because such directors are present at the meeting of ourboard or a committee thereof which approves such transactions, or solelybecause their votes are counted for such purpose if:

 

·                          The fact of such common directorship orfinancial interest is disclosed or known by our board or committee and noted inthe minutes, and our board or committee authorizes, approves or ratifies thecontract or transaction in good faith by a vote for that purpose withoutcounting the vote or votes of such interested directors; or

 

·                          The fact of such common directorship orfinancial interest is disclosed to or known by the stockholders entitled tovote, and they approve or ratify the contract or transaction in good faith by amajority vote or written consent of stockholders holding a majority of theshares of common stock entitled to vote (the votes of the interested directorsor officers shall be counted in any such vote of stockholders); or

 

·                          The contract or transaction is fair andreasonable to us at the time it is authorized or approved.

 

In addition, interested directors may be counted indetermining the presence of a quorum at a meeting of our board or a committeethereof that approves such transactions. If there are no disinteresteddirectors, we shall obtain a majority vote of the stockholders approving thetransaction.

 

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With regard to transactions between us and ourprincipal stockholder, Elixir Group, our board of directors has established acommittee of the board, known as the conflicts committee, made up exclusivelyof at least three members of our board who satisfy the independencerequirements of Section 803(A)(2) of the NYSE Amex Company Guide andmeet the criteria for independence as set forth in Rule 10A-3(b)(1) underthe Exchange Act, and who are not then, and during the two years prior to theirappointment or election have not been, an officer, director, employee of orconsultant or advisor to Elixir Group or any affiliate of Elixir Group. Theconflicts committee operates under a charter that has been approved by ourboard of directors. While the original conflicts committee charter empoweredthe conflicts committee to veto any agreement or transaction between us andElixir Group or any of its affiliates involving an aggregate amount in excessof $200,000, in November 2008, following the recommendation by all membersof the conflicts committee, the board approved a revision of the charterrequiring the conflicts committee to review and approve all material agreementsor transactions, if any, between us and Elixir Group or its affiliates. TheCompany has filed with the SEC a current report on Form 8-K regarding suchrevision on April 27, 2009 and the revised charter took effect on May 5,2009.

 

The conflicts committee charter shall not be amendedor modified unless (i) such amendment or modification has been approvedand recommended by a majority of the members of the conflicts committee and (ii) atleast five business days preceding the effective date of such amendment ormodification we have filed with the SEC a current report on Form 8-K thataccurately and fully discloses the proposed amendment or modification and thebasis for the conflicts committee’s recommendations.

 

***Elixir GroupTransactions***

 

**Product Participation Agreement andExchange Agreement**

 

In January 2007 and prior tothe change in control as described below, Elixir Group Limited subscribed onemillion of new shares of common stock and 16 million warrants of our company(collectively, the “Original Warrants”). 

 

On September 10,2007 we underwent a change in control and a resultant change in our businessmodel pursuant to the Securities Purchase and Product Participation Agreement (“ProductParticipation Agreement”) dated June 12, 2007 (as amended by an amendmentdated October 21, 2007 and subsequently terminated on November 6,2008), with our principal shareholder, Elixir Group Limited (“Elixir Group”), awholly-owned subsidiary of Melco International Development Limited.  From September 2007to November 6, 2008, Elixir Group, through its wholly-owned subsidiaryElixir International Limited, was our strategic partner in the electronicgaming machine participation business and in such capacity identified andsecured on our behalf venues for the placement of electronic gaming machinesand casino management systems, which track game performance and providestatistics on installed electronic gaming machines owned and leased byus.  We contracted with the venue owners for the placement of theelectronic gaming machines on a revenue sharing basis. Elixir Group assistedthe venue owners with the licensing and regulatory process, the physical designof the gaming floor and the installation of electronic gaming machines andsystems.  Elixir Group acquired and installed the gaming machines, casinomanagement systems and other gaming peripherals and upon completion of theset-up of the gaming floor, sold us the gaming machines and systems at its costplus fifteen percent (15%).  Pursuant tothe Product Participation Agreement, we agreed to issue to Elixir Group a controllingblock of our common shares and grant Elixir Group the right to nominate acertain numbers of directors to our board of directors.

