**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** |
|------------------------------------------------------|------------------------------------------------------------------------------------------------------|
| ** **                                           |
| **For the fiscal year ended December 31, 2007** |
| ** **                                           |
| **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 of registrant as specified in its charter)

 

| **Nevada**                                                      | ** ** | **91-1696010**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of

incorporation or organization) |       | (I.R.S. Employer

Identification No.) |

 

**6650Via Austi Parkway, Suite 170, Las Vegas, Nevada 89119**

(Address of principal executive offices, including zip code)

 

**Registrant’stelephone number, including area code: (702) 733-7195**

** **

**Securities to be registered under Section 12(b) ofthe Act:**

 

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

** **

**Securities to be registered under Section 12(g) ofthe 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 thepast 90 days.  Yes  x No  o

 

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 theregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company (asdefined in Rule 12b-2 of 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:  $71,867,413

 

State the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date: 114,930,365 shares as of March 26, 2008.

 

DOCUMENTS INCORPORATED BYREFERENCE

 

Portions of the proxystatement for the registrant’s 2008 annual meeting of shareholders to be filedwith the SEC within 120 days after the end of the fiscal year ended December 31,2007 are incorporated by reference in Part III of this Form 10-K.

 

 

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**TABLE OF CONTENTS**

 
| **PART I**   |
|-------------------|
| ** **        | ** ** | ** ** |
| **Item 1.**       | **Business** | **1** |
| ** **        | ** ** | ** ** |
| **Item 1A.**      | **Risk Factors** | **14** |
| ** **        | ** ** | ** ** |
| **Item 1B.**      | **Unresolved Staff  Comments** | **19** |
| ** **        | ** ** | ** ** |
| **Item 2.**       | **Properties** | **19** |
| ** **        | ** ** | ** ** |
| **Item 3.**       | **Legal Proceedings** | **20** |
| ** **        | ** ** | ** ** |
| **Item 4.**       | **Submission of  Matters to a Vote of Security Holders** | **21** |
| ** **        | ** ** | ** ** |
| **PART II**  |
| ** **        | ** ** | ** ** |
| **Item 5.**       | **Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer  Repurchases of Equity Securities** | **22** |
| ** **        | ** ** | ** ** |
| **Item 6.**       | **Selected Financial  Data** | **22** |
| ** **        | ** ** | ** ** |
| **Item 7.**       | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | **22** |
| ** **        | ** ** | ** ** |
| **Item 7A.**      | **Quantatative  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** | **73** |
| ** **        | ** ** | ** ** |
| **Item 9A(T).**   | **Controls and  Procedures** | **73** |
| ** **        | ** ** | ** ** |
| **Item 9B.**      | **Other Information** | **74** |
| ** **        | ** ** | ** ** |
| **PART III** |
| ** **        | ** ** | ** ** |
| **Item 10.**      | **Directors,  Executive Officers and Corporate Governance** | **75** |
| ** **        | ** ** | ** ** |
| **Item 11.**      | **Executive  Compensation** | **75** |
| ** **        | ** ** | ** ** |
| **Item 12.**      | **Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters** | **75** |
| ** **        | ** ** | ** ** |
| **Item 13.**      | **Certain  Relationships and Related Transactions, and Director Independence** | **75** |
| ** **        | ** ** | ** ** |
| **Item 14.**      | **Principal  Accountant Fees and Services** | **75** |
| ** **        | ** ** | ** ** |
| **PART IV**  |
| ** **        | ** ** | ** ** |
| **Item 15.**      | **Exhibits and  Financial Statement Schedules** | **76** |

** **

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**CAUTIONARY NOTICE**

 

Thisannual report on Form 10-K contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended.  Those forward-looking statements include ourexpectations, beliefs, intentions and strategies regarding the future.  Such forward-looking statements relate to,among other things, overall industry environment, our expectations for the businessrelationship between us and Elixir Group Limited, our working capitalrequirements and results of operations, the further approvals of regulatoryauthorities, adverse court rulings, production and/or quality control problems,the denial, suspension or revocation of privileged operating licenses bygovernmental authorities, competitive pressures and general economicconditions.  These and other factors thatmay affect our financial results are discussed more fully in “Risk Factors”and  “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included in thisreport.  We caution readers not to placeundue reliance on any forward-looking statements.  We do not undertake, and specificallydisclaim any obligation, to update or revise such statements to reflect new circumstancesor unanticipated events as they occur, and we urge readers to review andconsider disclosures we make in this and other reports that discuss factorsgermane to our business.  See inparticular our reports on Forms 10-K, 10-Q, and 8-K subsequently filed fromtime to time with the Securities and Exchange Commission.

 

**PART I**

 

**ITEM. 1           BUSINESS.**

 

**OVERVIEW**

 

ElixirGaming Technologies, Inc. is engaged in (i) the ownership and leasingof electronic gaming machines in resorts, hotels, cruise ships and other venuesthroughout Asia placed on a revenue share basis with venue owners; (ii) thedesign, manufacture and distribution of table game products; and (iii) thedesign, manufacture and sale of component parts for the automotive industry.Our primary focus is on the ownership and leasing of gaming machines on arevenue sharing basis across several countries in Asia where we or ouraffiliates have established a strategic presence.

 

Ourprincipal shareholder, Elixir Group Limited (“Elixir Group”), a wholly-ownedsubsidiary of Melco International Development Limited, is our strategic partnerin the electronic gaming machine business. Through its wholly-owned subsidiary, Elixir International Limited,Elixir Group identifies and secures on our behalf venues for the placement ofelectronic gaming machines and casino management systems, which track gameperformance and provides statistics on each installed electronic gaming machineowned and leased by us.  We contract withthe venue owner for the placement of the electronic gaming machines on arevenue sharing basis. Elixir Group assists the venue owner with the licensingand regulatory process, the physical design of the gaming floor and theconstruction and installation of electronic gaming machines and systems.  Elixir Group targets venues with no existinggaming operations and offers a turn-key solution whereby a gaming floor isdelivered in a fully operational state to the venue owner.  Elixir Group acquires and installs the gamingmachines, casino management systems and other gaming peripherals and uponcompletion of the set-up of the gaming floor, sells us the gaming machines andsystems at its cost plus fifteen percent (15%).

 

In addition to theelectronic gaming machine business, we develop, manufacture and distributevarious table game devices used in the gaming industry, including automatedcard verification machines, electronic card shuffling systems, high-frequencyRFID-gaming chips and plaques.

 

Through our July 2006acquisition of Dolphin Advanced Technologies Pty Ltd. (“Dolphin”), we alsodesign, manufacture and sell component parts for the automotive industry,including inner and remote 

 

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door handles, fuel fillerhinge assemblies, module brackets, steering wheel spoke covers, speaker grills,fasteners, safety products, and cosmetic components for automobiles.

 

Weare headquartered in Las Vegas, Nevada, with offices in Macau, Hong Kong,Philippines, Cambodia and Australia.  Wealso have manufacturing facilities in Guangdong Province, China, and Melbourne,Australia, and research and development facilities in Zhuhai, China.  We expect to open an office in Ho Chi MinhCity, Vietnam during 2008.

 

Our principal executive offices in the UnitedStates are located at:

 

Elixir GamingTechnologies, Inc.

6650 Via AustiParkway, Suite 170

Las Vegas, Nevada,89119

USA

 

The telephone and facsimile numbers of ouroffices in the United States are (702) 733-7195 and (702) 733-7197,respectively.

 

We own or have rights tocertain trademarks that we use in connection with the sale of our products,including, but not limited to, the following: *VendingData*TM,*Deck Checker*TM, *RandomEjection*TM, *Random Plus*TM, *PokerOne*TM, *ChipWasher*TM, *ShufflePro*TM, *DeckSetter*® and*Dolphin*TM. This report also makesreference to trademarks and trade names of other companies.

 

#### **RECENT DEVELOPMENTS**

#### ** **

During fiscal 2007 through the date of thisreport, we have engaged in the following transactions:

 

**DistributionOutsourcing**

** **

InJune 2007, we completed the outsourcing of the distribution of our tablegames products through an agreement with Suzo Happ Group.  The agreement grants Suzo Happ Group theexclusive right to market, distribute and service our table game productswithin North, Central and South America as well as South Africa, Europe and theRussian Federation.  Pursuant to our January 2006distribution agreement, as amended in 2007, we appointed Elixir Group as theexclusive distributor of our table games products throughout Asia, Australiaand New Zealand.

 

**Changein Control**

** **

OnSeptember 10, 2007, we underwent a change in control and a resultantchange in our business model pursuant to a Securities Purchase and ProductParticipation Agreement (“Participation Agreement”) dated June 12, 2007between us and Elixir Group.  Pursuant tothe Participation Agreement, we agreed to issue to Elixir Group our commonshares and warrants subject to Elixir Group’s sourcing and identification onour behalf of venues for the placement of electronic gaming machines in thegeneral Asia region.  We entered into theParticipation Agreement for purposes of developing, with the assistance andresources of Elixir Group, the business of owning and leasing electronic gamingmachines pursuant to lease agreements with venue owners on a revenue sharingbasis.  Elixir Group also agreed to sellto us the electronic gaming machines to be placed under the lease agreements atits cost plus fifteen percent (15%).

 

Atthe initial closing, we issued to Elixir Group 25,000,000 shares of our commonstock and warrants to purchase an additional 88,000,000 shares of our commonstock.  On September 13, 2007, weissued an additional 15,000,000 shares of our common stock to Elixir Grouppursuant to the Participation Agreement based on Elixir Group’s placement ofadditional electronic gaming machines. Based on the aforementioned issuances, as of September 13, 2007, wehad 77,552,305shares ofcommon stock issued 

 

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andoutstanding, of which 41,000,000 (or 52.9%) were held by Elixir Group.  Elixir Group’s ownership of a majority of ourcommon stock as of September 13, 2007 represented a change in control forus.

 

Theinitial closing of the transactions under the Participation Agreement,including our issuance of common shares and warrants to Elixir Group, wereapproved by our shareholders at a special meeting of shareholders held on September 10,2007.  Upon completion of thistransaction, we changed our name from VendingData Corporation to Elixir GamingTechnologies, Inc. and our American Stock Exchange trading symbol changedfrom VNX to EGT.

 

Accordingto the terms of the Participation Agreement, Elixir Group has the right to “earn-in”an equity interest in our company based on the achievement of variousperformance milestones in terms of (a) the cumulative number of electronicgaming machines that are contracted to be placed and leased pursuant to leaseagreements entered into between us and the venue owners sourced and identifiedby Elixir Group (the “gaming machines under contract”) and (b) thecumulative number of electronic gaming machines physically placed by us and inoperation on the gaming premises of the venue owners pursuant to the leaseagreements which, pursuant to the terms of the Participation Agreement,includes electronic gaming machines in a public gaming area subject totemporary closure for compliance or safety reasons (the “gaming machines inoperation”).  The initial closing of thetransactions under the Participation Agreement was subject to the placement,including gaming machines placed in venues subject to temporary closure, of atleast 1,000 electronic gaming machines in operations.

 

Atthe initial closing, we issued to Elixir Group 25,000,000 common shares andwarrants, with an exercise price of $2.65 per share, to purchase up to88,000,000 additional shares of our common stock. The warrants vest and firstbecome exercisable based on the achievement of certain performance milestoneswith respect to the number of gaming machines under contract and gamingmachines in operation.  Elixir Group isentitled to earn a total of 55,000,000 shares of our common stock (inclusive ofthe 25,000,000 shares issued at the initial closing and the 15,000,000 sharesissued on September 13, 2007), and the 88,000,000 warrants will vest andbecome exercisable, subject to achieving the following performance milestoneswith respect to the cumulative number of gaming machines under contract andelectronic gaming machines in operation as follows:

 
| ** ** | ** ** | **Cumulative  Gaming Machines  Under Contract** | ** ** | **Cumulative  Gaming Machines  in Operation** | ** ** | **Shares  Earned  by Elixir Group** | ** ** | **Vesting of  Warrants Earned  by Elixir Group** | ** ** |
|------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------|------------|--------------------------------------------------|------------|
|       |       | 1,000                                           |       | 1,000                                         |       | 25,000,000                          |       | —                                           |       |
|       |       | 2,000                                           |       | 1,000                                         |       | 15,000,000                          |       | 22,000,000                                       |       |
|       |       | 3,000                                           |       | 2,000                                         |       | 10,000,000                          |       | 22,000,000                                       |       |
|       |       | 4,000                                           |       | 3,000                                         |       | 5,000,000                           |       | 22,000,000                                       |       |
|       |       | 5,000                                           |       | 4,000                                         |       | —                              |       | 22,000,000                                       |       |
| Total      |       | 5,000                                           |       | 4,000                                         |       | 55,000,000                          |       | 88,000,000                                       |       |

 

Inaddition to the above, we agreed that upon the initial placement of 1,000gaming machines in operation with venue owners identified by Elixir Group, wewould reduce by $1.00 the exercise price of all warrants with exercise pricesranging between $3.00 and $5.00 sold to Elixir Group pursuant to the SecuritiesPurchase Agreement entered into in October 2006 (the “2006 Warrants”).When the cumulative number of electronic gaming machines under contract reaches2,000 units and the cumulative number of gaming machines in operation reaches1,000 units, we agreed to further reduce by $1.00 the exercise prices of the2006 Warrants. When the cumulative number of electronic gaming machines undercontract reaches 3,000 units and the cumulative number of machines in operationreaches 2,000 units, we will further reduce by $1.00 the exercise prices of the2006 Warrants. As of the date of this report, we have reduced the exerciseprice of the 2006 Warrants by $2.00 based on the achievement of the relatedperformance milestones.

 

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Inconnection with the initial closing of the transactions under the ParticipationAgreement, we entered into a registration rights agreement with ElixirGroup.  The registration rightsagreement, as amended, requires us to file a selling shareholder registrationstatement with the SEC on or before December 31, 2008 for purposes ofregistering the resale of the shares of our common stock issued to Elixir Grouppursuant to the transaction, including all shares that are issued, or may beissued, upon exercise of the warrants. Pursuant to the registration rights agreement, as amended, the holdersof the common stock are also entitled to certain demand and piggyback registrationrights.

 

Pursuantto the Participation Agreement, at the initial closing the authorized number ofmembers of our board of directors was eight and Elixir Group was entitled toappoint to our board no less than three directors.  At least one Elixir Group nominee is entitledto serve on each committee of our board, provided, in the case of the auditcommittee, such Elixir Group nominee satisfies the applicable independencerequirements of the audit committee charter. At the September 10, 2007 special meeting of our shareholders,immediately prior to the closing, our shareholders voted to approve theelection to our board of directors the following nominees of Elixir Group:Gordon Yuen, Joe Pisano and Lorna Patajo-Kapunan. Ms. Kapunan was alsoappointed to the compensation and nominating committees of our board ofdirectors, and serves as chairperson of our nominating committee.

 

TheParticipation Agreement further provides that Elixir Group will at all times beentitled to appoint to our board of directors a pro rata share of the authorizedmembers of our board based on Elixir Group’s percentage ownership of ouroutstanding common shares.  In November 2007,Elixir Group appointed to our board Mr. Clarence Chung, chief operatingofficer of Melco International Development Limited, the parent company ofElixir Group.

 

Atthe closing on September 10, 2007, James Crabbe and Mark R. Newburgresigned from our board of directors.  Onthe same date, our board of directors appointed Gordon Yuen to serve aschairman of the board, president and chief executive officer of our company,David Reberger to serve as our treasurer, chief financial officer andsecretary, and Joe Pisano to serve as a member of our board of directors andexecutive vice president.  Mr. Yuenalso serves as chief executive officer and Mr. Pisano serves as generalmanager of gaming for Elixir Group. Prior to those appointments, Mark R. Newburg served as our president,treasurer and chief executive officer and Arnaldo Galassi served as our chieffinancial officer and secretary.

 

Pursuantto the Participation Agreement, Elixir Group has agreed that until the secondanniversary of the closing, the pre-closing shareholders of our company will beentitled to the benefit of continued representation on our board of directorsof at least two of the three independent directors serving on the board priorto the closing. The three independent directors serving on our board prior tothe closing were Vincent DiVito, Robert Miodunski and Maj. Gen. Paul Harvey,each of whom continues to serve on our board as of the date of thisreport.  In the event of the resignation,termination or death of any two pre-closing independent directors, theremaining pre-closing independent director shall be entitled to name a replacement.  At least one of the pre-closing independentdirectors shall be entitled to serve on each committee of our board ofdirectors, provided, in the case of the audit committee, such directorsatisfies the independence requirements of the audit committee charter.

 

**Securities Amendment and Exchange Agreement**

 

Inconjunction with the private placements of common shares described below, in October 2007we entered into a Securities Amendmentand****Exchange Agreement (the“Exchange Agreement”) with Elixir Group, pursuant to which we agreed to issue toElixir Group up to 31.2 million shares of our common stock in exchange forElixir Group’s cancellation of up to 78 million of the 88 million warrants itreceived under the above-described Participation Agreement.  At our annual meeting of shareholders held onDecember 17, 2007, a majority of our voting shares excluding shares heldby Elixir Group) voted to 

 

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approvethe Exchange Agreement and our issuance of common shares to Elixir Group inexchange for its cancellation of warrants.

 

The initial closing under the ExchangeAgreement occurred on December 17, 2007, at which time we issued 4.8million shares of our common stock to Elixir Group in exchange for itscancellation of 12 million warrants that had vested and were exercisable.  The remaining 66 million warrants subject tothe Exchange Agreement are unvested at as of the date of this report and theirexercise is subject to the achievement of certain performance milestones withrespect to the placement of electronic gaming machines, pursuant to theParticipation Agreement.  Pursuant to theExchange Agreement, Elixir Group will cancel the remaining 66 million warrants,subject to their vesting, in return for our issuance of common shares at therate of one common share for every 2.5 warrants cancelled, or a total of 26.4million common shares if all of the 66 million warrants vest.

 

**Private Placements of Common Shares**

 

In October 2007, we completed atransaction whereby we sold 15 million shares of common stock to institutionalinvestors at a price of $3.50 per share, generating net proceeds to us, afterissuance costs, of approximately $50 million. In December 2007, Elixir Group entered into a private transactionwith institutional investors whereby Elixir Group sold 16,000,000 warrants topurchase our common shares with an exercise price of $2.65 per share for $0.86per warrant.  As a condition of the sale,the warrants were immediately exercised at the closing and we receivedapproximately $40 million in net proceeds.

 

Upon execution of the transaction under theExchange Agreement and the private placements, as of the date of this report,Elixir Group owns 45.8 million shares of our common stock (representing 39.9%of our common shares outstanding as of the same date) and 76 million warrantsto purchase shares of our common stock, of which 66 million warrants will becanceled, subject to their vesting, in exchange for our issuance of one commonshare for every 2.5 warrants cancelled.

 

**Shuffle Master Litigation**

 

On February 1, 2008, the FederalDistrict Court, District of Nevada, granted our motion for summary judgment inour patent litigation with Shuffle Master. Shuffle Master had filed the case in 2004, alleging that one of our shufflersinfringed a patent held byShuffle Master.  The District Court foundthat there was no infringement.  On February 15,2008, we filed a motion to recover our attorney fees in the case from ShuffleMaster.  We are also pursuingcollection of a $3 million bond Shuffle Master posted to secure the preliminaryinjunction at the outset of the litigation. On February 29, 2008, Shuffle Master filed a notice ofappeal of the February 1, 2008 court ruling.

 

**GAMING MACHINEPARTICIPATION**

 

**Overview**

 

SinceSeptember 2007, our primary business model has focused on the ownershipand leasing of electronic gaming machines placed with venue owners on a revenuesharing basis across several countries in Asia where we or our affiliates haveestablished a strategic presence.  Ourprincipal shareholder, Elixir Group, an indirect wholly-owned subsidiary ofMelco International Development Limited, is our strategic partner in theelectronic gaming machine business. Through its wholly-owned subsidiary, Elixir International Limited,Elixir Group identifies and secures, on our behalf, venues for the placement ofelectronic gaming machines and systems to be owned and leased by us, and thenassists the venue owner with the physical design of the gaming floor, and theconstruction and installation of electronic gaming machines and systems. Wegenerate recurring revenues by providing customers with the necessaryelectronic gaming machines and related systems through revenue sharingarrangements. 

 

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Electronicgaming machine participation operations began in September 2007 andcomprise 3% of our consolidated revenues for the year ended December 31,2007.

 

Thetarget market for our electronic gaming machine participation business arethree-, four- and five-star hotels, resorts, cruise ships, and various othermedium to large venues across Asia.  Wefocus on underserved gaming markets that we believe are poised for significantgrowth, and many of the targeted venue owners have little or no gamingoperations or experience.  We believethat Asian hotel and resort owners, among others, have a growing interest inintroducing gaming at their venues.  Webelieve this trend is driven by strong economic growth, a rising middle classthroughout Asia and the increasing acceptance of gaming as a form ofentertainment and recreation.