 

In conjunction with our October 2007private placement of common shares, in October 2007 we entered into aSecurities Amendment and Exchange Agreement (the “Exchange Agreement”) withElixir Group, pursuant to which we agreed to issue to Elixir Group up to 31.2million shares of our common stock in exchange for Elixir Group’s cancellationof up to 78 million of the 88 million warrants it received under the ProductParticipation Agreement.  The initial closing under the Exchange Agreementoccurred on December 17, 2007, at which time we issued 4.8 million sharesof our common stock to Elixir Group in exchange for its cancellation of 12million warrants that had vested and were exercisable.

 

InDecember 2007, Elixir Group sold 10 million warrants that it received under theProduct Participation Agreement (but which are not subject to the ExchangeAgreement) together with 6 million Original Warrants to certain third partyinvestors. As of the date of this filing, Elixir Group still holds 10 millionOriginal Warrants, which however are going to expire on December 31, 2010. 

 

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On November 6, 2008, we entered into a letter ofagreement terminating the Product Participation Agreement (the “TerminationAgreement”). Pursuant to the Termination Agreement, Elixir Group and we agreedto terminate, with immediate effect, the Product Participation Agreement saveand except for certain provisions therein regarding board representation, whichincludes but is not limited to, the continued presence until September 10,2009 of at least two independent directors who served on the board since priorto the September 2007 close of the Product Participation Agreement. Withsuch termination, Elixir Group ceased to have rights to identify suitablegaming venues for us and exclusive rights to supply electronic gaming machinesand related equipment and systems for our participation business and, as aresult, Elixir Group is no longer entitled to earn an aggregate of 41.4 millionadditional shares of our common stock under the Product ParticipationAgreement. In addition, on November 6, 2008, Elixir Group agreed to cancelwarrants to purchase 66 million shares of our common stock, representing allthe remaining outstanding warrants issued to Elixir Group pursuant to theProduct Participation Agreement, which were subject to the Exchange Agreement.

 

In September 2007, our stockholders approved theissuance of options to purchase five million shares of our common stockpursuant to the initial closing of the transactions under the ProductParticipation Agreement to certain employees and non-employees. Each option hadan exercise price of $2.90 per share and will vest over a three-year period andhave a five-year term.

 

**Purchase and Sale of Gaming Machines**

 

During the fiscal year ended December 31, 2008,we purchased $32.6 million in value of electronic gaming machines, casinomanagement systems and other peripherals from Elixir International Limited, awholly-owned subsidiary of Elixir Group.

 

On November 6, 2008, and in connection with theTermination Agreement described above and the Facility Amendment Agreementdescribed below, we entered into a Machines Disposal Agreement (the “DisposalAgreement”) with Elixir International.

 

Pursuant to the Disposal Agreement, we agreed toreturn 715 electronic gaming machines to Elixir Group, which as considerationfor such sale and return, agreed to extinguish our existing current tradepayable of approximately $13.9 million to Elixir International.

 

After the return of $13.9 million in value ofelectronic gaming machines, we had a receivable balance of $0.5 million and anote payable of $12.1 million as of December 31, 2008.  In addition,at December 31, 2008, we had deposits on orders with Elixir Internationaltotaling $348,232 for gaming machines, which were subsequently delivered inearly 2009.

 

No purchases of electronic gaming machines were madefrom Elixir International during the fiscal year ended December 31, 2009.

 

**Elixir Trade Credit Facility andSubsequent Amendments**

 

On April 21, 2008, we entered into a Trade CreditFacility Agreement (the “Facility Agreement”) with Elixir International. Pursuant to the Facility Agreement, Elixir International provided trade creditsto us for our purchase of electronic gaming machines from Elixir Internationalin exchange for our issuance of unsecured notes to Elixir International bearinginterest at a fixed rate of eight percent (8.0%) per annum.  Title of anygaming machines offered in exchange for the notes passed to us upon issuance ofthe notes.

 

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Upon entering into the Facility Agreement, weimmediately issued the first note pursuant to the terms of the FacilityAgreement in the principal amount of $15 million (the “Initial Advance”), thereby extinguishing the payable of an equivalent amount to ElixirInternational in respect to gaming machines previously acquired.  We wereobligated to repay the principal, plus any accrued interest thereon, of theInitial Advance in 24 equal monthly installments.  The Initial Advance wassubject to demand by Elixir International for immediate payment only if therewas either an event of default or a change of control as defined in theFacility Agreement.

 

An “event of default” occurs pursuant to the FacilityAgreement if, among other things, we default in the payment when due of anyprincipal or interest on any note issued pursuant to the Facility Agreement; orwe become insolvent or generally fail to pay or admit in writing our inabilityto pay our debts as they become due; or we apply for, consent to, or acquiescein the appointment of a trustee, receiver or other custodian forourselves or any of our property, or make a general assignment for thebenefit of our creditors; or a trustee, receiver or other custodian willotherwise be appointed for us or any of our assets and not be discharged within30 days; or any bankruptcy, reorganization, debt arrangement, or other case orproceeding under any bankruptcy or insolvency law, or any dissolution orliquidation proceeding is commenced by or against us and be consented to oracquiesced in by us or remains undismissed for 30 days; or we take anycorporate action to authorize, or in furtherance of, any of the foregoing; orany judgments, writs, warrants of attachment, executions or similar processes(not undisputedly covered by insurance) in an aggregate amount in excess of$100,000 is issued or levied against us or any of our assets and will not bereleased, vacated or fully bonded prior to any sale and in any event within 30days after its issue or levy; or we become subject to pending or threatenedlitigation, arbitration or a governmental litigation or proceeding, notpreviously disclosed to Elixir International, and such action could have amaterial adverse affect on our operations or financial condition.

 

A “change of control” occurs pursuant to the FacilityAgreement if, among other things, after April 21, 2008: (i) anyperson or two or more persons acting in concert (other than ElixirInternational or its affiliates) acquire beneficial ownership (within themeaning of Rule 13d-3 under the Securities Exchange Act of 1934), directlyor indirectly, of securities of our company representing 50% or more (on afully-diluted basis) of the combined voting power of all our securities (otherthan securities owned by Elixir Group or its affiliates) entitled to vote inthe election of directors; or (ii) our sale of substantially all of ourassets; or (iii) any sale of our securities by Elixir Group or itsaffiliates or any issuance of new securities by us resulting in the combinedvoting power of all our securities (on a fully-diluted basis) owned by ElixirGroup or its affiliates falls below 30%.

 

On November 6, 2008, and in connection with theTermination Agreement and Disposal Agreement described above, we entered intoan Amendment of the Trade Credit Facility Agreement and Related Note withElixir International (the “Facility Amendment Agreement”). Pursuant to theFacility Amendment Agreement, Elixir International surrendered to us the $15 millionpromissory note representing the Initial Advance to us in exchange for theissuance of a new promissory note (the “New Note”) for $12.1 million, the thenoutstanding principal at the time of the exchange, with the following newrepayment terms: (a) the New Note and the interest accrued thereon shallbe repaid in 24 equal monthly installments reset from January 1, 2009; (b) interestshall be accrued on the outstanding principal at the rate of five percent(5.0%) (instead of 8.0%) per annum starting from January 1, 2009; and nomonthly repayments under the Initial Advance being required for the months ofOctober, November and December 2008. Save for the said new repaymentterms, all other terms under the Facility Agreement, including the “event ofdefault” and “change of control” provisions remain unchanged.

 

On January 1, 2009, we began paying monthlyinstallments of approximately $530,000 under the New Note and have paid orsettled six installments during the six-month period ended June 30,2009.  As at June 30, 2009, the unpaid principal balance under theNew Note was approximately $9.2 million (the “Outstanding Principal”). On July 24,2009, for the purpose of improving our financial flexibility to capitalize onpotential growth and investment opportunities, such as expansion of ourplacements and operation of electronic gaming machines on a participation basisin new venues, at our request, Elixir International entered into 

 

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Amendment No. 2 to the Trade Credit FacilityAgreement and Related Note with us (the “Second Facility Amendment Agreement”). Pursuant to the Second Facility Amendment Agreement, Elixir Internationalagreed to restructure the payment schedule of the Outstanding Principal. Underthe revised payment schedule, we are not required to make any repayments ofprincipal or interest under the Facility Agreement until July 1, 2010provided that interest at the rate of 5% continues to accrue on the OutstandingPrincipal balance. The repayment of the Outstanding Principal balance andinterest accrued thereon are to be repaid in 18 equal monthly installmentscommencing on July 1, 2010.