 

We endeavor to contract withvenue owners to retain 100% of the slot floor so that revenue is not diluted bythe introduction of other gaming products. To date, we have secured 100% of the slot floors for all venues undercontract.  We endeavor to contract for aminimum of 20% of the net win per machine from each venue owner, and to date wehave contracted to receive at least 20% of the net win and in certain venues asmuch as 25% of the net win.  We targetvenues where we can place at least 100 gaming machines in operation and at mostof our venues to date we have contracted to place between 100 and 200 gamingmachines.

 

We expect that ourelectronic gaming machine participation revenues and gross margins will beinfluenced by a number of factors, including the delay between the date ofinstallation of the machines and date the machines “go-live” or are placed inservice and earning revenue; the number and type of machines in service; thelevels of play; and variations in the participation agreement with respect torevenue sharing.  In addition, we may initiallyinstall fewer electronic gaming machines than contracted for at a venue andincrease the number of electronic gaming machines gradually as a way to builddemand for our product.  Our cost ofsales will include the depreciation, joint cost sharing (in limited cases) andother installation and maintenance costs of the electronic gaming machines.

 

**OurStrategic Partner - Elixir Group**

 

We rely on our principalshareholder, Elixir Group, for the marketing, design and development of thegaming venues of the venue owners to whom we lease our electronic gamingmachines and related systems on a revenue sharing basis.  Elixir Group is an indirect wholly-ownedsubsidiary of Melco International Development Limited.  Through its wholly-owned subsidiary, ElixirInternational Limited, Elixir Group identifies and secures on our behalf venuesfor the placement of electronic gaming machines owned and leased by us.  We contract with the venue owner for theleasing and maintenance of the electronic gaming machines on a revenue sharingbasis. Elixir Group assists the venue owner with the physical design of thegaming floor, and the construction and installation of electronic gamingmachines and systems.  Elixir Groupacquires and installs the electronic gaming machines and related systems and,upon completion of the set-up of the gaming floor, sells us the electronicgaming machines and systems at its cost plus 15 percent (15%).

 

Elixir Group provides thedevelopment and implementation of various related gaming services to three-,four- and five-star resorts and hotels in the Philippines, Cambodia, andVietnam and for cruise ship operators in the Asia Pacific region.  Their 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 floor space and present anappealing environment 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 its customers.

 

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Once the development phaseis complete, Elixir Group installs all the electronic gaming machines andsystems and then turns over the project to us in a “ready for operation”state.  We expect that the time from theinitial execution of the contract until the commencement of electronic gamingmachine participation at the particular venue will be approximately six to ninemonths depending on a number of factors, some of which are outside of ourcontrol.  These factors include, but arenot limited to, the operator’s discretion, delays due to construction orrenovation of the property, obtaining regulatory approvals business licenses bythe operator and staff training.  Weassist the venue owner by providing training for its gaming floor personnelregarding the operation and maintenance of the gaming machines and back-of-the-houseaccounting.  In addition, we maintain allperformance data and provide on-going technical and operations support in orderto optimize game performance throughout the floor.

 

ElixirGroup participates in our gaming business pursuant to certain exclusive rightsgranted by us to Elixir Group in the Participation Agreement.  Pursuant to the Participation Agreement, wehave granted Elixir Group the exclusive rights, for a six-year period ending onSeptember 10, 2013, to identify on our behalf potential venue ownersthroughout the general Asian territory. Elixir Group has agreed to use its reasonable best efforts to identifyand secure venues on our behalf, and not engage directly or indirectly in theplacement of electronic gaming machines on a participation basis in the definedterritories except on our behalf.

 

Pursuantto the Participation Agreement, we have agreed to buy from Elixir Group, andElixir Group has agreed to sell to us, all of the electronic gaming machinesand the casino management systems to be used in our gaming businesscontemplated by the Participation Agreement. Elixir Group purchases the electronic gaming machines from leadingmanufacturers, including International Game Technology, AristocratTechnologies, WMS Gaming, and Interblock and utilizes Progressive GamingInternational Corporation’s integrated casino management solutions for trackinggame performance, and providing in-depth statistics on each installed game.** **Inthe event of Elixir Group’s purchase of electronic gaming machines or systemsfor resale to us from a party not affiliated with Elixir Group, our purchaseprice is Elixir Group’s cost plus 15 percent (15%). In the event of themanufacture of electronic gaming machines or systems by Elixir Group or ElixirGroup’s purchase of electronic gaming machines or systems for resale to us froman affiliate of Elixir Group, our purchase prices are the same price at whichElixir Group would sell such machines or systems in an arm’s length transactionwith an unrelated third party.

 

Asdescribed above, Elixir Group designs and constructs the gaming floors andprovides for the related signage and peripheral fixtures.  We reimburse Elixir Group for its costsactually incurred in the set-up of the gaming operations in amounts equal to ElixirGroup’s out-of-pocket costs plus 15 percent (15%) excluding any costsassociated with labor to perform their obligations.

 

ElixirGroup does not share in the revenue generated by electronic gaming machinesplaced by us.

 

****Marketing and Customer Service****

 

Our goal, in association with Elixir Group, is to work with owners andoperators of three-, four- and five-star hotels throughout the markets wecurrently serve and with select cruise line operators in the Asia Pacificregion.  Elixir Group advises thesepotential new customers on the benefits of converting their conference rooms,restaurants/bars, business centers or other appropriately sized facilities togaming venues featuring on average between 100 and 200 electronic gamingmachines.

 

Once a new facility is identified and ready for conversion to a gamingvenue, Elixir Group actively works with local community, businesses andreligious organizations to inform them of our plans.  At the same time, Elixir Group assists thevenue owners with the physical design of the gaming floor, and the constructionand installation of electronic gaming machines and systems.  Upon completion of the development andinstallation of electronic gaming machines at the venue, Elixir Group sells thegaming and casino management system to us.

 

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**Competition**

 

The global gaming industryis highly competitive.  Competitorsinclude RGB, a subsidiary of Dreamgate Corp. an Asian distributor that placeselectronic gaming machines on a revenue sharing basis.  RGB is a distributor of Aruze, Ainsworth,Atronic, and WMS gaming machines. Part of our operating strategy includesaddressing markets and customers where we will face less competition and entrybarriers due to several factors including:

 

·                  **U.S. GamingLaws:** All of the major gaming equipment suppliers are licensed by a largenumber of U.S. regulatory agencies.  Inorder for one of these companies to enter the markets we serve in Asia on adirect revenue sharing model with a foreign operator, the operator would berequired to submit to various U.S. regulatory procedures.  We are not subject to this requirement as wehave surrendered all our licenses in the United States.

 

·                  **LocalKnowledge:** Through our association with Elixir Group, we havean extensive database of contacts and relationships throughout the Asian regionthat provides us with a unique opportunity to penetrate these undevelopedmarkets.

 

****GamingRegulation and Licensing of Gaming Machine Participation****

 

Theregulatory structure in the Asian countries where we are pursuing ourelectronic gaming machine participation business, including the Philippines,Cambodia and Vietnam, is not as developed or clearly defined as the UnitedStates.  In general, all of the countriesin which we currently operate, including the Philippines, Cambodia and Vietnam,require the venue owner to obtain a gaming license in order to operate theelectronic gaming machines leased by us. In general, we are not considered to be an operator of the machines becausewe lease the gaming machines to the venue owner, and we are otherwise notrequired to obtain any form of gaming license in either the Philippines,Cambodia or Vietnam in order to engage in our business of owning and leasingelectronic gaming machines on a revenue sharing basis in suchjurisdictions.  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 adversedevelopments in the regulation of the gaming industry could be difficult tocomply with and significantly increase our costs, which could cause ourprojects to be unsuccessful.

 

All of the countries inwhich we currently operate, including the Philippines, Cambodia and Vietnam,require the venue owner to obtain a gaming license in order to operate theelectronic gaming machines leased by us. We haveconfirmed that all of the venue owners to whom we lease electronic gamingmachines, our customers in the Philippines, Cambodia andVietnam, hold therequired gaming licenses to operate their venues.

 

**TABLE GAME PRODUCTS**

 

**Overview**

 

Through our table gameproducts segment, we develop, manufacture and sell through our distributornetwork products that automate the current manual processes supporting casinotable games and provide additional security to the gaming industry.  Our table game products include:

 

·                  The DeckCheckerTM, an automated playing card scanner that scans decks of playing cardsto ensure an accurate count and verifies that all of the playing cards arepresent.  This product confirms theintegrity of each playing card and will reject any non-conforming playingcards.

 

·                  The RandomPlusCard Shuffler, a shuffling device capable of shuffling up to eight decks ofplaying 

 

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cards at once.  The RandomPlus utilizes state of the artelectronics for improved reliability and longevity and is designed withadditional user accessible adjustments to accommodate a wide variety of playingcard types and conditions.

 

·                  The ShuffleProShuffler, a high-speed playing card-shuffler designed for use with one or twodeck table games such as standard poker room games and baccarat.

 

·                  The highfrequency RFID casino chip, a traditional casino chip embedded with a RFID tagthat allows casinos to identify counterfeit casino chips and track tableplay.  The high frequency 13.56 MHz RFIDcasino chip is designed to provide real-time data capability, enhanced chipsecurity, player tracking and accounting management benefits for casinos. Thehigh frequency RFID chips enable casinos to read 1,000 chips per second andhave a memory capacity of over 10,000 bits.

 

·                  Traditionalcasino chips for various table games, including a wide range of American stylegaming chips with 30 different color combinations, various sizes and otherpersonalized printing combinations.

 

·                  The ChipWasher, the firstfully-automated gaming chip cleaner that washes and sanitizes gaming chips. Thebuild-up of oils and residue makes chips sticky and difficult for dealers andplayers to handle, which makes for slower play.

 

****Marketingand Distribution****

 

During the first half of 2007, we distributed our table gaming productsthrough direct sales and indirectly through distributors.  In February 2007, we began thediscontinuation of our direct sales and focused our sales and service throughthird-party distributors.

 

On January 6, 2006, we entered into adistribution agreement with Elixir Group. The distribution agreement has aninitial three-year term, with rollover provisions, and provides exclusivedistribution rights for our high frequency RFID casino chip for certainSoutheast Asia casino properties and non-exclusive distribution rightselsewhere in Asia. In October 2006 and February 2007, thedistribution agreement was expanded to encompass our entire line of table gameproducts.  We also extended Elixir Group’sexclusive distribution rights to include all of Asia, Australia and NewZealand.

 

In June 2007, we entered into a distribution agreement with SuzoHapp Group, pursuant to which Suzo Happ Group serves as the exclusivedistributor of our table game products in North, Central and South America,Europe, South Africa and the Russian Federation.  This agreement in conjunction with theappointment of Elixir Group as our exclusive distributor for Asia, Australiaand New Zealand, completed our transition from in-house sales to third-partydistributor sales.  The transition wasfully implemented at the end of December 2007. Our distributors receivecompensation through our volume discount pricing structure, which allows themto sell the products to their customers at market driven prices.

 

We use distributors to gain exposure for our products in all geographicareas as we believe distributors with a local presence to be more effectivethan having our own sales force.  Webelieve that utilizing distributors to sell our table game products has twomain advantages:

 

·                  Distributors have theregulatory authorities to operate in the respective markets and are able toaddress and resolve regulatory compliance issues that may arise in a timelymanner; and

 

·                  Distributors have theinternal infrastructure and superior contacts necessary to effectively sell andservice our products in certain markets.

 

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****CustomerService****

 

In December 2007, we completed the transfer of responsibility forsales and service of our table games products to Suzo Happ Group, our exclusivedistributor of table games products in North and South America, Europe andSouth Africa.  Suzo Happ Group hasextensive sales and technical service teams throughout the US and SouthAmerica, Europe and South Africa.

 

Ourstandard warranty period is 90 days for our products. If a problem arisesduring the warranty period, we will arrange for the product to be fixed at nocost to the customer. Certain components that we use to manufacture ourproducts are acquired from third parties and may contain longer warrantyperiods.

 

****Competition****

 

Thegaming industry is extremely competitive. We compete with many established gaming companies, almost all of whichare substantially larger in the table games segment, have more substantialhistories, backgrounds, experience and records of successful operations,greater technical, marketing and other resources, more employees and moreextensive facilities than we have or will have in the foreseeable future.  Our most significant competitors are ShuffleMaster and Gaming Partners International Corporation.

 

****GamingRegulation and Licensing****

 

Inconnection with the negotiation and development of the Participation Agreementwith Elixir Group, we decided to focus our primary business operations on theownership and leasing of electronic gaming machines in Asia.  In order to most efficiently accomplish ourgoals and objectives with respect to the Asian electronic gaming machinemarket, we decided to surrender our gaming licenses in the U.S., and thisprocess is nearly complete.

 

Inmost jurisdictions, our table game products fall within the generalclassification of “associated equipment”, which is defined as equipment that isnot classified as a “gaming device,” but which has an integral relationship tothe 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, theregulatory authorities must approve associated equipment after testing in anappropriate testing lab (either state run or independent) in advance of its useat licensed locations.  In thosejurisdictions in the U.S. that allow the sale of our approved table gameproducts through a licensed distributor, we sell through Suzo Happ Group, ourexclusive distributor for North and South America, Europe and SouthAfrica.  In other jurisdictions wheresales through a distributor are not allowed, including New Jersey, Mississippi,Indiana and Washington, our products will not be available.  In the Asian markets, our products aredistributed by Elixir Group, pursuant to the terms of the January 2006distribution agreement as amended in 2007.

 

****Product Development, Manufacturing and Assembly****

 

We maintain a facility for the manufacture and assembly of our tablegame products in Xiaolan, China.  InZhuhai, China, we have 15 full-time research and development engineers who arefocused on enhancements to our Shuffler line, to our DeckChecker product lineand to our ChipWasher line.

 

In addition, we occasionally engage research and developmentconsultants to complement our skill set in specific areas of engineeringactivities.  We hire contract personnelon a varied basis depending upon production and installation volume.

 

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****Suppliers****

 

Mostcomponents for our Shufflers and DeckChecker products are sourced in China.Shuffler and DeckChecker assembly is conducted in China and final units areshipped to our Macau warehouse for distribution to the North American, Asian,Australian and European markets. The manufacture of RFID casino chips isperformed at Dolphin, our subsidiary in Australia, which specializes in plasticinjection molding. Dolphin has licensed certain RFID technology from MagellanTechnology Pty Ltd in Sydney, Australia, the owner of the intellectual propertyfor RFID technology. Dolphin sources their RFID tags from Progressive GamingInternational Corporation.

 

**NON-GAMING OPERATIONS**

 

Dolphinspecializes in tool-making, custom injection molding and clean room manufactureof high precision plastic products. We have non-gaming product lines ofhigh-quality products for the automotive industry.  From our state of the art facility inMelbourne, Australia, we produce various automotive components including: innerremote door handles, fuel filler hinge assemblies, module brackets, steeringwheel spoke covers, speaker grills, fasteners, safety products, and cosmeticcomponents. In addition to Australia, Dolphin supplies components to automanufacturers in several countries around the world including Argentina,Mexico, Germany, Malaysia, and Thailand.

 

****Marketingand Distribution****

 

Wemarket our products through automotive organizations and institutions and are apreferred supplier to General Motors Holden, Toyota, Autoliv, and Bridgestone,all of whom typically include us among the suppliers from whom they solicitbids on supply contracts.

 

****Competition****

 

Theautomotive tool-making and injection molding products businesses are highlycompetitive.  Our competitors include,ITW Deltar; Hook Plastics; Palm Plastics & Tooling; Hasico and Sneddon &Kingston Plastics, all of whom have greater financial resources, infrastructureand experience.

 

****Product Development, Manufacturing and Assembly****

 

Automotivecomponents manufactured by our Dolphin division are used for both internal andexternal applications and some are safety products.  We use our experience and expertise inengineering, tool-making and process technology in partnership with leading automakers.We provide to our customers full design, development and prototyping of newproducts.  Simultaneous engineering andProduction Part Approval Process (“PPAP”), a process which includes 19procedures that a supplier must adhere to and must be approved by the customer,is standard for automotive components manufactured at our Dolphin subsidiary.

 

We maintain a state-of-the-art manufacturing facility in Melbourne,Australia for the production of automotive component parts.

 

In addition, we occasionally engage research and development consultantsto complement our skill set in specific areas of engineering activities.  We hire contract personnel on a varied basisdepending upon production and installation volume.

 

**RESEARCH AND DEVELOPMENT**

 

In February 2007 we transferred our research and developmentefforts to our newly created research and development center located in Zhuhai,China. The relocation of the engineering division to the Zhuahi 

 

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office is a strategic step in the continued integration of ourengineering division in Zhuhai with Elixir Group’s newly established gamingresearch and development center in Macau. All research and development relatedto non-gaming operations is performed at our facilities in Melbourne,Australia.  Our current research anddevelopment emphasis is to improve our existing product lines, as demonstratedby the development of our new ShufflePro shuffler deployed in early 2007. Wespent $974,870 in 2007 and $1,555,882 in 2006 on research and development activities.

 

**INTELLECTUAL PROPERTY**

** **

We have secured and endeavorto secure, to the extent possible, exclusive rights to our table game products,primarily through federal and foreign intellectual property rights, such aspatents, copyrights and trademarks. We have applied for various patents withrespect to other concepts and products, including potential non-gamingapplications of our technologies.

 

With respect to our shufflers, the United States Patent and TrademarkOffice has issued ten patents, Patent Nos. 5,584,483, 5,676,372, 6,019,368,6,293,546, 6,299,167, 6,698,756 and 6,719,288, 6,886,829, 6,959,925 and7,066,464 in addition to two design patents, Patent Nos. D488,193 and D490,481.These patents expire on dates between April 2014 and April 2024. Inaddition, there are seven patent applications on file with the United StatesPatent and Trademark Office and nine applications pending in foreign countries.Our shufflers have also been issued two patents in Australia, one patent inCanada and one Patent Cooperation Treaty (“PCT”) patent.

 

The United States Patent and Trademark Office has issued two patents,Patent No. 6,629,894 and 6,726,205 related to the DeckChecker.  These patents are valid until August 2020.  In addition, we currently hold patents on theDeckChecker in Australia, China, Europe and South Africa, together with oneapplication pending in Canada and one PCT application to file.

 

There is currently one ChipWasher application on file with the UnitedStates Patent and Trademark Office (the “USPTO”) and five applications pendingin foreign jurisdictions.

 

In October 2005, we acquired the rights to U.S. Patent No. 6,659,875,which covers a unique process for manufacturing RFID chips and plaques. We alsohold patents covering similar processes issued by Australia and the UnitedKingdom. In addition, in February 2007, we filed a new provisionalspecification in Australia to protect additional enhancements in themanufacture of RFID chips and plaques.

 

There can be no assurance that any of the claims contained in ourpending United States or foreign patent or trademark applications will beissued, that any of these rights will not be infringed by others or thatalready issued patents or trademark registrations will not be invalidated orcanceled. Third parties could infringe on our rights or successfully duplicateour products without infringing on our legal rights.

 

Many elements incorporated in our proprietary products are in thepublic domain or otherwise not amenable to legal protection and the steps takenby us will not, in and of themselves, preclude competition with our proprietaryproducts.

 

InJanuary 2007, we concluded the sale of a patent portfolio related to theSecure Drop product line for $500,000.

 

**EMPLOYEES**

** **

Asof February 29, 2008, wehad approximately eight full-time employees in the United States, sevenfull-time employees in Macau, 29 full-time employees in the Philippines, onefull-time employee in Cambodia, 69 full-time employees in China, and 64full-time employees in Australia. None of our U.S., 

 

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Macau,Philippines, Cambodia or China employees are represented by a labor union, andwe consider our relationships with our employees to be satisfactory.

 

**AVAILABLE INFORMATION**

** **

Ourwebsite is located at www.elixirgaming.com. The information on or accessible through our web site is not part ofthis annual report on Form 10-K.  Acopy of this annual report on Form 10-K is located at the SEC’s PublicReference Room at 100 F Street, NE, Washington, D.C. 20549. Information onthe operation of the Public Reference Room can be obtained by calling theSEC at 1-800-SEC-0330. The SEC maintains an internet site that containsreports, proxy and information statements and other information regarding ourfilings at www.sec.gov.