 

None of the Facility Agreement, the Facility AmendmentAgreement or the Second Facility Amendment Agreement includes a commitment onthe part of Elixir International for granting any further credit or otherfacilities to us. We do not expect to receive any further amounts of credit orother facilities under the Facility Agreement as amended by the FacilityAmendment Agreement and the Second Facility Amendment Agreement.

 

***Melco Transactions***

 

**Services Agreements**

 

On May 18, 2009, we entered into two servicesagreements with Melco Services Limited (“Melco Services”), a wholly-ownedsubsidiary of Melco International Development Limited, which is also the parentof our principal shareholder, Elixir Group Limited.

 

One of the services agreements involves theoutsourcing of our internal audit functions to Melco Services (the “IA ServicesAgreement”) and pursuant to the terms thereof, with effect from the date of theIA Services Agreement, the internal audit personnel of Melco Services becameresponsible for providing the following services to us:

 
| · | reporting to the our audit committee on internal  audit matters and SOX 404 compliance issues; and                                                                                                                                                                                                |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                              |
| · | conducting risk assessment and internal control  reviews of our business processes with the support of our internal audit  team. It is anticipated that such reviews will be conducted with reference to  our internal audit charter and annual audit schedules approved by our audit  committee. |

 

The consideration payable by us for the aforesaidinternal audit related services is HK$120,000 (equivalent to approximatelyUS$15,500) per quarter. Effective October 1, 2009, Melco Services and ourCompany mutually agreed to reduce, the quarterly fee payable under the IAservices agreement from HK$120,000 (equivalent to approximately $15,500) perquarter to HK$1 (equivalent to $0.13) per quarter. In October 2009, werecruited internal audit personnel as our employees to perform the internalaudit works for us under the guidance and assistance of the internal auditdirector of Melco Services.

 

The other services agreement relates to the provisionof information technology systems support and human resources related servicesby Melco Services (the “IT & HR Services Agreement”). Pursuant to theterms of the IT & HR Services Agreement, with effect from the datethereof, the information technology and human resources personnel of MelcoServices became responsible for providing the following services to us:

 
| · | handling our network infrastructure and server  systems;                                                                    |
|--------|-----------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                        |
| · | performing the network and systems management tasks  in accordance with our information technology policies and procedures; |
|   |                                                                                                                        |
| · | providing human resources services to those of our  staff who are located in the Hong Kong office;                          |

 

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| · | monitoring and advising on human resources policies  and practices in general;                                                                                                                                                           |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                     |
| · | upon the request of our chief executive officer,  monitoring and re-designing, if necessary, the salary packages and related  fringe benefits of our staff (subject to any necessary review or approval by  our compensation committee); |
|   |                                                                                                                                                                                                                                     |
| · | acting as a consultant in human resource areas when  requested by our compensation committee; and                                                                                                                                        |
|   |                                                                                                                                                                                                                                     |
| · | standardizing and re-organizing human resources  documentation flows and enhancing the inter-office communications between our  Hong Kong and overseas offices.                                                                          |

 

The consideration payable by us for the aforesaidinformation technology systems support and human resources related services isHK$112,500 (equivalent to approximately US$14,500) per quarter. EffectiveOctober 1, 2009, Melco Services and our Company mutually agreed to terminatethe IT & HR Agreement.

 

Save for the aforesaid differences, the two servicesagreements are for identical terms and both carry an initial term commencingfrom the date of the relevant agreement to March 31, 2010 (subject toautomatic renewal of additional annual periods unless otherwise terminated byeither party before the expiration of the relevant annual term). Also, eitherparty may terminate the relevant services agreement by thirty (30) days priorwritten notice if the other party is in breach or by at least ninety (90) daysprior written notice without cause. Meanwhile, both services agreements containthe customary confidentiality provisions, and each party and its personnelshall abide by such provisions during and after the performance of the relevantservices.