 

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**EXECUTIVEOFFICERS OF THE REGISTRANT**

 

Thenames of our executive officers and their ages, titles and biographies as of January 31,2008 are set forth below:

 
| **Name**       | ** ** | **Age** | ** ** | **Position**                                                               |
|----------------|------------|---------|------------|----------------------------------------------------------------------------|
| Gordon Yuen    |       | 50      |       | Chairman of the Board  of Directors, President and Chief Executive Officer |
| Joe Pisano     |       | 50      |       | Executive Vice  President                                                  |
| David Reberger |       | 35      |       | Treasurer, Chief  Financial Officer, and Secretary                         |
| Martha Vlcek   |       | 47      |       | Vice President of  Finance and Chief Accounting Officer                    |

 

Ourexecutive officers are appointed by, and serve at the discretion of, our boardof directors. Each executive officer is a full-time employee. There is nofamily relationship between any of our executive officers or directors.

 

*Gordon Yuen*joined our board ofdirectors in September 2007 and has served as chairman of the board andour president and chief executive officer since September 2007.  Mr. Yuen has served as chief executiveofficer of Elixir Group since 2002. Mr. Yuen has extensive experience inkey management positions in IT companies and financial institutions, includingHong Kong Shanghai Bank (HSBC), American Express International and AmericanExpress Bank. Mr. Yuen graduated from York University, Ontario, Canada,with a Bachelor of Arts with a major in Business Administration.

 

*Joe Pisano* joined our board ofdirectors in September 2007 and has served as our senior vice presidentsince September 2007 and executive vice president since February 2008.Mr. Pisano has served as general manager of gaming for Elixir Group since August 2006.From March 2002 to July 2006, Mr. Pisano served as businessdevelopment manager-Asia Pacific for IGT (Australia) Pty Ltd, a wholly-ownedsubsidiary of International Game Technology (NYSE:IGT), a designer, developerand manufacturer of microprocessor based gaming products. Mr. Pisano has aMasters in Business and Technology from the University of New South Wales inAustralia.

 

*David Reberger* has served as ourtreasurer, chief financial officer and secretary since September 2007.   Mr. Reberger had served as a consultantto Elixir Group from August 2007 to September 2007. Between April 2001and August 2007, Mr. Reberger served as a mergers and acquisitionsadviser in the Sydney, Australia office of CIBC World Markets where he was anexecutive director and industry head of the Asia-Pacific gaming, lodging andleisure group.  Mr. Reberger is aqualified charted accountant and has a Bachelor and Master of Commerce from theUniversity of New South Wales in Australia.

 

*MarthaVlcek*has served as our vice president of finance since April 2007 andhas served as our chief accounting officer since November 2007.  From November 2006 to March 2007, Ms. Vlcekwas a consultant to various companies within the gaming industry. From June 2006to October 2006, Ms. Vlcek served as chief financial officer ofWinWin Gaming, Inc., a Las Vegas, Nevada based multi-media developer andpublisher of sports, lottery and other games. From February 2005 to June 2006,Ms. Vlcek was a consultant to various companies. From August 2002 to February 2005,Ms Vlcek served as vice president finance, Bally Gaming Inc. (Alliance GamingInc.). Prior to that Ms. Vlcek served as vice president and chieffinancial officer of PDS Gaming Corporation.

 

**ITEM 1A.               RISK FACTORS.**

 

In this report we make, and from time-to-time we otherwise make,written and oral statements regarding our business and prospects, such asprojections of future performance, statements of management’s plans andobjectives, forecasts of market trends, and other matters that areforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  Statements containing the words orphrases “will likely result,” “are expected to,” “will 

 

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continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,”“anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” orsimilar expressions identify forward-looking statements, which may appear indocuments, reports, filings with the Securities and Exchange Commission, newsreleases, written or oral presentations made by officers or otherrepresentatives made by us to analysts, stockholders, investors, newsorganizations and others, and discussions with management and other of ourrepresentatives.  For such statements, weclaim the protection of the safe harbor for forward-looking statements containedin the Private Securities Litigation Reform Act of 1995.

 

Our future results, including results related to forward-lookingstatements, involve a number of risks 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 arebased upon assumptions that are sometimes based upon estimates, data,communications and other information from suppliers, government agencies andother sources that may be subject to revision. Except as required by law, we do not undertake any obligation to updateor keep current either (i) any forward-looking statement to reflect eventsor 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 matters identified or described by us from time totime in filings with the SEC, there are several important factors that couldcause our future results to differ materially from historical results ortrends, results anticipated or planned by us, or results that are reflectedfrom time to time in any forward-looking statement. Some of these importantfactors, but not necessarily all important factors, include the following:

 

***We have a history of significant operating lossesand anticipate continued operating losses for at least the near term***. For the yearsended December 31, 2007 and 2006, we have incurred net losses of $234,598,580and $14,605,762, respectively, and our operations have used $11,662,149 and$7,709,812 of cash, respectively. As of December 31, 2007, we had anaccumulated deficit of $327,556,413. 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 pursuant to the Participation Agreement, there can be no assurance thatwe will be successful in generating positive cash flows from operations.

 

***The transactions under theParticipation Agreement with Elixir******Group******represent a material change in our business model, andthat business model has not been proven by us.*** On September 10,2007, we closed on the transactions pursuant to the Participation Agreementwith Elixir Group. Our decision to pursue the transactions under theParticipation Agreement, and specifically our decision to issue the significantequity to Elixir Group based upon the resulting placement of electronic gamingmachines, was based in large part on certain pro forma financial projectionsand underlying forecasts and assumptions concerning future events andcircumstances, including, but not limited to, Elixir Group’s ability to sourceand identify venue owners in the general Asia market with which we might placeelectronic gaming machines and the commercial success of those machines, whichour management believed to be significant to our future operations under theParticipation Agreement. Some assumptions will invariably not materialize andsome unanticipated events and circumstances occurring subsequently may affectother assumptions. Therefore, the actual results achieved may vary from the proforma projections considered by our management, and the variations may bematerial. No assurance can be given that our future results of operations underthe Participation Agreement will meet with consumer acceptance or marketsuccess.

 

***Our revenues from our gaming machine participationoperations are difficult to predict and may vary from our projections becau******se the business model is new andthe venues are not operated by us******.***  In connection with our June 2007Participation Agreement with Elixir Group, our primary focus now is on 

 

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theownership and leasing of gaming machines on a revenue sharing basis acrossseveral countries in Asia.  Inassociation with Elixir Group, we focus on targeting venue owners inunderserved gaming markets who have little or no gaming operations orexperience.  Since we participate on arevenue sharing basis with these venue owners, our revenue generated from therevenue sharing arrangements will be dependent to a significant degree on theefforts and capabilities of the venue owners. Our revenues and results of operations from our gaming machineparticipation may be difficult to predict and may vary depending on the abilityof the venue owners to manage the gaming operations of their venues.  Accordingly, there can be no guarantee thatthe venue owners will be able to manage the gaming operations successfully orthat the gaming venues operated by them will perform at levels consistent withour financial projections and underlying forecasts and assumptions. Further we have very limited past business relationships with the venueoperators and assume that the venue operators are reputable. In the event thatany of the venue operators are not reputable this would expose us to the riskof being unable to collect the revenue to which we are entitled under therevenue share arrangement and protect our gaming machine assets (all of whichare not insured). The risk of collecting the revenue rightfully due under therevenue share arrangement and protecting our gaming machine assets isheightened where delays are experienced by Elixir Group in installing a casinomanagement system once a venue is in operation which has happened in the past.

 

***We will require additional funding in the future tocontinue to operate our business***.   After giving effect to our receipt ofapproximately $90.0 million in net proceeds from the private placements ofour common shares and the exercise of warrants and the payment of$22.0 million in trade payable and notes payable during the fourth quarterof 2007, as of December 31, 2007 we had working capital of approximately$35.6 million. We believe we have sufficient cash on hand to fulfill allcurrent obligations as they become due. However, we believe in order to fund our projected agreements for theplacement of electronic gaming machines pursuant to the Participation Agreementwe will need at least $40.0 million of additional capital over the next12 months. We will endeavor to raise additional funds through variousfinancing sources, including the sale of our equity and debt securities and theprocurement of commercial debt financing, whether through Elixir Group or otherparties with a bias toward debt financing over equity raisings. However, therecan be no guarantees that such funds will be available on commerciallyreasonable terms, if at all. If such financing is not available on satisfactoryterms, we may be unable to expand or continue our business as desired andoperating results may be adversely affected. Any debt financing will increaseexpenses and must be repaid regardless of operating results and may involverestrictions limiting our operating flexibility. If we issue equity securitiesto raise additional funds, the following results may occur:

 

·                  the percentage ownership ofour existing stockholders will be reduced;

·                  our stockholders mayexperience additional dilution in net book value per share; or

·                  the new equity securitiesmay have rights, preferences or privileges senior to those of the holders ofour common stock.

 

***Our shareholders will undergo significant equitydilution pursuant to the transactions completed by the Participation Agreement***. According tothe terms of the Participation Agreement, Elixir Group has the right to “earn-in”an equity interest in our company based on the achievement of variousperformance milestones in terms of the cumulative number of the electronicgaming machines that are contracted to be placed and actually placed by us withvenue owners sourced and identified by Elixir Group. At the initial closing ofthe transaction under the Participation Agreement, we issued to Elixir Group25,000,000 common shares and warrants, with an exercise price of $2.65 pershare, to purchase up to 88,000,000 additional shares of our common stock.  Elixir Group is entitled to earn a total of55,000,000 shares of our common stock (inclusive of the 25,000,000 sharesissued at the initial closing and the 15,000,000 shares issued on September 13,2007), and the warrants will vest and become exercisable subject to achievingcertain performance milestones with respect to the cumulative number of gamingmachines under contract and gaming machines in operation. Our issuance ofequity to Elixir Group pursuant to the Participation Agreement will result insignificant equity dilution to our shareholders.

 

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InDecember 2007, Elixir Group sold 10 million of the 88 millionwarrants issued under the Participation Agreement to certain accreditedinvestors who immediately exercised the 10 million warrants. Pursuant tothe Exchange Agreement with Elixir Group dated October 21, 2007, we haveagreed to issue shares of our common stock in exchange for Elixir Group’scancellation of the remaining 78 million warrants issued under theParticipation Agreement, at an exchange ratio of one common share for every 2.5outstanding warrants. As of March 26, 2008, we have issued 4.8 millionshares of our common stock in exchange for Elixir Group’s cancellation of 12million of its outstanding vested warrants. We have also agreed to issue up to26.4 million shares of our common stock in exchange for Elixir Group’scancellation of 66 million of its outstanding unvested warrants, subject to thevesting of such warrants.

 

***The accounting treatment for thetransactions under the Participation Agreement will negatively impact ourreportable net results over the life of the gaming machine lease agreementsthat relate to the equity earned by Elixir******Group*****.** Our issuance of commonshares and warrants to Elixir Group under the Participation Agreement isaccounted for under EITF No. 96-18, *Accounting for EquityInstruments that are Issued to Other than Employees for Acquiring, or inConjunction with Selling, Goods or Services*, which addresses theaccounting for, among other things, the issuance of equity in exchange forservices rendered. As electronic gaming machines are placed with venue ownersin satisfaction of the performance milestones set forth in the ParticipationAgreement, and Elixir Group earns equity thereby, we will record contractacquisition fees and additional paid-in-capital, in the dollar amounts ofshares earned using the values of the shares earned based on market prices asof the dates of placement. Assuming Elixir Group achieves all the remainingperformance milestones under the Participation Agreement, earns the remaining15,000,000 common shares and the 66 million warrants become vested andimmediately exchanged for 26.4 million common shares under the ExchangeAgreement and assuming a $3.00 per share price we would realize approximately$124.2 million in non-cash charges to our statement of operations.   Although this amount is a non-cash chargeand would not negatively impact cash flows from operations or EBITDA, the chargeswill materially negatively impact our reportable net profits/(losses) fromoperations.

 

***Elixir Group holds a significantinterest in our common stock, giving Elixir******Group******the power to control our management and all******shareholder******actions*****.** As a result of thetransactions consummated under the Participation Agreement, our company hasundergone a change in control in which Elixir Group now holds a significantinterest in our company. As of March 26, 2008, Elixir Group owns 45.8million shares of our common stock, representing 39.9% of our issued andoutstanding common shares, and has the right to earn another 15 million commonshares under the Participation Agreement and another 26.4 million shares underthe Exchange Agreement with Elixir Group dated October 21, 2007.Accordingly, Elixir Group effectively controls our management and all mattersrequiring approval by our shareholders, including the ability to control ourboard of directors and effect the approval of mergers and other significantcorporate transactions. This concentration of ownership will make it difficultfor other shareholders to effect substantial changes in our company, and alsowill have the effect of delaying, preventing or expediting, as the case may be,a further change in control of our company.

 

***The**********interests of Elixir******Group******may conflict with the interests of our other******shareholders*****.** Elixir Group, as ourprincipal shareholder, effectively controls all matters submitted forshareholder approval and has control over our management and affairs. We cannotassure you that the interests of Elixir Group will coincide with the interestsof our other shareholders. Although our board of directors has created aconflicts committee, made up exclusively of directors independent of ElixirGroup, with veto rights over certain transactions between us and Elixir Group,in circumstances involving a conflict of interest between Elixir Group, on theone hand, and our company or the other shareholders, on the other, we can giveno assurance that Elixir Group would not exercise its power to control us in amanner that would benefit Elixir Group to the detriment of our othershareholders.

 

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***We rely on distributors exclusivelyin all our markets and our limited sales experience in foreign countries could causeus to lose sales***. All sales of our products are achieved throughdistributor relationships, including our arrangements with Elixir Group andSuzo Happ Group. We believe the distributors that we have engaged areexperienced and reputable; however, if we are unable to manage theserelationships, our ability to generate revenue and profits in may be adverselyaffected.

 

***Our growth into markets outside theUnited States exposes us to risks inherent in international business operations***. We intend tomarket our gaming machine participation business and sell our table gameproducts outside the United States. We intend to focus our sales efforts inAsia, but our international expansion efforts may not be successful. Ourinternational operations expose us to risks and challenges that we wouldotherwise not face if we conducted our business only in the United States, suchas:

 

·                  increased cost of enforcing our intellectualproperty rights;

·                  heightened price sensitivity from customersin emerging markets;

·                  our ability to establish local manufacturing,support and service functions, and to form channel relationships with resellersin non-U.S. markets;

·                  localization of our electronic gamingmachines and components, including translation into foreign languages and theassociated expenses;

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

·                  foreign currency fluctuations;

·                  laws favoring local competitors;

·                  weaker legal protections of intellectualproperty rights and mechanisms for enforcing those rights;

·                  market disruptions created by public healthcrises in regions outside the U.S., such as Avian flu, SARS and other diseases;

·                  difficulties in staffing and managing foreignoperations, including challenges presented by relationships with workers’councils and labor unions; and

·                  changing regional economic and politicalconditions.

 

***We may be unable to adequatelyprotect our intellectual property rights***. Our success in businessesother than gaming machine participation is impacted by maintaining theconfidentiality and proprietary nature of our intellectual property rights. Ourability to compete may be damaged, and our revenues may be reduced if we areunable to protect our intellectual property rights adequately. To protect theserights, 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. Theprotections provided by laws governing intellectual property rights do notprevent our competitors from developing, independently, products similar orsuperior to our products and technologies. In addition, effective protection ofcopyrights, trade secrets, trademarks, and other proprietary rights may beunavailable or limited in certain foreign countries. We may be unaware ofcertain non-publicly available patent applications, which, if issued aspatents, could relate to our services and products as currently designed or aswe may modify them in the future. Legal or regulatory proceedings to enforceour patents, trademarks or copyrights could be costly, time consuming, andcould divert the attention of management and technical personnel.

 

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***It is possible that our productsexcluding our gaming machine participation business will be the subject offuture patent litigation if the products are sold and installed in the UnitedStates and, if commenced, could subject us to continuing litigation costs andrisks***. To the extent that we introduce new products thatincorporate the same or similar technology, it is likely that a competitor willbring one or more claims against us seeking damages, injunctive or otherequitable relief, or both. We cannot predict the outcome of any present orfuture litigation that may occur.

 

Ifour future products incorporate technologies that infringe the proprietaryrights of third parties and we do not secure licenses from them, we could beliable for substantial damages that would cause a material reduction inrevenues and impair our prospects for achieving growth and profitability.

 

Infurtherance of the development of our services or products, we may need toacquire licenses for intellectual property to avoid infringement of third partyrights or claims of infringement. These licenses may not be available oncommercially reasonable terms, if at all. Claims for infringement, if made, coulddamage our business prospects, our results of operations and financialcondition, whether or not the 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.

 

Ifany third party prevails in an action against us for infringement of itsproprietary rights, we could be required to pay damages and either enter intocostly licensing arrangements or redesign our products so as to exclude theinfringing technology. As a result, we would incur substantial costs and delaysin product development, sales and shipments, our revenues may decline substantiallyand we may not be able to achieve the growth required for us to achieveprofitability.

 

***Our board of directors may issueblank check preferred stock, which may affect the voting rights of our holdersand could deter or delay an attempt to obtain control of us***. Our board ofdirectors is authorized, without stockholder approval, to issue preferred stockin series and to fix and state the voting rights and powers, designation,preferences and relative, participating, optional or other special rights ofthe shares of each such series and the qualifications, limitations andrestrictions thereof. Preferred stock may rank prior to our common stock withrespect to dividends rights, liquidation preferences, or both, and may havefull or limited voting rights. Accordingly, issuance of shares of preferredstock could adversely affect the voting power of holders of our common stockand could have the effect of deterring or delaying an attempt to obtain controlof us.

 

**ITEM 1B.               UNRESOLVED STAFF COMMENTS**

 

Notapplicable.

 

## **ITEM 2.                  PROPERTIES.**

## ** **

In March 2008, we moved our U.S. headquarters to new offices at6650 Via Austi Parkway, Suite 170, Las Vegas, Nevada, which consists ofapproximately 2,600 square feet of office facilities used for accounting andadministration.  The lease requiresmonthly payments of approximately $7,200 and expires in March 2010.

 

Prior to March 2008, our headquarters were located at 1120 TownCenter Drive, Suite 260, Las Vegas, Nevada, which consist of approximately7,000 square feet of office facilities. The five-year lease requires paymentsof approximately $18,000 per month and expires in February 2012.   In February 2008, we entered into asublease for the balance of our term. Pursuant to the sublease agreement, our sublessee is required to pay usrent in the amount of $14,600 per month, a 20% discount on our base rentpayable by us, throughout the term of the lease.  Additionally, we lease approximately 3,000square feet of 

 

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warehouse space located at 6151 S. McLeod, Suite A, Las Vegas,Nevada. The three-year lease requires payments of approximately $2,500 permonth and expires in February 2010. We are currently seeking a subtenant for this location as we have movedour entire inventory to our distributor locations on consignment.

 

We also lease the following offices throughout Asia and in Australia:

 
| **Location/Activities**                                       | ** ** | **Expiration Date********of Lease** | ** ** | **Monthly********Lease********Payment********(USD)** | ** ** | **Area  (sq. ft.)** |
|---------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------|------------|---------------------|
| Zhuhai, China; Research  and Development facilities           |       | December 2009                  |       | $                                                    | 4,700      |                | 5,000 |
| Melbourne, Australia;  Administrative offices                 |       | December 2013                  |       | 20,300                                               |       | 32,000              |
| Melbourne, Australia;  Manufacturing and Warehouse facilities |       | January 2014                   |       | 19,600                                               |       | 32,000              |
| Philippines;  Administrative office                           |       | April 2012                     |       | 5,900                                                |       | 5,100               |
| Philippines; Warehouse  facilities                            |       | March 2009                     |       | 3,260                                                |       | 5,800               |
| Cambodia;  Administrative office                              |       | March 2008                     |       | 2,600                                                |       | 500                 |
| Guangdong, China;  Manufacturing facilities                   |       | August 2008                    |       | 4,800                                                |       | 47,000              |
|                                                               |            |                                     |            |                                                      |            |                     |  |

 

We share office space in Macau and Hong Kong with Elixir Group.  We are presently negotiating lease terms atthese sites.  Our facilities are suitablefor their respective uses and, in general, are adequate to support our currentand anticipated future level of business operations.

 

## **ITEM3.                  LEGAL PROCEEDINGS.**

## ** **

On October 5, 2004, Shuffle Master filed a patent infringementaction against us in the United States District Court, District of Nevada (CaseNo. CV-S-04-1373-JCM-LRL) claiming that the use, importation and offeringfor sale of our PokerOne shuffler infringed Shuffle Master’s United StatesPatent, No. 6,655,684. We responded by denying Shuffle Master’s claim ofpatent infringement. On April 27, 2007, we filed a motion for summaryjudgment and on February 1, 2008, the District Court granted our motionfor summary judgment on all patent infringement claims.  On February 29, 2008, Shuffle Masterfiled a notice of appeal of the February 1, 2008 court ruling.  On February 15, 2008, we delivered ademand to Shuffle Master for $3.0 million in damages for the wrongfulinjunction they obtained in 2004.  Wealso filed a motion in District Court to recover our attorneys’ fees in thelitigation.  We intend to vigorouslypursue collection of the $3.0 million bond and our attorneys’ fees from ShuffleMaster, however, there can be no assurances we will be successful in doing so.