 

**Item 14.                 Principal Accountant Fees and Services**

 

The following table setsforth the aggregate fees billed to us for services rendered to us for thefiscal years ended December 31, 2009 and 2008 by our independentregistered public accounting firms for such years, as of the filing dates,Ernst & Young (Hong Kong) for the audit of our consolidated financialstatements for the fiscal years ended December 31, 2009 and 2008, andassistance with the reporting requirements thereof, the review of our condensedconsolidated financial statements included in our quarterly reports on Form 10-Q,and accounting and auditing assistance relative to acquisition accounting andreporting.

** **
| ** **         | ** ** | **2009** | ** **    | **2008** | ** ** |
|--------------------|------------|----------|---------------|----------|------------|
| Audit Fees         |       | $        |  362,603 |     | $          |  485,346 |   |
| Audit-Related Fees |       | —   |          | 41,234   |       |
| Tax Fees           |       | 26,000   |          | —   |       |
|               |       | $        |  388,603 |     | $          |  526,580 |   |

 

**Audit Committee Pre-Approval Policies**

 

Our audit committee approvesall audit fees, audit-related fees, tax fees and special engagement fees. The audit committee approved 100% of such fees for the fiscal year ended December 31,2009.

 

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**PART IV**

 

**Item 15.****        ****Exhibits and Financial Statement Schedules**

 

(a) Financial statements

 

Reference is made to the Index andFinancial Statements under Item 8 in Part II hereof where these documentsare listed.

 

(b) Financial statementschedules

 

Financial statement schedules areeither not required or the required information is included in the consolidatedfinancial statements or notes thereto filed under Item 8 in Part IIhereof.

 

(c) Exhibits

 

The exhibits to this Annual Reporton Form 10-K are set forth below. The exhibit index indicates eachmanagement contract or compensatory plan or arrangement required to be filed asan exhibit.

 

**Exhibit Index**

 
| **Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                        |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1        |       | Amended and Restated Articles of  Incorporation dated June 7, 2003. (Incorporated by reference from the  registrant’s current report on Form 8-K filed on June 18, 2003).                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                |
| 3.2        |       | Amended and Restated Bylaws of  the registrant dated November 13, 2002. (Incorporated by reference from  the registrant’s current report on Form 8-K filed on January 8,  2003).                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                |
| 3.3        |       | Certificate of Amendment to  Articles of Incorporation dated August 23, 2005. (Incorporated by  reference from the registrant’s annual report on Form 10-KSB filed on  April 13, 2007).                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                |
| 3.4        |       | Certificate of Amendment to  Articles of Incorporation dated January 9, 2007. (Incorporated by  reference from the registrant’s annual report on Form 10-KSB filed on  April 13, 2007).                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                |
| 3.5        |       | Certificate of Amendment to  Articles of Incorporation dated September 10, 2007. (Incorporated by  reference from the registrant’s quarterly report on Form 10-QSB filed on  November 14, 2007).                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                |
| 10.3       |       | Lease Agreement dated  December 29, 2006, by and between the registrant and Howard Hughes  Properties, Limited Partnership. (Incorporated by reference from the  registrant’s annual report on Form 10-KSB/A filed on November 13,  2007).                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                |
| 10.4       |       | Form of Indemnification  Agreement, incorporated by reference from the registrant’s quarterly report  on 10-QSB/A filed on August 19, 2003.                                                                                                                                                          |
|       |       |                                                                                                                                                                                                                                                                                                                |
| 10.5       |       | Amended and Restated 1999 Stock  Option Plan. (Incorporated by reference from the registrant’s quarterly  report on 10-QSB/A filed on August 19, 2003) (Note (2)).                                                                                                                                        |
|       |       |                                                                                                                                                                                                                                                                                                                |
| 10.14      |       | Patent Purchase Agreement dated  October 1, 2005 among registrant, William Westmore Purton, Dolphin  Products Pty Ltd. and Dolphin Advanced Technologies Pty Ltd. (Incorporated by  reference to Exhibit 10.27 to the registrant’s annual report on  Form 10-KSB filed on March 31, 2006). |
|       |       |                                                                                                                                                                                                                                                                                                                |
| 10.19      |       | Senior Secured Note Purchase  Agreement dated May 2, 2006 among registrant and the Bricoleur Funds.  (Incorporated by reference to Exhibit 10.1 to the registrant’s Current  Report on Form 8-K dated May 2, 2006).                                                                        |