 

OnOctober 5, 2007, William Purton and two entities under his control (“Purton”)filed suit in the Supreme Court of Victoria, Australia for claims totalingapproximately $1,203,500 he alleges to be owed under the July 2006 sharesale agreement pursuant to which we purchased Dolphin Advanced Technologies,Pty Ltd. from Purton.  We filed a defenseand counterclaim against Purton alleging that Purton owes us in excess of$1,000,000 pursuant to certain breaches of his representations, warranties andcovenants in the share sale agreement. The matter is proceeding toward trialand we intend to vigorously defend our position and prosecute our counterclaim.

 

20

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## **ITEM 4.                  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

## ** **

OnDecember 17, 2007, we held our annual meeting of shareholders in HongKong.  Out of 93,781,022 common sharesissued and outstanding as of the record date and entitled to vote at suchannual meeting, there were present at such meeting, in person and by proxy,shareholders holding 68,510,346 of our voting shares.  We held the annual meeting of shareholders,for the purposes of:

 

·                  Re-electing eight directors,each to serve until our 2008 annual meeting of shareholders; and

 

·                  Approving the ExchangeAgreement dated October 21, 2007 between us and Elixir Group, and toauthorize and approve our issuance of shares of our common stock to ElixirGroup pursuant thereto.

 

Allof the persons nominated to serve on our board of directors, namely GordonYuen, Joe Pisano, Lorna Patajo-Kapunan, Major General Paul A. Harvey, VincentL. DiVito, Robert L. Miodunski, Clarence Chung and John Crawford, were electedto our board of directors.  In addition,our shareholders approved the Exchange Agreement and our issuance of shares ofour common stock to Elixir Group pursuant thereto, as follows:

 
| Shares  voted for  |   | 67,276,842 |   |
|--------------------|--------|------------|--------|
| Shares  against    |   | 1,231,204  |   |
| Shares  abstaining |   | 2,300      |   |

 

Therewere no broker non-votes cast on any of the above matters.

 

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# **PART II**

# ** **

**ITEM 5.****                                                     ****MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITYSECURITIES.**

## ** **

**Market Information**

** **

Ourcommon stock currently trades on the American Stock Exchange, or AMEX, underthe symbol “EGT.”

 

Thefollowing table sets forth the high and low closing sale price of our commonstock, as reported by the AMEX for each quarter during the past two fiscalyears:

 
| **2007**       | ** ** | **Low** | ** ** | **High** | ** ** |
|----------------|------------|---------|------------|----------|------------|
| Fourth Quarter |       | $       | 3.41       |     | $          | 5.78 |   |
| Third Quarter  |       | $       | 2.60       |     | $          | 4.37 |   |
| Second Quarter |       | $       | 2.63       |     | $          | 4.05 |   |
| First Quarter  |       | $       | 1.87       |     | $          | 2.90 |   |
|           |       |    |       |     |       |
| **2006**       | ** ** | **Low** | ** ** | **High** | ** ** |
| Fourth Quarter |       | $       | 1.97       |     | $          | 2.70 |   |
| Third Quarter  |       | $       | 1.98       |     | $          | 2.62 |   |
| Second Quarter |       | $       | 2.00       |     | $          | 2.96 |   |
| First Quarter  |       | $       | 2.20       |     | $          | 3.80 |   |

 

**Holders of Record**

 

Asof March 26, 2008, we hadoutstanding 114,930,365 shares of common stock, held by approximately 267shareholders 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.

 

Forequity compensation plan information, please refer to Item 12 in Part IIIof this annual report on Form 10-K.

 

## **ITEM 6.**                                                     SELECTED FINANCIAL DATA.

## ** **

Notapplicable.

 

**ITEM 7.****                                                     ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**OVERVIEW**

 

We intend for this discussion to provide the readerwith information that will assist in understanding our financial statements,the changes in certain key items in those financial statements from year toyear, and the primary factors that accounted for those changes, as well as howcertain accounting principles affect our financial statements.  The discussion also provides informationabout the financial results of the various segments of our business to providea better understanding of how those segments and their 

 

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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, 2007and 2006 included elsewhere in this report.

 

Our operations currently consist of three segments:

 

·                  *Gaming machineparticipation*,which focuses on our ownership of electronic gaming machines placed in resorts,hotels, cruise ships and other venues throughout Asia placed on a revenuesharing basis;

 

·                  *Table game products,*which focuses on the design, manufactureand distribution of table game products, including traditional and RFID casinochips, automated shuffling devices, card scanners and chip washers; and

 

·                  *Non-gaming products,* which focuses on the design, manufactureand sale of component parts primarily for the automotive industry.

 

Prior to July 2006, our operations consistedexclusively of our design, manufacture and distribution of table game products,particularly automated shuffling devices, card scanners and chip washers.  In July 2006, we acquired our non-gamingproduct division and expanded our table game product line through ouracquisition of Dolphin Advanced Technologies PTY Ltd (“Dolphin”), a Melbourne,Australia business engaged in the design, manufacture and distribution oftraditional and RFID casino chips and component parts primarily for theautomotive industry.  Our results ofoperations set forth in the consolidated financial statement for fiscal years2007 and 2006 include the results of Dolphin for all periods subsequent to the July 12,2006 closing of the acquisition, and approximately 48.2% and 54.3% of our totalrevenue in fiscal 2007 and 2006, respectively, consisted of revenue derivedfrom the non-gaming products.

 

In September 2007, we commenced our gamingmachine participation operations and since then our primary business focus hasbeen on the ownership and leasing of electronic gaming machines placed withvenue owners on a revenue share basis across several countries in Asia where weor our affiliates have established a strategic presence.  Revenue from our electronic gaming machineparticipation operations comprised three percent (3%) of our total revenues forthe year ended December 31, 2007.

 

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** **

**RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31,2007 AND 2006**

** **

**The following is a scheduleshowing summarized operating results on a consolidated basis and separately byeach of our three segments:  gamingmachine participation, table game products and non-gaming products.**

 
| ** **                       | ** ** | ** ** | ** **   | ** ** | ** ** | **Increase (Decrease)** | ** ** |
|----------------------------------|------------|------------|--------------|------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** ** | ** **   | ** ** | ** ** | **from 2006 to 2007**   | ** ** |
| ** **                       | ** ** | **2007**   | ** **   | **2006**   | ** ** | **Dollar Amount**       | ** ** | **% Amount** | ** ** |
| Total:                           |       |       |         |       |       |                    |       |   |   |
| Revenues                         |       | $          | 12,240,563   |       | $          | 7,838,214               |       | $ | 4,402,349 |   | 56 | % |
| Gross loss                       |       | $          | (486,849     | )          | $          | (1,063,310              | )          | $ | 576,461 |   | 54 | % |
| Gross margin percentage          |       | (4         | )%           | (14        | )%         | 10                      | %          | 74 | % |
| Operating loss                   |       | $          | (234,648,661 | )          | $          | (11,153,668             | )          | $ | (223,494,993 | ) | 2,004 | % |
| Net loss                         |       | $          | (234,598,580 | )          | $          | (14,605,762             | )          | $ | (219,992,818 | ) | 1,506 | % |
|                             |       |       |         |       |       |                    |       |   |   |
| Basic and diluted loss per share |       | $          | (4.55        | )          | $          | (0.60                   | )          | $ | (3.95 | ) | 658 | % |
|                             |       |       |         |       |       |                    |       |   |   |
| Gaming machine  participation:   |       |       |         |       |       |                    |       |   |   |
| Revenues                         |       | $          | 389,596      |       | $          | —                  |       | $ | 389,596 |   | 100 | % |
| Gross loss                       |       | $          | (288,129     | )          | $          | —                  |       | $ | (288,129 | ) | 100 | % |
| Gross margin percentage          |       | (74        | )%           | —     |       | (74                     | )%         | 100 | % |
|                             |       |       |         |       |       |                    |       |   |   |
| In-service units                 |       | 320        |         | —     |       | 320                     |       | 100 | % |
|                             |       |       |         |       |       |                    |       |   |   |
| Table game products:             |       |       |         |       |       |                    |       |   |   |
| Revenues                         |       | $          | 5,206,076    |       | $          | 4,057,784               |       | $ | 1,148,292 |   | 28 | % |
| Gross loss                       |       | $          | (181,406     | )          | $          | (183,257                | )          | $ | 1,851 |   | 1 | % |
| Gross margin percentage          |       | (3         | )%           | (5         | )%         | 2                       | %          | 4 | % |
|                             |       |       |         |       |       |                    |       |   |   |
| Units sold:                      |       |       |         |       |       |                    |       |   |   |
| Shufflers                        |       | 177        |         | 301        |       | (124                    | )          | 41 | % |
| DeckCheckers                     |       | 98         |         | 107        |       | (9                      | )          | 8 | % |
| ChipWashers                      |       | 4          |         | —     |       | 4                       |       | — |   |
| RFID Chips                       |       | 1,005,502  |         | 350,251    |       | 655,251                 |       | 187 | % |
|                             |       |       |         |       |       |                    |       |   |   |
| Non-gaming products:             |       |       |         |       |       |                    |       |   |   |
| Revenues                         |       | $          | 6,644,891    |       | $          | 3,780,430               |       | $ | 2,864,461 |   | 76 | % |
| Gross loss                       |       | $          | (17,314      | )          | $          | (880,053                | )          | $ | 862,739 |   | 98 | % |
| Gross margin percentage          |       | NM         | %            | (23        | )%         | 30                      | %          | 129 | % |

** **

**Overview**

 

Total revenues increased and gross loss decreased infiscal 2007 over the prior year predominantly due to non-gaming operationswhich was primarily a result of our owning Dolphin for all of fiscal 2007versus the last six months in the prior year period.  We also improved both revenues and grossmargin in our table game products segment primarily due to the growth in thesale of RFID chips as a result of new property openings in Macau.

 

Operating loss and loss per share in fiscal 2007 werenegatively impacted by significant non-recurring transactions in fiscal 2007,most of which resulted in non-cash charges, as follows:

 

·                  Contract acquisition fees of $170.9million as a result of our issuance of shares and warrants to Elixir Group forperformance milestones attained in accordance with the Participation Agreement.

 

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·                  Impairments to assets of $40.5 million asfollows:

 

·                  $27.3 million related to the impairmentto the fair value of warrants issued to Elixir Group as a prepaid commission inJanuary 2007 and modified in September 2007; and

 

·                  $13.2 million of impairment to goodwilland other intangibles of Dolphin in accordance with SFAS 142 and SFAS 144.

 

·                  Restructuring charges of $1.4 million dueto management redundancies and reductions in service and other staff as aresult of completing the transition to a full distributor model.

 

·                  Loss on extinguishment of debt of $1.4million related to the early payoff of the long-term debt in November 2007.

 

·                  Stock-based compensation expense of $5.9million primarily as a result of the accelerated vesting of outstanding optionstriggered by the change of control of our company in September 2007 andthe issuance of 5,000,000 shares to our executive management and affiliates ofElixir Group in September 2007.

 

**Gaming Machine Participation**

 

In September 2007, we began our electronic gamingmachine participation operations in Asia as part of our primary focus ofplacing electronic gaming machines and casino management systems on a revenuesharing basis.   As of December 31,2007, we had entered into contracts for the placement of over 1,500 games inover 12 venues in the Philippines and Cambodia, of which 320 machines were inservice and generating revenue.

 

Our costs of gaming machine participation consistprimarily of depreciation on the electronic gaming machines and systems,specific joint sharing costs and other installation and training expenses. Webegin to depreciate our electronic gaming machines and casino managementsystems costs once the machine is placed into service and generatingrevenue.  Our depreciation cost onelectronic gaming machines and casino management systems is approximately$13.00 per machine per day.

 

**Table Game Products**

 

Table game products revenueincreased primarily as a result of increases in shuffler revenue and RFID chiprevenue.  Shuffler revenue increased byapproximately $845,000 to $923,000 for the year ended December 31, 2007compared to $78,000, net of sales returns of $383,000, in the prior year.  Returns were recorded due to productperformance.  The increase in shufflerrevenue is a result of the prior year roll out of our new line of shufflers atlow introductory or replacement prices and higher returns due to poorperforming equipment.  In the currentyear we sold less shuffler units but at significantly higher average sellingprices.  The increase in RFID chiprevenue of $468,000 from $1,799,000 in fiscal 2006 to $2,267,000 in fiscal 2007is due to new casino openings in Asia.

 

Our gross loss on table game products decreased infiscal 2007 over the prior year due to the increased sales prices for ourshufflers, increased sales of our casino chips which typically carry a higherprofit margin and the reduction in our service costs.  In fiscal 2006, we incurred $2.1 million ofcosts in connection with our direct servicing of our table game products,compared to servicing costs of $728,000 in fiscal 2007.  In connection with our out-sourcing of thedistribution and sales of our table game products, we also out-sourced theservicing of all table game products during the fourth quarter 2007.  The improvements in gross loss were offset bya write-down of inventory of $1.6 million. The write-down of inventory was dueto discontinuation of our Poker One product line and product obsolescence andaging.

 

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**Non-Gaming Products**

 

Non-gaming products revenue, which consists ofautomotive tooling and parts, increased in fiscal 2007 from fiscal 2006primarily as a result of owning Dolphin for the entire 2007 fiscal yearcompared to the last six months in the prior year.  Contracts with our major suppliers providefor a steady flow of revenue from these sources and therefore we do not expectto see major variances from year-to-year from this revenue stream.

 

Gross margins improved due to improvements inproduction efficiencies, reduced production headcount and a decrease in toolingcosts as a result of a new car introduction in 2006.  In the prior year, we converted ourproduction line for a new long-term automotive contract incurring costs of $1.8million.  Expectations are that our grossmargins will continue to improve in the near future.

 

**Operating Expenses**

 

Thefollowing is a schedule showing expenses on a consolidated basis:

 
| ** **                                                                         | ** ** | ** **  | ** **  | ** ** | ** ** | **Increase (Decrease)** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|-------------------------|------------|
| ** **                                                                         | ** ** | ** **  | ** **  | ** ** | ** ** | **from 2006 to 2007**   | ** ** |
| ** **                                                                         | ** ** | **2007**    | ** **  | **2006**   | ** ** | **Dollar Amount**       | ** ** | **% Amount** | ** ** |
| Selling, general and administrative (including stock- based  compensation expense) |       | $           | 18,139,530  |       | $          | 7,909,776               |       | $ | 10,229,754 |   | 129 | % |
| Research and development                                                           |       | 974,870     |        | 1,555,882  |       | (581,012                | )          | (37 | )% |
| Depreciation and  amortization                                                     |       | 1,002,607   |        | 624,700    |       | 377,907                 |       | 60 | % |
| Impairment of goodwill, intangibles and other assets                               |       | 40,458,972  |        | —     |       | 40,458,972              |       | 100 | % |
| Contract acquisition fees                                                          |       | 170,857,000 |        | —     |       | 170,857,000             |       | 100 | % |
| Restructuring charges                                                              |       | 1,362,750   |        | —     |       | 1,362,750               |       | 100 | % |
| Loss on extinguishment of  debt                                                    |       | 1,366,083   |        | —     |       | 1,366,083               |       | 100 | % |
| Total                                                                              |       | $           | 234,161,812 |       | $          | 10,090,358              |       | $ | 224,071,454 |   | 2,221 | % |

 

***Selling, General and Administrative Expense***

 

Duringfiscal 2007, selling, general and administrative expenses increased as a resultof increased stock-based compensation expenses of $5.9 million compared to $1.2million in the prior year due to accelerated vesting of outstanding optionstriggered by our change of control which occurred in September 2007 and5,000,000 options granted to our executive management and to affiliates ofElixir Group.  The remaining increase inselling, general and administrative expenses in 2007 over the prior year is dueto the following:

 

·                  Salaries and wages increasedby $2.3 million in 2007 over the prior year primarily due to an increase in thenumber of senior management executives.

 

·                  Consulting and accountingfees increased $1.5 million in 2007 over the prior year as a result of therestatement of prior year financial statements, S-3 filings, Sarbanes-Oxleycompliance, and a fee paid for the sale of intellectual property.

 

·                  Legal fees increased $0.6million as a result of litigation with Shuffle Master.

 

·                  The remaining increase of $1.0million is due to an increase in expenses relating to investor relations,travel, insurance, rent and other related office expenses.

 

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***Impairment of Goodwill, Intangibles andOther Long-Lived Assets***

 

In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 142, *Goodwilland Other Intangible Assets*, we review goodwill for impairment on anannual basis or more frequently if events or circumstances indicate that thecarrying value may not be recoverable. Dolphin, which was acquired in July 2006,has not met financial operating expectations to date due to a number of factorsincluding the loss of a general manager and sales staff in early 2007 for whichthe company has not yet found suitable replacements.  As such, we determined that the originalfinancial forecast needed to be adjusted downward and tests for impairment werewarranted.

 

In accordance with SFAS 142, we performed atwo-step impairment test which compared the fair value of a reporting unit withits carry amount, including goodwill, and allocating the fair value to all theassets and liabilities of Dolphin as if the reporting unit had been acquired ina business combination.  Based on ourreview, we recorded an impairment adjustment to goodwill of $10.6 million.

 

Long-livedassets and definite-life intangible assets are reviewed for impairment quarterlyor whenever events or circumstances indicate that the carrying amount of assetsmay not be recoverable in accordance with SFAS No. 144, “*Accounting for the Impairment or Disposal of Long-lived Assets.*”We evaluate recoverability of assets to be held and used by comparing thecarrying amount of an asset to future net undiscounted cash flows to begenerated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured as the amount by which the carryingamount of the assets exceeds the fair value of the assets. Such reviews assessthe fair value of the assets based upon our estimates of the future cash flowswe expect the assets to generate. In response to changes in industry and marketconditions, we may be required to strategically realign our resources in thefuture, which could result in an impairment of long-lived assets.

 

We assessed the potential impairment of intangibleassets subject to amortization based upon the factors identified above inaccordance with SFAS No. 144. During the third quarter, we underwent a complete change in ourexecutive management and, at that time, new management intended to hire ageneral manager to oversee and manage the operations of both the gaming andnon-gaming businesses.  We believed thisnew general manager would improve margins and controls costs in line withproduction needs.  Although we believedthat the opportunity to increase sales of RFID chips and plaques wasattainable, we adjusted our financial forecast downward to reflect currentoperations which resulted in an impairment to goodwill and intangibles of $4.5million in the third quarter.  During thefourth quarter 2007, the board directed management to explore possible alternativesfor a joint partnership or a possible sale of the gaming and non-gamingbusinesses.  Although this discussion didnot give rise to recording any assets held for sale under SFAS No. 144criteria, it became clear at this time that management was not going to focuson these businesses and that future investment in these businesses would beheld to a minimum.  Accordingly, wedetermined that the carrying value of the customer relationships and tradenames associated with the table game products segment would not be recoverablebased upon our calculation of the assets’ fair value based on the projected netcash flows expected to result from the assets, including any eventualdisposition.  Based on this calculation,we recorded impairments on intangible assets of the table game products segmentof $2.5 million for customer relationships and $45,000 for trademarks for theyear ended December 31, 2007.

 

The following table summarizes the goodwill andintangible impairment:

 
| Goodwill               |   | $         | 10,576,526 |   |
|------------------------|--------|-----------|------------|--------|
| Customer relationships |   | 2,535,898 |       |
| Trademarks             |   | 45,000    |       |
|                   |   | $         | 13,157,424 |   |

 

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OnJanuary 25, 2007, we issued warrants to purchase up to 16,000,000 sharesof our common stock (the “2006 Warrants”) to Elixir Group, which at the timewas our Asian distributor of table game products, as an incentive to meetcertain sales targets.  These warrantswere accounted for in accordance with Financial Accounting Standards Board (“FASB”)Emerging Issues Task Force Issue (“EITF”) No. 96-18, *Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices*.  The 2006 Warrantshad a fair market value of $6,147,000 as of January 25, 2007 and wereclassified in our balance sheet as prepaid commissions subject to amortizationto commission expense at a rate of 8% of the gross revenue generated by thedistributor.

 

InSeptember 2007, we conducted the initial closing of the transactions underthe Participation Agreement between us and Elixir Group.  In accordance with the ParticipationAgreement, we agreed that upon the initial placement of 1,000 electronic gamingmachines with gaming operators identified by Elixir Group, we would reduce by$1.00 the exercise price of 10 million of the 2006 Warrants, which originallyhad exercise prices ranging from $3.00 per share to $5.50 per share.  When the cumulative number of electronicgaming machines under contract reached 2,000 units and the cumulative number ofelectronic gaming machines placed in operation reaches 1,000 units, we agreedto further reduce by $1.00 the exercise prices of the 10 million warrants. Whenthe cumulative number of electronic gaming machines under contract reaches3,000 units and the cumulative number of electronic gaming machines placed in operationreaches 2,000 units, we will further reduce by $1.00 the exercise prices of the10 million 2006 Warrants. As of the date of this report, we have reduced theexercise price of the 10 million 2006 Warrants by $2.00 based on theachievement of the related performance milestones.

 

Inaccordance with SFAS No. 123R, *Share-basedPayments,*the reduction in exercise price constituted a modificationin terms and the 2006 Warrants and required a recalculation of fair value.  The modification increased the fair value ofthe warrants by $22.7 million bringing the unamortized balance of the prepaidsales incentive account to $28.8 million. Per SFAS No. 144, a long-livedasset (asset group) shall be tested for recoverability whenever events orchanges in circumstances indicate that its carrying amount may not berecoverable including an accumulation of costs significantly in excess of theamount originally expected for the acquisition.

 

Weestimated fair value using present value techniques based on estimates of cashflows.  In accordance with SFAS No. 144,an impairment loss shall be recognized if the carrying amount of an intangibleasset is not recoverable and its carrying amount exceeds its fair value. Afteran impairment loss is recognized, the adjusted carrying amount of theintangible asset shall be its new accounting basis.  Based upon the above, we recorded animpairment to the asset of $27.3 million and included the amount in loss fromoperations in our consolidated statement of operations and deficit.

 

***Contract Acquisition Fees***

 

OnJune 12, 2007, we entered into the Participation Agreement with ElixirGroup. Pursuant to the Participation Agreement, we agreed to issue to ElixirGroup common shares and warrants to purchase common shares, subject to ElixirGroup’s identification and securing of gaming venues located in the generalAsia region on our behalf.  We agreed toplace electronic gaming machines in gaming venues pursuant to lease agreementsbetween us and the venue owner under what are commonly referred to as revenuesharing arrangements, which provide for us to receive variable rental paymentsfor electronic gaming machines as lessor. Elixir Group also agreed to sell to us the electronic gaming machinesthat are placed under the lease agreements.

 

OnSeptember 10, 2007, we conducted an initial closing of the transactionsunder the Participation Agreement. At the initial closing, we issued to ElixirGroup 25,000,000 shares of our common stock and warrants, with an exerciseprice of $2.65 per share, to purchase up to 88,000,000 additional shares of ourcommon stock. Elixir Group is entitled to earn a total of 55,000,000 shares ofour common stock (inclusive of the 25,000,000 shares issued at the initialclosing and the 15,000,000 shares issued on 

 

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September 13,2007), and the 88,000,000 warrants will vest and become exercisable based onthe achievement of certain performance milestones with respect to the number ofelectronic gaming machines under contract and placed with the venue owners.

 

Thetransactions under the Participation Agreement are accounted for pursuant toEITF 96-18 *Accounting for Equity Instruments That Are Issuedto Other Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices. *In accordance with EITF 96-18, wevalued the initial 25,000,000 common shares and 88,000,000 unvested warrants atfair value on the measurement date which occurred when the first performancemilestone was deemed to have been achieved. The common shares were initially capitalized in accordance with SFAS 91,*Accounting for Non-Refundable Fees and CostsAssociated with Originating or Acquiring Loan and Initial Direct Costs ofLeases* and the fair value of the unvested warrants wasdeferred.  The fair value of the commonshares (based on the market price our stock) totaled $77.8 million and the fairvalue of the unvested warrants (based on a Black-Scholes option-pricingcalculation) totaled $160.0 million.

 

In accordance with SFAS No. 144, we tested thisasset for recoverability using present value techniques based on estimatedfuture cash flows.  Based upon thisassessment, we recorded a charge of $77.8 million recorded as contractacquisition fees in the consolidated statement of operations for the year endedDecember 31, 2007.

 

Immediately following the initial closing of thetransactions under the Participation Agreement, Elixir Group became a relatedparty and in accordance with SFAS No. 13 *Accountingfor Leases*, initial direct costs between related parties should notbe capitalized.  Accordingly, upon theachievement of the second performance milestone by Elixir Group on September 13,2007, the 15,000,000 shares of our common stock that were issued (valued at$53.1 million based on the market price of our stock) and the vesting of the22,000,000 warrants (valued at $40.0 million based on a Black-Scholesoption-pricing calculation) was recorded as contract acquisition fess asincurred.

 

***Restructuring Charge***

 

In accordance with SFAS No. 146, *Accounting for Cost Associated with Exit or DisposalActivities*, we incurred a restructuring charge of $1.4 million forseverance wages and benefits based upon contractual and other agreements withemployees which only includes charges for termination benefits measured at theestimated fair value at the termination date. It does not include charges for services yet to be rendered.  The total reduction in headcount was 21people.  On September 10, 2007, aspart of the initial closing of the transactions under the ParticipationAgreement with Elixir Group, we announced a change in executivemanagement.  As part of therestructuring, in October 2007 we gave termination notice to all servicetechnicians, inventory management personnel, some regulatory compliance personneland some administrative staff.  As of January 2008,all these costs had been paid. Restructuring charges have been presented within operating costs andexpenses in the consolidated statement of operations.

 

***Loss on Extinguishment of Debt***

 

On November 1, 2007, we paid in cash $11.0million to certain funds under the management of Bricoleur Capital in fullpayment of our obligations under a debt agreement which included accruedinterest of $0.4 million.  We recorded anon-cash loss on extinguishment of debt of $1.4 million.

 

***Research and Development Expenses***

 

Research and development expenses decreased as aresult of reduced expenses in fiscal 2007 related to the development ofShufflePro and Chip Washer products. Ongoing research and development is currently focused on productenhancements.

 

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***Depreciationand Amortization Expenses***

 

Depreciation andamortization expense increased as a result of owning Dolphin for a full year in2007 compared to six months in 2006. Additionally, costs associated with the implementation of a newaccounting system in August 2007 are being depreciated.

 

**Other Income (Expenses):**

 
| ** **                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2007 vs. 2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
|                              |       |     |       |     |       |              |       |   |   |
| Interest expense and finance fees |       | $        | (2,066,361 | )        | $          | (3,296,378        | )          | $ | 1,230,017 |   | 37 | % |
| Interest income                   |       | 323,312  |       | 29,443   |       | 293,869           |       | 998 | % |
| Acquisition costs                 |       | (195,431 | )          | (163,077 | )          | (32,354           | )          | 20 | % |
| Foreign currency gains            |       | 714,094  |       | —   |       | 714,094           |       | 100 | % |
| Patent sale and other             |       | 521,342  |       | (22,082  | )          | 543,424           |       | 2,461 | % |
| Total other income (expense)      |       | $        | (703,044   | )        | $          | (3,452,094        | )          | $ | 2,749,050 |   | 80 | % |
|                              |       |     |       |     |       |              |       |   |   |
| Income tax provision              |       | $        | 753,125    |     | $          | —            |       | $ | 753,125 |   | 100 | % |

 

***Interest Expense and Finance Fees***

 

The decrease in interest expense and finance fees wasdue to the lower average principal balance on notes payable in fiscal 2007versus fiscal 2006 as a result of principal payments during the year and thepay-off of $11.0 million in long-term debt in November 2007 from theproceeds of a the private placement of common stock in October 2007.

 

***Interest Income***

 

Interest income increased asa result of the increase in our cash and cash equivalents held in overnightmoney market accounts.  Our cash and cashequivalents totaled $68.3 million as of December 31, 2007, compared to$0.3 million at December 31, 2006.

 

***Acquisition Costs***

 

Acquisition costsincreased as a result of recording legal expenses, which were incurred afterthe purchase price allocation period.

 

***Foreign Currency Transactions***

 

Gains as a result of foreign currency transactionsoccurred as a result of US dollar denominated payables in our Philippinessubsidiary, which commenced operations in fiscal 2007, whose functionalcurrency is the Philippines peso.

 

***Patent Sale and Other***

 

Inthe first quarter of 2007, we recorded a $0.5 million gain on the sale of ourintellectual property related to our previously discontinued Secure Dropproduct line.

 

**FINANCIAL CONDITION**

 

**Liquidityand Capital Resources**

** **

As of December 31,2007, we had working capital of $35.6 million, an increase of $37.3 millioncompared to our working capital deficit as of December 31, 2006. In October 2007,we completed a private

 

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placementof 15 million shares of our common stock to institutional investors at a priceof $3.50 per share, generating net proceeds to us, after offering costs, of$49.8 million.  In December 2007,Elixir Group entered into a private transaction with institutional investorswhereby Elixir Group sold 16,000,000 warrants to purchase our common shareswith an exercise price of $2.65 per share for $0.86 per warrant.  As a condition of the sale, the warrants wereimmediately exercised at the closing and we received $40.7 million in netproceeds.

 

Ourworking capital needs for the foreseeable future will be driven primarily byour purchase**of electronic gamingmachines leased** by us on a revenue sharing basisthroughout Asia. We believe we have sufficient cash on hand to fulfill allcurrent obligations as they become due. We believe**in orderto fund projected agreements for the placement of electronic gaming machinespursuant to the Participation Agreement we will need at least $40.0 million ofcapital over the next 12 months in addition to the $90.5 million of capital wereceived**in the fourth quarter of**2007. If we do notraise the additional capital we are under no requirement to purchase additionalelectronic gaming machines from Elixir Group. We will consider raisingadditional funds through various financing sources, including the sale of ourequity and debt securities**and**the procurement of commercial debt financing.However, there can be no guarantees that such funds will be available oncommercially 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 may occur:**

 

**·****                 ****the percentage ownership of ourexisting stockholders will be reduced;**

**·****                 ****our stockholders may experienceadditional dilution in net book value per share; or**

**·****                 ****the new equity securities mayhave rights, preferences or privileges senior to those of the holders of ourcommon stock.**

 

***CashFlows Summary***

 
| ** **                       | ** ** | **2007**        | ** **      | **2006**       | ** ** | **Increase (Decrease)  from 2006 to 2007** | ** ** |
|----------------------------------|------------|-----------------|-----------------|----------------|------------|--------------------------------------------|------------|
| **Cash provided by (used  in):** | ** ** | ** **      | ** **      | ** **     | ** ** | ** **                                 | ** ** |
| **Operations**                   |       | $               | **(11,601,905** | **)**          | $          | **(7,709,812**                             | **)**      | $ | **(3,892,093** | **)** |
| **Investing**                    | ** ** | **(10,313,674** | **)**           | **(1,915,150** | **)**      | **(8,398,524**                             | **)**      |
| **Financing**                    | ** ** | **89,868,511**  | ** **      | **9,023,607**  | ** ** | **80,844,604**                             | ** ** |
| **Net change**                   |       | $               | 67,952,932      |           | $          | (601,355                                   | )          | $ | 68,554,287 |   |

 

****Operations****

 

**Cash used in operations increasedas a result of the increase in our net loss including one-time payments for therestructuring and prepayments on insurance and leased office deposits.**

 

****Investing****

 

**Cash used in investing activitiesincreased as a result of the purchase of electronic gaming machines from ElixirGroup.  Electronic gaming machines in theamount of $39.2 million were purchased in fiscal 2007 and $19.6 million has yetto be paid as of the date of this report.**

 

****Financing****

 

**Cash provided by financing activities increased asa result of a private placement of our common shares with institutionalinvestors in the fourth quarter of fiscal 2007. **In October 2007, we completed a transactionwhereby we sold 15 million shares of newly issued common stock to institutionalinvestors at a price of $3.50 per share, generating net proceeds to theCompany, after issuance costs, of $49.8 

 

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million.  In December 2007, Elixir Group enteredinto a private transaction with institutional investors whereby Elixir Groupsold 16,000,000 warrants to purchase our common shares with an exercise priceof $2.65 per share for $0.86 per warrant. As a condition of the sale, the warrants were immediately exercised atthe closing and we received $40.7 million in net proceeds.  **This increase was partially offset by prior yearnet funding of $6.2 million.**

 

****Financial Condition****

**** ****
| **** ****                      | **** **** | ****2007****   | **** ****  | ****2006****   | **** **** | ****Increase (Decrease)**************from  2006 to 2007**** | **** **** |
|-------------------------------------|----------------|----------------|-----------------|----------------|----------------|-------------------------------------------------------------|----------------|
| **Total assets**                    | ** **     | **$**          | **123,714,028** | ** **     | **$**          | **30,618,241**                                              | ** **     | **$** | **93,095,787** | ** ** | **304** | **%** |
| **Total liabilities**               | ** **     | **39,426,095** | ** **      | **26,520,091** | ** **     | **12,906,004**                                              | ** **     | **49** | **%** |
| **Total stockholders’ equity** | ** **     | **84,287,933** | ** **      | **4,098,150**  | ** **     | **80,189,783**                                              | ** **     | **1,957** | **%** |
|                                     |                |                |                 |                |                |                                                             |                |  |  |  |  |  |

 

**Changes from 2006 to 2007 are due to the following:**

 

**·****                 ****Total assets increased as aresult of capital raising activities of $90.5 million and an increase of $39.2million in our fixed assets due primarily to the purchase of over 1,500electronic gaming machines in fiscal 2007. This was partially offset by cash repayments on notes payable andcapital lease obligations.**

 

**·****                 ****Total liabilities increased as aresult of an increase of $29.6 million in related party payables due to thepurchase of gaming devices noted above which was partially offset by repaymentson notes and leases payable.**

 

**·****                 ****Stockholders’ equity increased asa result of the issuance of stock and warrants in connection with theachievement of performance milestones by Elixir Group pursuant to the ParticipationAgreement and capital raising activities noted above net of losses for theyear.**

 

**Contractual Cash Obligations and Off Balance SheetArrangements**

 

Our contractual cashobligations under our debt agreements, capital leases and operating leases includinginterest payments for the next five years as of December 31, 2007 are asfollows:

** **
| ** **                  | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|------------|------------|----------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**  | ** ** | **1 Year**                 | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
| Debt agreements             |       | $          | 31,893     |                       | $          | 31,893 |   | $ | — |   | $ | — |   | $ | — |   |
| Capital leases              |       | 1,397,106  |       | 480,663                    |       | 510,126 |   | 406,317 |   | — |   |
| Operating leases            |       | 3,673,569  |       | 759,336                    |       | 1,227,433 |   | 1,111,639 |   | 575,161 |   |
| Interest expense            |       | 290,907    |       | 88,830                     |       | 132,381 |   | 69,696 |   | — |   |
| Total                       |       | $          | 5,393,475  |                       | $          | 1,360,722 |   | $ | 1,869,940 |   | $ | 1,587,652 |   | $ | 575,161 |   |

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

** **

Our consolidated financialstatements were prepared in conformity with accounting principles generallyaccepted in the United States. Accordingly, we are required to make estimatesincorporating judgments and assumptions we believe are reasonable based on ourhistorical experience, contract terms, observance of known trends in ourcompany and the industry as a whole, as well as information available fromother outside sources. Our estimates affect amounts recorded in the financialstatements 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 orcomplex judgments about 

 

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matters that are inherentlyuncertain or variable. Senior management discussed the development, selectionand disclosure of the following accounting estimates, considered most sensitiveto changes from external factors, with the audit committee of our board ofdirectors.

 

*Goodwill and Other IntangibleAssets*

 

Intangible assets consist ofpatents, customer relationships and trademarks and goodwill. They are recordedat cost and are amortized, except goodwill, on a 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 adopted SFAS No. 142,*Goodwill and Other Intangible Assets,*effective January 1,2002.  Under SFAS No. 142,goodwill 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.

 

We measure and test goodwillfor impairment using the two-step approach under SFAS 142, at least annually onDecember 31 or more often if there are indicators of impairment. If thecarrying amount of goodwill exceeds its implied fair value, an impairment lossis recognized equal to that excess.  Ourgoodwill is a result of our acquisition of Dolphin in July 2006.  Our current year measurement and testsresulted in an impairment to goodwill of $10.6 million, which has been recordedin our 2007 consolidated statement of operations.  After giving effect to the impairment, ourgoodwill as of December 31, 2007 is $84,210.

 

In determining the fairvalue of Dolphin, we applied the income approach using the discounted cash flow(DCF) method. We then compared the implied valuation multiples of a groupof comparable competitor gaming companies under the market approach to test thereasonableness of our DCF results. The DCF analysis is based on the presentvalue of two components as follows:

 

·                  the sum of our five yearprojected cash flows; and

·                  a terminal value assuming along-term growth rate.

 

The cash flow estimates areprepared based on our financial operating plan for Dolphin, consideringhistorical results and anticipated future performance based on our expectationsregarding product introductions and market opportunities. The discount ratesused to determine the present value of future cash flows are derived from theweighted average cost-of-capital of a set of comparable gaming companies,considering the size and specific risks of each reporting unit.

 

Our portfolio of otherdefinite-life intangibles substantially consists of patents, contracts,trademarks, developed technology, and customer relationships. We regularlymonitor events or changes in circumstances that indicate the carrying value ofthese intangibles may not be recoverable or require a revision to the estimatedremaining useful life in accordance with SFAS 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. Our otherintangibles totaled $5.5 million at December 31, 2007 and$8.9 million at December 31, 2006 after recording impairments.

 

If an event or changeoccurs, we estimate future cash flows directly associated with the use of theintangible to test recoverability and remaining useful lives based on theforecasted utilization of the asset and expected product revenues. Indeveloping estimated future cash flows, we incorporate assumptions regardingchanges in legal factors, related industry climate, regulatory actions, contractualfactors, operational performance and the company’s strategic business plans, aswell as the effects of obsolescence, demand, competition, and other marketconditions.  When the carrying amountexceeds the 

 

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undiscounted future cashflows expected to result from the use and eventual disposition of afinite-lived intangible asset or asset group, we then compare the carryingamount to its current fair value. We estimate the fair value using prices forsimilar assets, if available, or more typically using a DCF model. We recognizean impairment loss if the carrying amount is not recoverable and exceeds itsfair value.  For the year ended December 31,2007, we incurred an impairment loss of approximately $2.6 million related tocustomer relationships and trademarks of Dolphin.

 

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. While we believe our estimates of futurerevenues and future cash flows are reasonable, different assumptions couldmaterially affect the assessment of useful lives, recoverability and fairvalue. 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 weexperience a significant unexpected decrease in demand for our products or ahigher occurrence of inventory obsolescence because of changes in technology orcustomer requirements, we could be required to increase our inventoryprovisions. Our inventories totaled $1.7 million and $3.4 million at December 31,2007 and 2006, respectively, after giving effect to inventory provisions.  We recorded a provision of approximately $1.6million for obsolete inventory for the year ended December 31, 2007.

 

*ConsignmentInventory*

 

Atthe end of the fourth quarter, we transferred to our distributor $65,908 ofservice supplies and parts on consignment, which is recorded as inventory at December 31,2007.  Revenue is not recognized, and theinventory remains ours, until ownership of the product and title passes to thedistributor which occurs upon the distributor’s use of the products or sales tothird-party customers.

 

*GamingEquipment and Systems*

 

Gamingequipment and systems are stated at cost. Wedepreciate electronic gaming machines and systems over a five-year useful lifeto a minimal salvage value once placed in service.

 

*Propertyand Equipment*

 

We are also required toestimate salvage values and useful lives for our property and equipment,including electronic gaming machines. Trends in market demand and technological obsolescence may require us torecord impairment charges.  Noimpairments to property and equipment were recorded in fiscal 2007.

 

*RevenueRecognition*

 

Werecognize revenue when all of the following have been satisfied:

 

·                  persuasive evidence of anarrangement exists;

·                  the price to the customer isfixed and determinable;

·                  delivery has occurred andany acceptance terms have been fulfilled;

·                  no significant contractualobligations remain; and

·                  collection is reasonably assured.

 

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*Gaming Machine Participation Revenue*

 

We earn recurring revenueby providing customers with fully operational gaming floors consisting ofelectronic gaming machines and casino management systems.  Revenues are recognized on the contractualterms of the participation agreements between us and the venue owners and arebased on our share of net winnings. Joint costs sharing are recorded in cost of revenue.

 

*Gaming and Non-GamingProduct Sales*

 

Werecognize revenue from the sale of our products to end users upon shipmentagainst customer contracts or purchase orders. Revenue from shuffler rentals isrecorded at the first of each month in accordance with rental contract terms.  We completed our transition to outsourcingall future sales to third-party distributors during the fourth quarter 2007 andwill no longer record rentals on our table game products.

 

Werecognize revenue from our sales to independent distributors upon shipmentagainst distributor contracts or purchase orders of our product.  We recognize revenue on consignment inventorywhen ownership of the product and title passes to the distributor which occursupon the distributor’s use of the product in its service organization or to anend user.