 

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| 10.20  |   | Securities Put Agreement dated  May 2, 2006 among registrant and the Bricoleur Funds. (Incorporated by  reference to Exhibit 10.2 to the registrant’s Current Report on  Form 8-K dated May 2, 2006).                                                             |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.21  |   | Security Agreement dated  May 2, 2006 among registrant and the Bricoleur Funds. (Incorporated by  reference to Exhibit 10.3 to the registrant’s Current Report on  Form 8-K dated May 2, 2006).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.22  |   | Registration Rights Agreement  dated May 2, 2006 among registrant and the Bricoleur Funds.  (Incorporated by reference to Exhibit 10.3 to the registrant’s Current  Report on Form 8-K dated May 2, 2006).                                                        |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.23  |   | Share Sale Agreement dated  July 5, 2006 among registrant and William Westmore Purton, and Synwood  Pty Ltd. (Incorporated by reference to Exhibit 10.8 to the registrant’s  Quarterly Report on Form 10-QSB filed on August 14, 2006).                           |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.24  |   | Registration Rights Agreement  dated July 11, 2006 among registrant and William Westmore Purton, and  Synwood Pty Ltd. (Incorporated by reference to Exhibit 10.8 to the  registrant’s Quarterly Report on Form 10-QSB filed on August 14,  2006).                |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.25  |   | Alliance Agreement dated October 11,  2006 between registrant and Elixir Group Limited. (Incorporated by reference  to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-QSB  filed on November 14, 2006).                                             |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.26  |   | Amended and Restated Sales  Representative Agreement dated October 11, 2006 between registrant and  Elixir Group Limited. (Incorporated by reference to Exhibit 10.2 to the  registrant’s Quarterly Report on Form 10-QSB filed on November 14,  2006).           |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.27  |   | Securities Purchase Agreement  dated October 11, 2006 between registrant and Elixir Group Limited.  (Incorporated by reference to Exhibit 10.3 to the registrant’s quarterly  report on Form 10-QSB filed on November 14, 2006).                                  |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.29  |   | Securities Purchase Agreement  dated March 27, 2007. (Incorporated by reference from the registrant’s  current report on Form 8-K filed on March 30, 2007).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.30  |   | Registration Rights Agreement  dated March 28, 2007. (Incorporated by reference from the registrant’s  current report on Form 8-K filed on March 30, 2007).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.31  |   | Common Stock Purchase Warrant  dated March 28, 2007. (Incorporated by reference from the registrant’s  current report on Form 8-K filed on March 30, 2007).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.32  |   | Securities Purchase Agreement  dated May 3, 2007. (Incorporated by reference from the registrant’s quarterly  report on Form 10-QSB filed on May 15, 2007).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.33  |   | Registration Rights Agreement  dated May 3, 2007. (Incorporated by reference from the registrant’s  quarterly report on Form 10-QSB filed on May 15, 2007).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.34  |   | Securities Purchase and Product  Participation Agreement dated June 12, 2007 between registrant and  Elixir Group Limited. (Incorporated by reference from the registrant’s  current report on Form 8-K filed on June 13, 2007).                                       |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.35  |   | Securities Purchase Agreement by  and among the registrant and the purchasers identified on the signature  pages thereto, dated as of October 19, 2007. (Incorporated by  reference from the registrant’s current report on Form 8-K filed on  October 23, 2007). |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.36  |   | Registration Rights Agreement by  and among the registrant and the purchasers identified on the signature  pages thereto, dated as of October 19, 2007. (Incorporated by  reference from the registrant’s current report on Form 8-K filed on  October 23, 2007). |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.38  |   | Waiver and Amendment to Warrants  dated September 7, 2007. (Incorporated by reference from the  registrant’s quarterly report on Form 10-QSB filed on November 14,  2007).                                                                                             |

 

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| 10.39  |   | Warrant Purchase Agreement by  and among, Elixir Group Ltd, the registrant and the purchasers identified on  the signature pages thereto, dated as of December 11, 2007.  (Incorporated by reference from the registrant’s current report on  Form 8-K filed on December 11, 2007).                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.40  |   | Registration Rights Agreement by  and among the registrant and the purchasers identified on the signature  pages thereto, dated as of December 11, 2007. (Incorporated by  reference from the registrant’s current report on Form 8-K filed on  December 11, 2007).                                       |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.41  |   | Distribution, Service and  Support Agreement dated June 4, 2007 between registrant and Suzo Happ  Group. (Incorporated by reference from the registrant’s annual report on  Form 10-K filed on March 31, 2008).                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.42  |   | Trade Credit Facility Agreement  between registrant and Elixir International Limited dated as of  April 21, 2008. (Incorporated by reference from the registrant’s annual  report on Form 10-K filed on April 29, 2008).                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.43  |   | Separation Agreement between  Gordon Yuen and registrant. (Incorporated by reference from the registrant’s  current report on Form 8-K filed on November 14, 2008). (Note (2))                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.44  |   | Letter of agreement between  registrant and Elixir Group Ltd dated as of November 6, 2008 terminating  the Securities Purchase and Product Participation Agreement. (Incorporated by  reference from the registrant’s current report on Form 8-K filed on  November 14, 2008).                                 |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.45  |   | Machines Disposal Agreement  between registrant and Elixir International Limited dated as of  November 6, 2008. (Incorporated by reference from the registrant’s  current report on Form 8-K filed on November 14, 2008).                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.46  |   | Amendment of the Trade Credit  Facility Agreement and Related Note between registrant and Elixir  International Limited dated as of November 6, 2008. (Incorporated by  reference from the registrant’s current report on Form 8-K filed on  November 14, 2008).                                               |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.47  |   | Purchase and Settlement  Agreement between registrant and Shuffle Master, Inc. dated as of  March 16, 2009. (Incorporated by reference from Exhibit 10.47 to  the registrant’s annual report on Form 10K filed on March 30,  2009).                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.48  |   | Termination Agreement between  registrant and Happ Controls, Inc. (Suzo Happ) dated as of  March 13, 2009. (Incorporated by reference from Exhibit 10.48 to  the registrant’s annual report on Form 10K filed on March 30,  2009).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.49  |   | Machines Operation and  Participation Agreement by and among the registrant, Elixir Gaming Technologies  (Hong Kong) Limited and NagaWorld Limited dated as of December 13, 2008.  (Incorporated by reference from Exhibit 10.49 to the registrant’s annual  report on Form 10K filed on March 30, 2009). |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.50  |   | Heads of Terms for Supply of  Gaming Terminals between Elixir Gaming Technologies (Hong Kong) Limited and  Scientific Games World Limited dated as of November 19, 2008.  (Incorporated by reference from Exhibit 10.50 to the registrant’s annual  report on Form 10K filed on March 30, 2009).          |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.51  |   | Separation Agreement between  Joseph Pisano and registrant dated as of March 31, 2009. (Incorporated  by reference from the registrant’s current report on Form 8-K filed on  April 1, 2009) (Note (2)).                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.52  |   | Executive Employment Agreement  between Elixir Gaming Technologies (Hong Kong) Limited and Clarence Chung  dated as of April 20, 2009. (Incorporated by reference from the  registrant’s current report on Form 8-K filed on April 22, 2009)  (Note (2)).                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.53  |   | Two Services Agreements between  registrant and Melco Services Limited dated as of May 18, 2009.  (Incorporated by reference from the registrant’s current report on  Form 8-K filed on May 18, 2009).                                                                                                         |

 