 

Themaintenance components that are part of long-term sales contracts are recordedas deferred revenue and amortized over the remaining life of the salesagreement after the initial 90-day warranty as required by the Emerging IssuesTask Force Issue No. 00-21, *RevenueArrangements with Multiple Deliverables*. We provide currently forestimated warranty repair costs associated with sales contracts. Although thereare no extended warranties offered for our products, we provide for maintenancecontracts that are billed and recognized on a monthly basis. As noted above,our future sales will be through our third-party distributors and we will nolonger offer long-term sales contracts or service to customers.  Therefore as of December 31, 2007, wehave no remaining obligation to perform maintenance on gaming and non-gamingproducts sold to end users.

 

*Stock-based Compensation*

 

We account for stock-basedcompensation in accordance with SFAS No. 123R.  Under the fair value recognition provisions,we estimate stock-based compensation on the determined measurement date,generally the award grant date, and recognize expense over the requisiteservice period. Option valuation models require the input of highly subjectiveassumptions, and changes in the assumptions used can materially affect the fairvalue estimate. Judgment is required in estimating stock price volatility,forfeiture rates, expected dividends, and expected terms that options remainoutstanding. Stock-based compensation expense totaled $5,856,701 and $1,268,896for the years ended December 31, 2007 and 2006, respectively, and isincluded in selling, general and administrative expense in the consolidatedstatements of operations.

 

We adopted SFAS No. 123R,to account for all our stock-based compensation beginning January 1, 2006,and elected the modified prospective method of transition.

 

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*Contract Acquisition Fees*

 

Thetransactions under the Participation Agreement are accounted for pursuantto EITF 96-18.  In accordance with EITF96-18, we valued the initial issuance of 25,000,000 common shares based on themarket price of our stock and warrants to purchase 88,000,000 common sharesbased on a Black-Scholes option-pricing calculation on the measurement date,which occurred when the first performance milestone was achieved.  The fair value of the common shares wasinitially capitalized in accordance with SFAS 91, *Accountingfor Non-Refundable Fees and Costs Associated with Originating or AcquiringLoans and Initial Directs of Leases*, based on the market price ofour stock and the fair value of the warrants was deferred.

 

In accordance with SFAS No. 144,we tested this asset for recoverability using present value techniques based onestimated future cash flows and recorded contract acquisition fees of $77.8million, which is reflected in the statement of operations for the year ended December 31,2007.

 

Immediately following theinitial closing of the transactions under the Participation Agreement, ElixirGroup became a related party and in accordance with SFAS No. 13, initialdirect costs between related parties should not be capitalized.  Accordingly, upon the achievement of thefuture performance milestones by Elixir Group, the remaining shares of commonstock to be issued and future vesting of warrants will be expensed asincurred.  Accordingly, we recorded anadditional $93.1 million of contract acquisition fees, which is reflected inthe consolidated statement of operation for the year ended December 31,2007.

 

*IncomeTaxes*

 

Weare subject to income taxes in the U.S. (including federal and state) andseveral foreign jurisdictions in which we operate. Deferred income tax balancesreflect the effects of temporary differences between the carrying amounts ofassets and liabilities and their tax bases and are stated at enacted tax ratesexpected to be in effect when taxes are actually paid or recovered. SFAS No. 109,*Accounting for Income Taxes,* requiresthat deferred tax assets be evaluated for future realization and reduced by avaluation allowance to the extent we believe a portion will not be realized. Weconsider many factors when assessing the likelihood of future realization ofour deferred tax assets, including our recent cumulative earnings experienceand expectations of future taxable income by taxing jurisdiction, thecarry-forward periods available to us for tax reporting purposes, and otherrelevant factors.

 

Significantjudgment is required in evaluating our tax positions and determining ourprovision for income taxes. During the ordinary course of business, there aremany transactions and calculations for which the ultimate tax determination isuncertain. Effective January 1, 2007, we adopted the provisions of FIN No. 48,*Accounting**forUncertainty in Income Taxes and Interpretation of FASB Statement No. 109*,which contains a two-step approach to recognizing and measuring uncertain taxpositions accounted for in accordance with SFAS No. 109. The first step isto 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. We consider many factors when evaluating and estimating ourtax positions and tax benefits, which may require periodic adjustments andwhich may not accurately anticipate actual outcomes.

 

Weare subject to income tax examination by tax authorities in jurisdictions inwhich we operate. There are currently no income tax returns under examinationby the Internal Revenue Service or any other major tax authorities.

 

*Recently Issued Accounting Standards*

 

In December 2007,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 141(R), *BusinessCombinations* (“SFAS No. 141(R)”). SFAS No. 141(R) replacesSFAS No. 141, *Business Combinations*,but retains the requirement that the purchase method of accounting for 

 

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acquisitions be used forall business combinations. SFAS No. 141(R) expands on the disclosurespreviously required by SFAS No. 141, 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.SFAS No. 141(R) also requires an acquirer to record an adjustment toincome tax expense for changes in valuation allowances or uncertain taxpositions related to acquired businesses. SFAS No. 141(R) iseffective for all business combinations with an acquisition date in the firstannual period following December 15, 2008; early adoption is notpermitted. We will adopt this statement as of January 1, 2009. Managementis currently evaluating the impact SFAS No. 141(R) will have on ourconsolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 160, *Non-ControllingInterest in Consolidated Financial Statements, an Amendment of ARB No. 51*.This statement establishes accounting and reporting standards for ownershipinterest in subsidiaries held by parties other than the parent and for thedeconsolidation of a subsidiary. It also clarifies that a non-controllinginterest in a subsidiary is an ownership interest in the consolidated entitythat should be reported as equity in the consolidated financial statements.SFAS No. 160 changes the way the consolidated income statement ispresented by requiring consolidated net income to be reported at amounts thatinclude the amount attributable to both the parent and the non-controllinginterests. The statement also establishes reporting requirements that providesufficient disclosure that clearly identify and distinguish between theinterest of the parent and those of the non-controlling owners. This statementis effective for fiscal years beginning on or after December 15, 2008. Theadoption of SFAS No. 160 is not expected to have a material impact on ourfinancial position, results of operations or cash flows.

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS No. 157”), which clarifies thedefinition of fair value, establishes guidelines for measuring fair value, andexpands disclosures regarding fair value measurements. SFAS No. 157 doesnot require any new fair value measurements and eliminates inconsistencies inguidance found in various prior accounting pronouncements. SFAS No. 157will be effective for us on January 1, 2008. In February 2008, theFASB issued FASB Staff Position (FSP) SFAS No. 157-2 *Effective Date of FASB Statement No. 157*(FSP) SFAS No. 157-2) that deferred the effective date of SFAS No. 157for one year for certain non-financial assets and non-financial liabilities. Weare currently evaluating the impact of adopting SFAS No. 157 on ourfinancial position, cash flows, and results of operations.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities* (“FAS159”). SFAS No. 159 permits entities to choose to measure at fair valuemany financial instruments and certain other items that are not currentlyrequired to be measured at fair value. Subsequent changes in fair value for designated items will be requiredto be reported in earnings in the current period. SFAS No. 159 alsoestablishes presentation and disclosure requirements for similar types ofassets and liabilities measured at fair value. SFAS No. 159 is effectivefor financial statements issued for fiscal years beginning after November 15,2007. We are currently assessing the effect of implementing this guidance,which depends on the nature and extent of items elected to be measured at fairvalue, upon initial application of the standard on January 1, 2008.

 

**ITEM7A.****                                           ****QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Notapplicable.

 

37

----

 

## **ITEM 8.**                                                     FINANCIAL STATEMENTS AND SUMMPLEMENTARY DATA.

## ** **

**INDEX TO FINANCIAL STATEMENTS**

 
| Reports  of Independent Registered Public Accounting Firm                                               |   | 39     |
|---------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                    |   |   |
| Balance  Sheets at December 31, 2007 and 2006                                                      |   | 42     |
|                                                                                                    |   |   |
| Statements of Operations for the Years Ended  December 31, 2007 and 2006                           |   | 43     |
|                                                                                                    |   |   |
| Statements of Changes in Stockholders’ Equity for the  Years Ended December 31, 2007 and 2006 |   | 44     |
|                                                                                                    |   |   |
| Statements of Cash Flows for the Years Ended  December 31, 2007 and 2006                           |   | 45     |
|                                                                                                    |   |   |
| Notes to Financial Statements                                                                           |   | 46     |

 

38

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

 

Tothe Board of Directors and 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, 2007, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows forthe year then ended. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audit.

 

We conducted our audit 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 notengaged to perform an audit of the Company’s internal control over financialreporting. Our audit includes consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of the Company as of December 31,2007 and the consolidated results of its operations and its cash flows for theyear then ended, in conformity with accounting principles generally accepted inthe United States.

 

As discussed in Note 16 tothe consolidated financial statements, effective January 1, 2007, theCompany adopted the provisions of Financial Accounting Standards BoardInterpretation No. 48, Accounting for Uncertainty in Income Taxes.

 

 

Las Vegas, Nevada

March 31, 2008

 

39

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors

 

Elixir Gaming Technologies, Inc.

 

Wehave audited the consolidated balance sheets of Elixir Gaming Technologies, Inc.(formerly VendingData Corporation) and subsidiaries (“the Company”) as of December 31,2006, and the related consolidated statements of operations, stockholders’equity, and cash flows for the years then ended. These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits. We didnot audit the financial statements of Dolphin Advanced Technologies PTY LTD(Dolphin), a wholly-owned subsidiary, which financial statements reflect totalassets of $5,002,148, and total revenues of $5,645,527 or 18% and 72% of therespective consolidated totals. Those statements were audited by other auditorswhose report has been furnished to us, and our opinion, insofar as it relatesto the amounts included for Dolphin, is based solely on the report of the otherauditors.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, audits of its internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits and the report of other auditors provide a reasonable basis for ouropinion.

 

Inour opinion, based on our audits and the report of other auditors, theconsolidated financial statements referred to above, present fairly, in allmaterial respects, the consolidated financial position of the Company as of December 31,2006, and the consolidated results of its operations and cash flows for theyears then ended, in conformity with accounting principles generally acceptedin the United States.

 

Asdiscussed in Note 19 to the financial statements, the Company’s 2006 financialstatements have been restated. 

 

|   |   | /s/  Piercy  Bowler Taylor & Kern |
|--------|--------|------------------------------------------------------|
|   |   | Piercy  Bowler Taylor & Kern                |
|   |   | Certified  Public Accountants and Business Advisors  |

 

March 23,2007, except for Note 19, as to which the date is October 12, 2007

LasVegas, Nevada

 

40

----

 

**Independent Auditors’ Report to the Board of Directors on theConsolidated Financial Report of Dolphin Advanced Technologies Pty Ltd**

 

Wehave audited the consolidated balance sheet of Dolphin Advanced TechnologiesPty Ltd as of December 31, 2006, and the related consolidated statement ofoperations, consolidated statement of changes in stockholders equity andconsolidated cash flow statement for the period ended December 31, 2006.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrols over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statement, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides reasonablebasis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material aspects, the financial position of Dolphin AdvancedTechnologies Pty Ltd at December 31, 2006, and the results of itsoperations and its cash flow for the period ended December 31, 2006, inconformity with accounting principles generally accepted in the United Statesof America.

 

Datedthe 22nd day of March 2007

 

HorwathMelbourne

CharteredAccountants

 

41

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## **ELIXIRGAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

## **ConsolidatedBalance Sheets**

## **December 31,2007 and 2006**

 
| ** **                                                                                                             | ** ** | **2007**     | ** **  | **2006**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------|-------------|-------------|------------|
| **ASSETS**                                                                                                             |       |         |        |        |       |
| Current assets:                                                                                                        |       |         |        |        |       |
| Cash and cash equivalents                                                                                              |       | $            | 68,286,820  |        | $          | 333,888 |   |
| Current portion of accounts receivable, trade, net of allowance for  uncollectibles of $176,666 and $267,154           |       | 1,689,909    |        | 1,856,898   |       |
| Other receivables                                                                                                      |       | 298,940      |        | 146,458     |       |
| Inventories                                                                                                            |       | 1,686,670    |        | 3,407,361   |       |
| Prepaid expenses and other current assets                                                                              |       | 975,549      |        | 66,494      |       |
|                                                                                                                   |       | 72,937,888   |        | 5,811,099   |       |
|                                                                                                                   |       |         |        |        |       |
| Accounts receivable, trade, net of current portion                                                                     |       | 60,421       |        | 350,564     |       |
| Gaming equipment and systems, net of accumulated depreciation of  $569,926 and $0                                      |       | 39,193,962   |        | —      |       |
| Property and equipment, net of accumulated depreciation of $3,039,933  and $2,540,570                                  |       | 3,934,532    |        | 3,588,594   |       |
| Intangible assets, net of accumulated amortization of $1,689,096 and  $819,753                                         |       | 5,486,321    |        | 8,936,561   |       |
| Goodwill                                                                                                               |       | 84,210       |        | 11,195,737  |       |
| Prepaid commissions                                                                                                    |       | 1,398,800    |        | —      |       |
| Deposits and other assets                                                                                              |       | 617,894      |        | 735,686     |       |
|                                                                                                                   |       | $            | 123,714,028 |        | $          | 30,618,241 |   |
|                                                                                                                   |       |         |        |        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                         |       |         |        |        |       |
| Current liabilities:                                                                                                   |       |         |        |        |       |
| Accounts payable                                                                                                       |       | $            | 1,798,459   |        | $          | 2,354,163 |   |
| Amount due to related party                                                                                            |       | 29,601,448   |        | —      |       |
| Accrued expenses                                                                                                       |       | 5,248,458    |        | 3,744,590   |       |
| Short-term debt                                                                                                        |       | 31,893       |        | 676,597     |       |
| Current portion of long-term debt                                                                                      |       | —       |        | 299,494     |       |
| Capital lease obligations, current portion                                                                             |       | 480,663      |        | 440,719     |       |
| Customer deposits                                                                                                      |       | 197,019      |        | 14,257      |       |
|                                                                                                                   |       | 37,357,940   |        | 7,529,820   |       |
| Notes payable, net of current portion and net of debt discount of $0  and $2,837,911                                   |       | —       |        | 15,644,764  |       |
| Capital lease obligations, net of current portion                                                                      |       | 916,444      |        | 1,580,124   |       |
| Other liabilities                                                                                                      |       | 99,966       |        | —      |       |
| Deferred tax liability                                                                                                 |       | 1,051,745    |        | 1,765,383   |       |
|                                                                                                                   |       | 39,426,095   |        | 26,520,091  |       |
| Stockholders’ equity:                                                                                             |       |         |        |        |       |
| Common stock, $001 par value, 300,000,000 shares authorized;  114,914,934 and 30,015,099 shares issued and outstanding |       | 114,916      |        | 30,016      |       |
| Additional paid-in-capital                                                                                             |       | 411,323,072  |        | 97,872,787  |       |
| Treasury stock, 0 and 448,053 shares at cost                                                                           |       | —       |        | (846,820    | )          |
| Accumulated other comprehensive income                                                                                 |       | 406,358      |        | —      |       |
| Accumulated deficit                                                                                                    |       | (327,556,413 | )           | (92,957,833 | )          |
|                                                                                                                   |       | 84,287,933   |        | 4,098,150   |       |
|                                                                                                                   |       | $            | 123,714,028 |        | $          | 30,618,241 |   |

 

See accompanying notes to consolidated financial statements.

 

42

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**ELIXIRGAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

## **ConsolidatedStatements of Operations**

## **Years Ended December 31,2007 and 2006**

 
| ** **                                            | ** ** | **2007**     | ** **   | **2006**    | ** ** |
|-------------------------------------------------------|------------|--------------|--------------|-------------|------------|
| **Revenues:**                                         | ** ** | ** **   | ** **   | ** **  | ** ** |
| Table game products                                   |       | $            | 5,206,076    |        | $          | 4,057,784 |   |
| Gaming machine  participation                         |       | 389,596      |         | —      |       |
| Non-gaming products                                   |       | 6,644,891    |         | 3,780,430   |       |
|                                                  |       | 12,240,563   |         | 7,838,214   |       |
|                                                  |       |         |         |        |       |
| **Operating costs and expenses:**                     | ** ** | ** **   | ** **   | ** **  | ** ** |
| Cost of table game  products                          |       | 5,387,482    |         | 4,241,041   |       |
| Cost of gaming machine  participation                 |       | 677,725      |         | —      |       |
| Cost of non-gaming  products                          |       | 6,662,205    |         | 4,660,483   |       |
| Selling, general and  administrative                  |       | 18,139,530   |         | 7,909,776   |       |
| Research and development                              |       | 974,870      |         | 1,555,882   |       |
| Depreciation and  amortization                        |       | 1,002,607    |         | 624,700     |       |
| Impairment of goodwill,  intangibles and other assets |       | 40,458,972   |         | —      |       |
| Contract acquisition fees                             |       | 170,857,000  |         | —      |       |
| Restructuring charges                                 |       | 1,362,750    |         | —      |       |
| Loss on extinguishment of  debt                       |       | 1,366,083    |         | —      |       |
|                                                  |       | 246,889,224  |         | 18,991,882  |       |
|                                                  |       |         |         |        |       |
| Loss from operations                                  |       | (234,648,661 | )            | (11,153,668 | )          |
|                                                  |       |         |         |        |       |
| **Other income (expense):**                           | ** ** | ** **   | ** **   | ** **  | ** ** |
| Interest expense and finance fees                     |       | (2,066,361   | )            | (3,296,378  | )          |
| Interest income                                       |       | 323,312      |         | 29,443      |       |
| Acquisition costs                                     |       | (195,431     | )            | (163,077    | )          |
| Foreign currency gains                                |       | 714,094      |         | —      |       |
| Other                                                 |       | 521,342      |         | (22,082     | )          |
|                                                  |       | (703,044     | )            | (3,452,094  | )          |
| Income tax benefit                                    |       | 753,125      |         | —      |       |
|                                                  |       |         |         |        |       |
| **Net loss**                                          |       | $            | (234,598,580 | )           | $          | (14,605,762 | ) |
|                                                  |       |         |         |        |       |
| **Basic and diluted loss per  share**                 |       | $            | (4.55        | )           | $          | (0.60 | ) |
| ** **                                            | ** ** | ** **   | ** **   | ** **  | ** ** |
| **Weighted average common shares  outstanding**       |       | 51,574,786   |         | 24,270,827  |       |

** **

**Seeaccompanying notes to consolidated financial statements.**

** **

**43**

----

** **

## **ELIXIRGAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

## **ConsolidatedStatements of Changes in Stockholders’ Equity**

## **Years Ended December 31,2007 and 2006**

 
| ** **                                                    | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in** | ** ** | **Treasury** | ** ** | **Accu-mulated  Other  Compre-hensive** | ** ** | ** ** | ** ** | ** **   | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-------------------------|------------|--------------|------------|-----------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                                    | ** ** | **Shares**        | ** ** | **Dollars**             | ** ** | **Capital**  | ** ** | **Stock**                               | ** ** | **Income** | ** ** | **Deficit**  | ** ** | **Total** | ** ** |
| Balances,  January 1, 2006                               |       | 18,141,451        |       | $                       | 18,142     |         | $          | 70,008,398                              |       | $          | (846,820   | )            | $          | — |   | $ | (78,352,071 | ) | $ | (9,172,351 | ) |
| Exercise of  employee options                                 |       | 1,083,164         |       | 1,083                   |       | 1,260,297    |       | —                                  |       | —     |       | —       |       | 1,261,380 |   |
| Vesting of  options                                           |       | —            |       | —                  |       | 1,268,895    |       | —                                  |       | —     |       | —       |       | 1,268,895 |   |
| Warrants issued  for financing                                |       | —            |       | —                  |       | 3,380,000    |       | —                                  |       | —     |       | —       |       | 3,380,000 |   |
| Stock issued for  conversion of debt                          |       | 4,828,246         |       | 4,829                   |       | 10,899,671   |       | —                                  |       | —     |       | —       |       | 10,904,500 |   |
| Stock issued for  acquisition of Dolphin                      |       | 2,462,238         |       | 2,462                   |       | 7,581,526    |       | —                                  |       | —     |       | —       |       | 7,583,988 |   |
| Stock issued to  distributor through subscription receivables |       | 1,000,000         |       | 1,000                   |       | (1,000       | )          | —                                  |       | —     |       | —       |       | — |   |
| Exercise of  warrants                                         |       | 1,500,000         |       | 1,500                   |       | 1,648,500    |       | —                                  |       | —     |       | —       |       | 1,650,000 |   |
| Stock issued for  acquisition of technology                   |       | 1,000,000         |       | 1,000                   |       | 1,826,500    |       | —                                  |       | —     |       | —       |       | 1,827,500 |   |
| Net loss                                                      |       | —            |       | —                  |       | —       |       | —                                  |       | —     |       | (14,605,762  | )          | (14,605,762 | ) |
|                                                          |       |              |       |                    |       |         |       |                                    |       |       |       |         |       |   |   |
| Balances,  December 31, 2006                             |       | 30,015,099        |       | 30,016                  |       | 97,872,787   |       | (846,820                                | )          | —     |       | (92,957,833  | )          | 4,098,150 |   |
|                                                          |       |              |       |                    |       |         |       |                                    |       |       |       |         |       |   |   |
| Exercise of  employee options                                 |       | 2,050,944         |       | 2,051                   |       | 3,833,242    |       | —                                  |       | —     |       | —       |       | 3,835,293 |   |
| Exercise of  warrants                                         |       | 21,243,343        |       | 21,244                  |       | 50,264,116   |       | —                                  |       | —     |       | —       |       | 50,285,360 |   |
| Stock issued for  conversion of debt                          |       | 1,652,048         |       | 1,652                   |       | 4,870,516    |       | —                                  |       | —     |       | —       |       | 4,872,168 |   |
| Stock issued for  services                                    |       | 153,500           |       | 153                     |       | 472,627      |       | —                                  |       | —     |       | —       |       | 472,780 |   |
| Exchange of  treasury warrants for stock                      |       | —            |       | —                  |       | (842,340     | )          | 846,820                                 |       | —     |       | —       |       | 4,480 |   |
| Stock issued  pursuant to participation agreement             |       | 40,000,000        |       | 40,000                  |       | 130,810,000  |       | —                                  |       | —     |       | —       |       | 130,850,000 |   |
| Vesting of  warrants pursuant to participation agreement      |       | —            |       | —                  |       | 40,007,000   |       | —                                  |       | —     |       | —       |       | 40,007,000 |   |
| Warrants issued  as prepaid sales incentive                   |       | —            |       | —                  |       | 28,837,200   |       | —                                  |       | —     |       | —       |       | 28,837,200 |   |
| Vesting of  employee stock options                            |       | —            |       | —                  |       | 5,349,930    |       | —                                  |       | —     |       | —       |       | 5,349,930 |   |
| Vesting of  warrants                                          |       | —            |       | —                  |       | 94,235       |       | —                                  |       | —     |       | —       |       | 94,235 |   |
| Sale of stock                                                 |       | 15,000,000        |       | 15,000                  |       | 49,758,559   |       | —                                  |       | —     |       | —       |       | 49,773,559 |   |
| Warrants  exchanged for common stock                          |       | 4,800,000         |       | 4,800                   |       | (4,800       | )          | —                                  |       | —     |       | —       |       | — |   |
| Foreign currency  translations                                |       | —            |       | —                  |       | —       |       | —                                  |       | 406,358    |       | —       |       | 406,358 |   |
| Net loss                                                      |       | —            |       | —                  |       | —       |       | —                                  |       | —     |       | (234,598,580 | )          | (234,598,580 | ) |
|                                                          |       |              |       |                    |       |         |       |                                    |       |       |       |         |       |   |   |
| Balances,  December 31, 2007                             |       | 114,914,934       |       | $                       | 114,916    |         | $          | 411,323,072                             |       | $          | —     |         | $          | 406,358 |   | $ | (327,556,413 | ) | $ | 84,287,933 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

44

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## **ELIXIRGAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

## **ConsolidatedStatements of Cash Flows**

## **Years Ended December 31,2007 And 2006**

 
| ** **                                                                   | ** ** | **2007**    | ** **   | **2006**    | ** ** |
|------------------------------------------------------------------------------|------------|-------------|--------------|-------------|------------|
| Cash flows used in  operating activities:                                    |       |        |         |        |       |
| Net loss                                                                     |       | $           | (234,598,580 | )           | $          | (14,605,762 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |        |         |        |       |
| Impairment of goodwill and intangibles                                       |       | 13,157,424  |         | —      |       |
| Impairment of prepaid sales commissions                                      |       | 27,301,548  |         | —      |       |
| Loss on extinguishment of debt                                               |       | 1,366,083   |         | —      |       |
| Contract acquisition fees                                                    |       | 170,857,000 |         | —      |       |
| Income tax benefit                                                           |       | (753,125    | )            | —      |       |
| Foreign currency gains                                                       |       | (714,094    | )            | —      |       |
| Depreciation of property and equipment                                       |       | 1,148,497   |         | 788,073     |       |
| Amortization of intangible assets                                            |       | 869,342     |         | 514,207     |       |
| Amortization of debt discount                                                |       | 973,689     |         | 927,884     |       |
| Amortization of prepaid sales commissions                                    |       | 136,852     |         | —      |       |
| Stock-based compensation                                                     |       | 5,916,945   |         | 1,268,896   |       |
| Provision for obsolete inventory                                             |       | 1,577,383   |         | 241,931     |       |
| Loss on disposal of assets                                                   |       | 33,954      |         | 22,082      |       |
| Changes in operating  assets and liabilities:                                |       |        |         |        |       |
| Accounts receivable                                                          |       | 256,086     |         | 945,405     |       |
| Inventories                                                                  |       | 162,447     |         | 656,524     |       |
| Prepaid expenses and other current assets                                    |       | (809,367    | )            | 24,982      |       |
| Deposits and other assets                                                    |       | (64,608     | )            | 454,371     |       |
| Accounts payable                                                             |       | 196,509     |         | (730,349    | )          |
| Accrued expenses and other current liabilities                               |       | 1,384,110   |         | 1,781,944   |       |
| Net cash used in operating activities                                        |       | (11,601,905 | )            | (7,709,812  | )          |
|                                                                         |       |        |         |        |       |
| Cash flows used in  investing activities:                                    |       |        |         |        |       |
| Cash for business combination                                                |       | —      |         | (1,350,000  | )          |
| Acquisition of technology                                                    |       | —      |         | (716,500    | )          |
| Acquisition of property and equipment                                        |       | (10,319,288 | )            | (385,083    | )          |
| Proceeds from the disposition of property and equipment                      |       | 5,614       |         | 51,600      |       |
| Payments received on notes receivable                                        |       | —      |         | 484,833     |       |
| Net cash used in investing activities                                        |       | (10,313,674 | )            | (1,915,150  | )          |
|                                                                         |       |        |         |        |       |
| Cash flows provided by  financing activities:                                |       |        |         |        |       |
| Proceeds from sale of stock and warrants and exercise of options             |       | 101,432,693 |         | 2,911,380   |       |
| Proceeds from stock subscription payable                                     |       | 2,650,000   |         | —      |       |
| Repayment of notes payable and capital lease obligations                     |       | (14,214,182 | )            | (14,173,045 | )          |
| Cash paid for deferred financing fees                                        |       | —      |         | (45,947     | )          |
| Proceeds from notes payable, capital leases and short-term debt              |       | —      |         | 20,331,219  |       |
| Net cash provided by financing activities                                    |       | 89,868,511  |         | 9,023,607   |       |
| Increase (decrease) in  cash and cash equivalents                            |       | 67,952,932  |         | (601,355    | )          |
| Cash and cash equivalents  at beginning of year                              |       | 333,888     |         | 935,243     |       |
| Cash and cash equivalents  at end of year                                    |       | $           | 68,286,820   |        | $          | 333,888 |   |
|                                                                         |       |        |         |        |       |
| Supplemental cash flow  information:                                         |       |        |         |        |       |
| Cash paid for interest                                                       |       | $           | 1,362,681    |        | $          | 1,681,097 |   |
| Cash paid for taxes                                                          |       | 701,527     |         | 18,309      |       |
| Non-cash investing and  financing activities:                                |       |        |         |        |       |
| Loans converted to common stock                                              |       | $           | 4,872,168    |        | $          | 9,154,500 |   |
| Acquisition of technology with stock prior to business combination           |       | $           | —       |        | $          | 1,827,500 |   |
| Stock issued for business combination                                        |       | $           | —       |        | $          | 7,817,833 |   |
| Short-term note issued in connection with business combination               |       | $           | —       |        | $          | 5,782,168 |   |
| Electronic gaming machines purchased from related party as trade  payables   |       | $           | 29,601,448   |        | $          | — |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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## ** **

## ** **

 

 

 

## **ELIXIR GAMINGTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**NOTE 1.                DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTINGPOLICIES**

 

Theprincipal business activity of Elixir Gaming Technologies, Inc. and itssubsidiaries is the owning and leasing of electronic gaming machines placed inresorts, hotels, cruise ships and other venues through Asia and the developingand distributing of products related to the gaming and automotive industries.These products include electronic card shuffling devices, RFID casino chips andcomponent parts for the automotive industry.

 

***Principles of Consolidation***

 

Theseconsolidated financial statements are prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”) and include alladjustments of a normal recurring and nonrecurring nature that are necessary tofairly present the consolidated results of operations, financial position andcash flows for each period presented.

 

Theseconsolidated financial statements include the accounts of Elixir GamingTechnologies, Inc. and all its subsidiaries (the “Company”).

 

***Use of Estimates***

 

Theseconsolidated financial statements are prepared in conformity with accountingprinciples generally accepted in the United States (US).  Accordingly, the Company is required to makeestimates, judgments and assumptions that it believes are reasonable based onits historical experience, contract terms, observance of known trends in theCompany and the industry as a whole, and information available from otheroutside sources.  These estimates affectthe reported amounts of assets, liabilities, revenues and expenses and relateddisclosures of contingent assets and liabilities.  On a regular basis, the Company evaluates ourestimates, including those related to revenue recognition, product returns,long-lived assets, inventory obsolescence, stock-based compensation, incometaxes, bad debts, warranty obligations, long-term contracts, contingencies andlitigation.  Actual results may differfrom initial estimates.

 

***Reclassification***

 

Certainreclassifications have been made to the December 31, 2006 balance sheetand to the statement of operations for the year ended December 31, 2006 toconform to the current year presentation. In addition, the 2006 financial statements include the correction of a$3.0 million error in the presentation of long-term debt as current.

 

***Cash and Cash Equivalents***

 

Allhighly liquid debt instruments with an original maturity of three months orless are considered cash equivalents. The Company places its cash and temporary investments with financialinstitutions.  At December 31, 2007,the Company had deposits with financial institutions in excess of FDIC insuredlimits by $68.1 million.

 

TheCompany has restricted cash in the amount of $100,000, in the form of acertificate of deposit as security on a lease. This certificate of deposit has been recorded in deposits and otherassets in the consolidated balance sheets. The restriction will be removed in February 2012 upon terminationof the lease.

 

46

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***Inventories***

 

Inventoriesare stated at the lower of cost, determined using the first-in, first-outmethod, or market.  Cost elementsincluded in work-in-process and finished goods include raw materials, directlabor, and manufacturing overhead.  TheCompany reviews inventory quantities regularly and records charges for excessand obsolete products.  Inventoryprovisions total $1.6 million for the year ended December 31, 2007.

 

***Consignment Inventory***

 

Atthe end of the fourth quarter, the Company transferred to our distributor $65,908of service supplies and parts on consignment which is recorded asinventory.  Revenue is not recognizeduntil ownership of the product and title passes to the distributor which occursupon the distributor’s use of the products or sales to third-party customers.

 

***Gaming Equipment and Systems***

 

Gamingequipment is stated at cost.  The Companydepreciates gaming equipment and systems over a five-year useful life to aminimal salvage value once placed in service. Depreciation of gamingequipment of $569,926 is included in cost of sales in the consolidatedstatement of operations for the year ended December 31, 2007.

 

***Property and Equipment***

 

Propertyand equipment (Note 7) and equipment rented to customers are stated atcost. Depreciation is computed using the straight-line method over the usefullives of the assets currently estimated to be 3-5 years, which, in the case ofleasehold improvements, is limited to the life of the lease and renewal periodso long as renewal is intended. Depreciation of rental and manufacturingequipment of $445,304 and $677,580 are included in cost of sales in theconsolidated statements of operations for the years ended December 31,2007 and 2006, respectively.

 

***Goodwill and Intangible Assets***

 

Intangible assets consist ofpatents, customer relationships and trademarks and goodwill. They are recordedat cost and are amortized, except goodwill, on a 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 the Company believes there is not amore reliably determinable method of reflecting the pattern in which theeconomic benefits of the intangible assets are consumed or otherwise used up.

 

The Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 142,*Goodwill and Other Intangible Assets,*effective January 1,2002.  Under SFAS No. 142,goodwill 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.

 

The Company measures andtests goodwill for impairment using the two-step approach under SFAS No. 142,at least annually on December 31 or more often if there are indicators ofimpairment. If the carrying amount of goodwill exceeds its implied fair value,an impairment loss is recognized equal to that excess.  The Company’s goodwill is a result of itsacquisition of Dolphin in July 2006. The Company’s current year measurement and tests resulted in animpairment to goodwill of $10.6 million, which has been 

 

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recorded in its 2007consolidated statement of operations. After giving effect to the impairment, the Company’s goodwill as of December 31,2007 is $84,210.

 

In determining the fair valueof Dolphin, the Company applied the income approach using the discounted cashflow (DCF) method. The Company then compared the implied valuationmultiples of a group of comparable competitor gaming companies under the marketapproach to test the reasonableness of its DCF results. The DCF analysis isbased on the present value of two components as follows:

 

·                  the sum of the Company’sfive year projected cash flows; and

·                  a terminal value assuming along-term growth rate.

 

The cash flow estimates areprepared based on the Company’s financial operating plan for Dolphin,considering historical results and anticipated future performance based on theCompany’s expectations regarding product introductions and marketopportunities. The discount rates used to determine the present value of futurecash flows are derived from the weighted average cost-of-capital of a set ofcomparable gaming companies, considering the size and specific risks of eachreporting unit.

 

The Company’s portfolio ofother definite-life intangibles substantially consists of patents, contracts,trademarks, developed technology, and customer relationships. The Companyregularly monitors events or changes in circumstances that indicate thecarrying value of these intangibles may not be recoverable or require arevision to the estimated remaining useful life in accordance with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*. The Company’s other intangibles totaled $5.5million at December 31, 2007 and $8.9 million at December 31,2006 after recording impairments.

 

If an event or changeoccurs, the Company estimates future cash flows directly associated with theuse of the intangible to test recoverability and remaining useful lives basedon the forecasted utilization of the asset and expected product revenues. Indeveloping estimated future cash flows, the Company incorporates assumptionsregarding changes in legal factors, related industry climate, regulatoryactions, contractual factors, operational performance and the company’sstrategic business plans, as well as the effects of obsolescence, demand,competition, and other market conditions. When the carrying amount exceeds the undiscounted future cash flowsexpected to result from the use and eventual disposition of a finite-livedintangible asset or asset group, the Company then compares the carrying amountto its current fair value. The Company estimates the fair value using pricesfor similar assets, if available, or more typically using a DCF model. TheCompany recognizes an impairment loss if the carrying amount is not recoverableand exceeds its fair value.  For the yearended December 31, 2007, the Company incurred an impairment loss ofapproximately $2.6 million related to customer relationships and trademarks ofDolphin.

 

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. While the Company believes its estimates offuture revenues and future cash flows are reasonable, different assumptionscould materially affect the assessment of useful lives, recoverability and fairvalue. If actual future cash flows fall below initial forecasts, the Companymay need to record additional amortization and/or impairment charges.

 

***Accounts Receivable and Allowancefor Doubtful Accounts***

 

Accounts receivable arestated at face value less any allowance for doubtful accounts.  Allowances for doubtful accounts aremaintained at levels determined by the Company’s management to adequatelyprovide for uncollectible amounts.  Indetermining the estimated uncollected amounts, the Company 

 

48

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evaluates a combinationof factors, including, but not limited to, activity in the related market,financial condition of customers, specific customer collection experience andhistory of write-offs and collections.

 

***Prepaids and Other Current Assets***

 

Prepaids and othercurrent assets consist primarily of prepaid value-added taxes in foreigncountries and deposits.

 

***Litigation and Other Contingencies***

 

The Company is involvedin various legal matters, litigation and claims of various types in theordinary course of its business operations. The Company has regular litigationreviews, including updates from corporate and outside counsel, to assess theneed for accounting recognition or disclosure of these contingencies. Thestatus of significant claims is summarized in Note 18.

 

SFAS No. 5, *Accounting for Contingencies* requires thatliabilities for contingencies be recorded when it is probable that a liabilityhas been incurred and that the amount can be reasonably estimated. Significantmanagement judgment is required related to contingent liabilities and theoutcome of litigation because both are difficult to predict. For contingencieswhere an unfavorable outcome is reasonably possible and which are significant,the Company discloses the nature of the contingency and, where feasible, anestimate of the possible loss.

 

***Revenue Recognition***

 

TheCompany recognizes revenue when all of the following have been satisfied:

 

·                  persuasive evidence of anarrangement exists;

·                  the price to the customer isfixed and determinable;

·                  delivery has occurred andany acceptance terms have been fulfilled;

·                  no significant contractualobligations remain; and

·                  collection is reasonablyassured.

 

*Gaming and Non-GamingProduct Sales*

 

TheCompany recognizes revenue from the sale of its products to end users uponshipment against customer contracts or purchase orders. Revenue from shufflerrentals is recorded at the first of each month in accordance with rentalcontract terms.  The Company completed ittransition to outsourcing all future sales to third-party distributors duringthe fourth quarter 2007 and will no longer record rental income on our tablegame products.

 

TheCompany recognizes revenue from its sales to independent distributors uponshipment to the distributor against distributor contracts or purchase orders ofour product.  The Company recognizesrevenue on consignment inventory when ownership of the product and title passesto the distributor which occurs upon the distributor’s use of the product inits service organization or to an end user.

 

Themaintenance components that are part of long-term sales contracts are recordedas deferred revenue and are amortized over the remaining life of the salesagreement after the initial 90-day warranty as required by the Emerging IssuesTask Force Issue (“EITF”) No. 00-21, *RevenueArrangements with Multiple Deliverables*. The Company providescurrently for estimated warranty repair costs associated with sales contracts.Although there are no extended warranties offered for its products, the Companyprovides for maintenance contracts that are billed and recognized on a monthlybasis. As noted above, the Company’s 

 

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futuresales will be through its third-party distributors and it will no longer offerlong-term sales contracts or service to customers.  Therefore, as of December 31, 2007, theCompany has no remaining obligation to perform maintenance on gaming andnon-gaming products sold to end users.

 

Althoughsales are generally made with no right of return, during 2006, due to productperformance, the Company allowed returns of shuffler products and recordedsales returns and allowance of $383,000.

 

*Participation Revenue*

 

The Company earnsrecurring revenue by providing customers with electronic gaming machines andcasino management systems, which track game performance and provide statisticson each installed electronic gaming machine owned by the Company and leased tovenue owners. Revenues are recognized on the contractual terms of theparticipation agreements between the Company and the venue owners and are basedon the Company’s share of net winnings. The Company’s share of joint costs arerecorded in cost of revenue.

 

***Freight-Out and Warehousing Costs***

 

Freight-out andwarehousing costs are included in cost of product sales in the consolidatedstatements of operations.

 

***Advertising Expense***

 

The cost of advertisingis charged to expense as incurred.  Thecost of advertising was $26,081 and $112,723 for the years ended December 31,2007 and 2006, respectively

 

***Stock-Based Compensation***

 

The Company adopted SFAS No. 123R,*Share-Based Payment*, to accountfor all its stock-based compensation beginning January 1, 2006, andelected the modified prospective method of transition. Under the fair valuerecognition provisions of SFAS No. 123R, it estimates stock-basedcompensation on the determined measurement date, generally the award grant date,and recognizes expense over the requisite service period. Option valuationmodels require the input of highly subjective assumptions, and changes in theassumptions used can materially affect the fair value estimate. Judgment isrequired in estimating stock price volatility, forfeiture rates, expecteddividends, and expected terms that options remain outstanding. Stock-basedcompensation expense totaled $5.9 million and $1.3 million for the years ended December 31,2007 and 2006, respectively, and is included in selling, general andadministrative expense in the consolidated statements of operations.  See Note 13 for additional informationregarding these assumptions.

 

***Contract Acquisition Fees***

 

Thetransactions under the Securities Purchase and Product Participation Agreement(“Participation Agreement”) are accounted for pursuant to EITF 96-18, *Accounting for Equity Instruments That Are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services*.  In accordance with EITF 96-18, the Companyvalued the initial issuance of common shares based on the market price of itsstock and warrants based on a Black-Scholes option-pricing model calculation onthe measurement date, which occurred when the first performance milestone wasachieved.  The fair value of the commonshares was initially capitalized in accordance with SFAS 91, *Accounting for Non-Refundable Fees and Costs Associated withOriginating or Acquiring Loans and Initial Directs of Leases*, andthe fair value of the warrants was deferred.