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| 10.54  |   | Amendment No. 2 to Trade  Credit Facility Agreement and Related Note between registrant and Elixir  International Limited dated as of July 24, 2009. (Incorporated by  reference from the registrant’s current report on Form 8-K filed on  July 30, 2009).                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.55  |   | Option Deed between Elixir  Gaming Technologies (Hong Kong) Limited and NagaWorld Limited as of  July 25, 2009. (Incorporated by reference from the registrant’s current  report on Form 8-K filed on July 30, 2009).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.56  |   | Executive Employment Agreement  between Elixir Gaming Technologies (Hong Kong) Limited and Clarence Chung  dated as of November 10, 2009. (Incorporated by reference from  Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q  filed on November 10, 2009) (Note (2)). |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.57  |   | Machines Operation and  Participation Agreement by and among the registrant, Elixir Gaming Technologies  (Hong Kong) Limited and NagaWorld Limited dated as of July 25, 2009.  (Incorporated by reference from the registrant's current report on Form 8-K  filed on February 11, 2010) (Note (1)).         |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.58  |   | 2008 Stock Incentive Plan  (Incorporated by reference from the registrant's definitive proxy statement filed  on August 20, 2008) (Note (2)).                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.59  |   | Deed of Release dated June 27,  2009 between, inter alia, registrant and William Purton                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.60  |   | Machines Operation and  Participation Consolidation Agreement by and among the registrant, Elixir Gaming  Technologies (Cambodia) Limited and NagaWorld Limited dated as of December  30, 2009 (Note (1)).                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.61  |   | Restricted Stock Agreement  between registrant and Clarence Chung dated as of January 22, 2010 (Note (2)).                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 21.1   |   | List of subsidiaries of  registrant. (Incorporated by reference from Exhibit 21.1 to the registrant’s annual  report on Form 10- K filed on March 30, 2009).                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 23.1   |   | Consent of Ernst &  Young.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 31.1   |   | Certification under  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 31.2   |   | Certification under  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 32.1   |   | Certifications Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.  Section 1350.                                                                                                                                                                                               |

 

----

**Notes:**
| (1)    | Certain portions of the exhibit  have been omitted pursuant to Registrant’s confidential treatment request  filed with the Commission pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934. The omitted text has been filed separately with the  Commission. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                |
| (2)    | Indicates management  compensatory plan, contract or arrangement.                                                                                                                                                                                                                   |

 

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**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this annual report on Form 10-K to be signed onits behalf by the undersigned, thereunto duly authorized.

 
| ** **                     | **ELIXIR GAMING  TECHNOLOGIES, INC.** |
|--------------------------------|---------------------------------------|
|                           |                                  |
|                           |                                  |
| Date: March 30, 2010 | By:                                   | /s/Clarence Chung |
|                           |                                  | Clarence Chung |
|                           |                                  | Chief Executive Officer |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 

| **Signature**             | ** ** | **Title**                     | ** ** | **Date**            |
|---------------------------|------------|-------------------------------|------------|---------------------|
|                      |       |                          |       |                |
|                      |       |                          |       |                |
| /s/Clarence Chung         |       | Chief Executive Officer       |       | March 30, 2010 |
| Clarence Chung            |       | (Principal Executive Officer) |       |                |
|                      |       |                          |       |                |
|                      |       |                          |       |                |
| /s/Andy Tsui              |       | Chief Accounting Officer      |       | March 30, 2010 |
| Andy Tsui                 |       | (Principal Financial Officer) |       |                |
|                      |       |                          |       |                |
|                      |       |                          |       |                |
| /s/Vincent L. DiVito      |       | Director                      |       | March 30, 2010 |
| Vincent L. DiVito         |       |                          |       |                |
|                      |       |                          |       |                |
|                      |       |                          |       |                |
| /s/John W. Crawford, J.P. |       | Director                      |       | March 30, 2010 |
| John W. Crawford, J.P.    |       |                          |       |                |
|                      |       |                          |       |                |
|                      |       |                          |       |                |
| /s/Samuel Tsang           |       | Director                      |       | March 30, 2010 |
| Samuel Tsang              |       |                          |       |                |
|                      |       |                          |       |                |
|                      |       |                          |       |                |
| /s/Anthony Tyen, Ph.D.    |       | Director                      |       | March 30, 2010 |
| Anthony Tyen, Ph.D.       |       |                          |       |                |

 

91

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