 

50

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In accordance with SFAS No. 144,the Company tested this asset for recoverability using present value techniquesbased on estimated future cash flows and accordingly recorded a charge tocontract acquisition fees of $77.8 million in the statement of operations forthe year ended December 31, 2007.

 

Immediately following theinitial closing of the transactions under the Participation Agreement, ElixirGroup became a related party and, in accordance with SFAS No. 13 *Accounting for Leases*, initial direct costs between relatedparties should not be capitalized. Accordingly, upon the achievement of the future performance milestonesby Elixir Group, the remaining shares of common stock to be issued and futurevesting of warrants will be expensed as incurred. Elixir Group acheived thesecond performance milestone in September 2007 and accordingly the Company recordedadditional contract acquisition fees of $93.1 million.

 

***Research and Development***

 

Researchand development costs are charged to expense as incurred.  Employee related costs associated withproduct development are included in research and development costs.

 

***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 theeffects of temporary differences between the carrying amounts of assets andliabilities and their tax basis and are stated at enacted tax rates expected tobe in effect when taxes are actually paid or recovered. SFAS No. 109, *Accounting for Income Taxes,* requires that deferred taxassets be evaluated for future realization and reduced by a valuation allowanceto the extent the Company believes a portion will 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.

 

Significant judgment isrequired in evaluating its tax positions and determining its provision forincome taxes. During the ordinary course of business, there are manytransactions and calculations for which the ultimate tax determination isuncertain. Effective January 1, 2007, the Company adopted the provisionsof FIN No. 48, *Accounting**for Uncertainty in Income Taxes and Interpretation of FASB Statement No. 109*,which contains a two-step approach to recognizing and measuring uncertain taxpositions accounted for in accordance with SFAS No. 109. The first step isto 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 andestimating its tax positions and tax benefits, which may require periodicadjustments and which may not accurately anticipate actual outcomes.

 

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.

 

***Loss Per Share***

 

Basicloss per share is computed by dividing the reported net loss by the weightedaverage number of shares of common stock outstanding during the year. There isno difference in diluted loss per share from basic loss per share as theassumed exercise of common stock equivalents would have an anti-dilutive effectdue to losses.

 

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***Foreign Currency Translations andTransactions***

 

Thefunctional currency of the Company’s international subsidiaries is the localcurrency.  For these subsidiaries, theCompany translates the assets and liabilities at exchange rates in effect atthe balance sheet date and income and expense accounts at average exchangerates during the year.  Resultingcurrency translation adjustments are recorded directly to accumulated othercomprehensive income within stockholders’ equity.  Gains and losses resulting from transactionsin non-functional currencies are recorded in operations.

 

***Recently Issued Accounting Standards***

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), *Business Combinations*). SFAS No. 141(R) replacesSFAS No. 141, *Business Combinations*,but retains the requirement that the purchase method of accounting foracquisitions be used for all business combinations. SFAS No. 141(R) expandson the disclosures previously required by SFAS No. 141, better defines theacquirer and the acquisition date in a business combination, and establishesprinciples for recognizing and measuring the assets acquired (includinggoodwill), the liabilities assumed and any non-controlling interests in theacquired business. SFAS No. 141(R) also requires an acquirer torecord an adjustment to income tax expense for changes in valuation allowancesor uncertain tax positions related to acquired businesses. SFAS No. 141(R) iseffective for all business combinations with an acquisition date in the firstannual period following December 15, 2008; early adoption is notpermitted. The Company will adopt this statement as of January 1, 2009.Management is currently evaluating the impact SFAS No. 141(R) willhave on its consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 160, *Non-ControllingInterest in Consolidated Financial Statements, an Amendment of ARB No. 51*.This statement establishes accounting and reporting standards for ownershipinterest in subsidiaries held by parties other than the parent and for thedeconsolidation of a subsidiary. It also clarifies that a non-controllinginterest in a subsidiary is an ownership interest in the consolidated entitythat should be reported as equity in the consolidated financial statements.SFAS No. 160 changes the way the consolidated income statement ispresented by requiring consolidated net income to be reported at amounts thatinclude the amount attributable to both the parent and the non-controllinginterests. The statement also establishes reporting requirements that providesufficient disclosure that clearly identify and distinguish between theinterest of the parent and those of the non-controlling owners. This statementis effective for fiscal years beginning on or after December 15, 2008. Theadoption of SFAS No. 160 is not expected to have a material impact on theCompany’s financial position, results of operations or cash flows.

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements*, which clarifies the definition of fair value,establishes guidelines for measuring fair value, and expands disclosuresregarding fair value measurements. SFAS No. 157 does not require any newfair value measurements and eliminates inconsistencies in guidance found invarious prior accounting pronouncements. SFAS No. 157 will be effectivefor the Company on January 1, 2008. In February 2008, the FASB issuedFASB Staff Position (FSP) SFAS No. 157-2 *EffectiveDate of FASB Statement No. 157*that deferred the effective dateof SFAS No. 157 for one year for certain non-financial assets andnon-financial liabilities. The Company is currently evaluating the impact ofadopting SFAS No. 157 on our financial position, cash flows, and resultsof operations.

 

In February 2007,the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities*. SFAS No. 159permits entities to choose to measure at fair value many financial instrumentsand certain other items that are not currently required to be measured at fairvalue.

 

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Subsequent changes infair value for designated items will be required to be reported in earnings inthe current period. SFAS No. 159 also establishes presentation anddisclosure requirements for similar types of assets and liabilities measured atfair value. SFAS No. 159 is effective for financial statements issued forfiscal years beginning after November 15, 2007. The Company currentlyassessing the effect of implementing this guidance, which depends on the natureand extent of items elected to be measured at fair value, upon initialapplication of the standard on January 1, 2008.

 

**NOTE 2.                DOLPHIN ACQUISITION**

** **

**The Company acquired Dolphin Advanced Technologies Pty Ltd(“Dolphin”), a manufacturer of plastic injection molded products, on July 12,2006. Dolphin manufactures traditional and high frequency RFID casino chips aswell as non-gaming products including automotive components and medicalcomponents.  The results of operations ofDolphin have been included in our consolidated financial statements since theacquisition date.**

** **

**The Company acquired Dolphin pursuant to a share saleagreement with the sellers. The Company paid to the sellers the followingconsideration in exchange for all of the issued and outstanding capital sharesof Dolphin:**

 
| Cash  (a)                                                                   |   | $          | 1,350,000  |   |
|-----------------------------------------------------------------------------|--------|------------|------------|--------|
| 1,462,238  shares of the Company’s common stock at $3.50 per share     |   | 5,117,833  |       |
| 1,000,000  shares of the Company’s common stock at $2.70 per share (b) |   | 2,700,000  |       |
| Secured  convertible promissory notes (c)                                   |   | 5,782,168  |       |
| Purchase  price                                                             |   | 14,950,001 |       |
| Acquisition  costs                                                          |   | 250,000    |       |
| Total  purchase price                                                       |   | $          | 15,200,001 |   |

 

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(a) Includes$750,000 paid as a non-refundable deposit in April 2006,

(b) Includes1,000,000 shares issued as part of the non-refundable deposit; and

(c) Convertedin January 2007 into 1,652,048 shares of common stock.

 

Theaggregate adjusted purchase price was allocated based on the estimated fairvalue of the net assets acquired and liabilities assumed at the date ofacquisition as follows:

 
| Cash                                              |   | $          | 174,139    |   |
|---------------------------------------------------|--------|------------|------------|--------|
| Receivables                                       |   | 1,010,155  |       |
| Shareholder  receivable                           |   | 618,916    |       |
| Inventories                                       |   | 1,262,451  |       |
| Property,  plant, equipment                       |   | 2,567,090  |       |
| Identifiable  intangible assets and other         |   | 5,884,610  |       |
| Accounts  payable                                 |   | (1,248,278 | )          |
| Accrued  expenses                                 |   | (302,260   | )          |
| Provision  for dividends payable                  |   | (1,995,088 | )          |
| Contingent  purchase price liability              |   | (535,000   | )          |
| Deferred  tax liability                           |   | (1,765,383 | )          |
| Debt  and capital lease obligation — current |   | (749,245   | )          |
| Capital  lease obligation — non-current      |   | (917,843   | )          |
|                                              |   | 4,004,264  |       |
| Less  purchase price                              |   | 15,200,001 |       |
| Goodwill                                          |   | $          | 11,195,737 |   |

 

Asof December 31, 2006, the Company had a convertible note of $5,782,168outstanding for the balance of the Dolphin acquisition. The note was convertedto shares in January 2007 at $2.13 per share; however; the Company remainedcontingently liable if the holder sells such shares at market for 

 

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lessthan of $3.50 per share. As of October 30, 2007, all shares under thisagreement have been sold and the Company is obligated for $910,000 representingthe shortfall in the price at the sale date, which has been recorded in accruedexpenses in the consolidated balance sheet as of December 31, 2007.

 

Thefollowing unaudited pro forma consolidated financial information has beenprepared assuming that the Dolphin acquisition had occurred at the beginning of2006:

 
| ** **                        | ** ** | **2006**    | ** **  |
|-----------------------------------|------------|-------------|-------------|
| Net revenue                       |       | $           | 10,068,815  |   |
| Operating expenses                |       | 22,742,197  |        |
| Loss from operations              |       | (12,673,382 | )           |
| Interest expense                  |       | 2,607,237   |        |
| Income taxes                      |       | (58,992     | )           |
| Net loss                          |       | $           | (15,221,627 | ) |
| Basic and diluted loss per share  |       | $           | (0.57       | ) |
| Weighted average number of shares |       | 26,733,065  |        |

 

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**NOTE 3.**                                                 SEGMENTS

** **

TheCompany currently operates in three operating segments: (i) table gameproducts operations, (ii) gaming machine participation operations and (iii) non-gamingproducts operations, consisting primarily of the Dolphin automotive sector. Theaccounting policies of these segments are consistent with the Company’s policiesfor the consolidated financial statements. The following table presentsfinancial information for each of the Company’s operating segments:

 
| ** **                                       | ** ** | **Year Ended December 31,** | ** **   |
|--------------------------------------------------|------------|----------------------------------|--------------|
| ** **                                       | ** ** | **2007**                         | ** **   | **2006** | ** ** |
| Revenues:                                        |       |                             |         |   |   |
| Table game product operations                    |       | $                                | 5,206,076    |   | $ | 4,057,784 |   |
| Gaming machine participation operations          |       | 389,596                          |         | — |   |
| Non-gaming product operations                    |       | 6,644,891                        |         | 3,780,430 |   |
| Total  revenues                                  |       | $                                | 12,240,563   |   | $ | 7,838,214 |   |
|                                             |       |                             |         |   |   |
| Operating  loss:                                 |       |                             |         |   |   |
| Table game product operations                    |       | $                                | (13,338,831  | ) | $ | (183,260 | ) |
| Gaming machine participation operations          |       | (288,129                         | )            | — |   |
| Non-gaming product operations                    |       | (17,314                          | )            | (880,053 | ) |
| Corporate and other operating costs and expenses |       | (221,004,387                     | )            | (10,090,355 | ) |
| Total  operating loss                            |       | $                                | (234,648,661 | ) | $ | (11,153,668 | ) |
|                                             |       |                             |         |   |   |
| Identifiable  assets:                            |       |                             |         |   |   |
| Table game product operations                    |       | $                                | 8,388,949    |   | $ | 24,645,389 |   |
| Gaming machine participation operations          |       | 40,483,768                       |         | — |   |
| Non-gaming product operations                    |       | 3,754,231                        |         | 4,467,739 |   |
| Corporate                                        |       | 71,087,080                       |         | 1,505,113 |   |
| Total  identifiable assets                       |       | $                                | 123,714,028  |   | $ | 30,618,241 |   |
|                                             |       |                             |         |   |   |
| Goodwill:                                        |       |                             |         |   |   |
| Table game product operations                    |       | $                                | 84,210       |   | $ | 11,195,737 |   |
| Gaming machine participation operations          |       | —                           |         | — |   |
| Non-gaming product operations                    |       | —                           |         | — |   |
| Corporate                                        |       | —                           |         | — |   |
| Total  goodwill                                  |       | $                                | 84,210       |   | $ | 11,195,737 |   |
|                                             |       |                             |         |   |   |
| Capital  expenditures:                           |       |                             |         |   |   |
| Table game product operations                    |       | $                                | 250,488      |   | $ | 2,120,692 |   |
| Gaming machine participation operations(1)       |       | 39,023,178                       |         | — |   |
| Non-gaming product operations                    |       | 256,402                          |         | — |   |
| Corporate                                        |       | 390,668                          |         | 330,891 |   |
| Total  capital expenditures                      |       | $                                | 39,920,736   |   | $ | 2,451,583 |   |
|                                             |       |                             |         |   |   |
| Depreciation  and amortization:                  |       |                             |         |   |   |
| Table game product operations                    |       | $                                | 944,390      |   | $ | 1,076,740 |   |
| Gaming machine participation operations          |       | 569,926                          |         | — |   |
| Non-gaming product operations                    |       | 272,906                          |         | 177,077 |   |
| Corporate                                        |       | 230,617                          |         | 48,463 |   |
| Total  depreciation and amortization(2)          |       | $                                | 2,017,839    |   | $ | 1,302,280 |   |

 

----

(1) Includes $29.6million of gaming machines in trade payables.

 

(2) Includes $1,015,230and $677,580 for the years ended December 31, 2007 and 2006, respectivelythat was reported in cost of sales on the consolidated statements of operations(see Note 1).

 

55

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Geographic segment revenuesfor the years ended December 31, 2007 and 2006 are as follows:

 
| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Asia           |       | $                                | 3,374,161  |   | $ | 3,061,406 |   |
| United  States |       | 1,858,242                        |       | 1,074,106 |   |
| Australia      |       | 6,808,038                        |       | 3,702,702 |   |
| Europe         |       | 143,012                          |       | — |   |
| Other          |       | 57,110                           |       | — |   |
|           |       | $                                | 12,240,563 |   | $ | 7,838,214 |   |

 

For the year ended December 31,2007, in the table game products segment, one customer represented 48% of totaltable game product sales. Within the non-gaming products segment, during yearended December 31, 2007, one customer represented 39% of total non-gamingproduct sales.

 

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

 
| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Asia           |       | $                                | 39,459,415 |   | $ | 237,605 |   |
| United  States |       | 4,669,128                        |       | 5,212,544 |   |
| Australia      |       | 4,570,482                        |       | 18,270,743 |   |
| Europe         |       | —                           |       | — |   |
| Other          |       | —                           |       | — |   |
|           |       | $                                | 48,699,025 |   | $ | 23,720,892 |   |

** **

**NOTE 4.**                INVENTORIES

** **

Inventoriesat December 31, 2007 and 2006 consist of the following:

 
| ** **       | ** ** | **Year Ended December 31,** | ** ** |
|------------------|------------|----------------------------------|------------|
| ** **       | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Raw  materials   |       | $                                | 577,980    |   | $ | 633,185 |   |
| Work-in-progress |       | 230,449                          |       | 121,977 |   |
| Finished  goods  |       | 878,241                          |       | 2,652,199 |   |
|             |       | $                                | 1,686,670  |   | $ | 3,407,361 |   |

 

Duringthe year ended December 31, 2007, the Company recorded provisions forobsolete inventory of $1.6 million. No such provision was made for the yearended December 31, 2006.

 

**NOTE 5.                PREPAIDEXPENSES AND OTHER CURRENT ASSETS**

 

Prepaidexpenses and other current assets at December 31, 2007 and 2006 consist ofthe following:

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Prepaid  taxes                            |       | $                     | 701,527    |   | $ | 18,309 |   |
| Prepaid  service and licensing agreements |       | 71,879                |       | — |   |
| Prepayment  of suppliers                  |       | 26,860                |       | — |   |
| Other                                     |       | 175,283               |       | 48,185 |   |
| Total                                     |       | $                     | 975,549    |   | $ | 66,494 |   |

 

56

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**NOTE 6.                RECEIVABLES**

** **

Accountsreceivable at December 31, 2007 and 2006 consist of the following:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|------------------|------------|
| ** **                             | ** ** | **2007**         | ** ** | **2006** | ** ** |
| Trade  accounts                        |       | $                | 1,926,996  |   | $ | 2,474,616 |   |
| Other                                  |       | 298,940          |       | 146,458 |   |
|                                   |       | 2,225,936        |       | 2,621,074 |   |
| Less:  allowance for doubtful accounts |       | (176,666         | )          | (267,154 | ) |
| Net                                    |       | $                | 2,049,270  |   | $ | 2,353,920 |   |
| Non  current portion                   |       | $                | 60,421     |   | $ | 350,564 |   |

 

Otherreceivables at December 31, 2007 and 2006 consist of the following:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Contract  sales and notes receivables |       | $                     | 171,209    |   | $ | — |   |
| Other                                 |       | 127,731               |       | 146,458 |   |
| Total                                 |       | $                     | 298,940    |   | $ | 146,458 |   |

 

Changesin the allowance for doubtful accounts for the years ended December 31,2007 and 2006 consist of the following:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Allowance  for doubtful accounts - beginning |       | $                                | 267,154    |   | $ | 276,420 |   |
| Provision  for bad debts (recoveries)        |       | 129,493                          |       | 35,080 |   |
| Write-offs                                   |       | (219,981                         | )          | (44,346 | ) |
| Allowance  for doubtful accounts - ending    |       | $                                | 176,666    |   | $ | 267,154 |   |

** **

**NOTE 7.                PROPERTYAND EQUIPMENT**

** **

Propertyand equipment consists of the following at December 31, 2007 and 2006:

 
| ** **                                      | ** ** | **Useful Life** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **(years)**     | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Equipment  rented by customers                  |       | 3 - 5           |       | $                     | 85,011     |   | $ | 162,451 |   |
| Equipment  and vehicles, furniture and fixtures |       | 3 - 5           |       | $                     | 6,329,146  |   | $ | 5,470,612 |   |
| Leasehold  improvements                         |       | 5               |       | 560,308               |       | 496,101 |   |
|                                            |       |            |       | 6,974,465             |       | 6,129,164 |   |
| Less  accumulated depreciation                  |       |            |       | 3,039,933             |       | 2,540,570 |   |
|                                            |       |            |       | $                     | 3,934,532  |   | $ | 3,588,594 |   |

 

Of the Company’s furnitureand equipment $2.0 million represents assets that are held under capital leases(Note 11).

 

57

----

 

**NOTE 8.                GOODWILLAND INTANGIBLE ASSETS**

** **

*Definite-Life Intangible Assets*

 

Allof the Company’s definite-life intangible assets are subject toamortization. Definite-life intangible assets are comprised of thefollowing:

 
| ** **                           | ** ** | **Useful Life** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------|------------|-----------------------|------------|
| ** **                           | ** ** | **(years)**     | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Definite-life  intangible assets:    |       |            |       |                  |       |   |   |
| Patents                              |       | 10              |       | $                     | 4,986,314  |   | $ | 4,986,314 |   |
| Less:  accumulated amortization |       |            |       | (1,147,900            | )          | (638,702 | ) |
|                                 |       |            |       |                  |       |   |   |
| Customer relationships               |       | 10-13           |       | 1,684,103             |       | 4,220,000 |   |
| Less:  accumulated amortization |       |            |       | (478,712              | )          | (160,154 | ) |
|                                 |       |            |       |                  |       |   |   |
| Trademarks                           |       | 10-13           |       | 505,000               |       | 550,000 |   |
| Less:  accumulated amortization |       |            |       | (62,484               | )          | (20,897 | ) |
| Total                                |       |            |       | $                     | 5,486,321  |   | $ | 8,936,561 |   |

 

Amortizationexpense for definite-life intangible assets was $0.9 million and $0.4 millionfor the years ended December 31, 2007 and 2006, respectively. Annualestimated amortization expense for each of the five succeeding fiscal years isas follows:

 
| 2008       |   | $         | 604,978   |   |
|------------|--------|-----------|-----------|--------|
| 2009       |   | 604,978   |      |
| 2010       |   | 604,978   |      |
| 2011       |   | 604,978   |      |
| 2012       |   | 604,978   |      |
| Thereafter |   | 2,461,431 |      |
| Total      |   | $         | 5,486,321 |   |

 

*Impairment of Intangible Assets and Goodwill*

 

In accordance with SFAS No. 142 and SFAS No. 144,the Company reviews goodwill and intangible assets for impairment on an annualbasis (December 31) or more frequently if events or circumstances indicatethat the carrying value may not be recoverable. Dolphin, which was acquired in July 2006,has not met expectations to date due to a number of factors including the lossof a general manager and sales staff in early 2007, and, to date, the Companyhas not found suitable replacements.  Assuch, the Company believed that original financial forecasts needed to beadjusted downward and a test for impairment was warranted.

 

In accordance with SFAS 142, the Company performeda two-step impairment test which compared the fair value of a reporting unitwith its carry amount, including goodwill and allocating the fair value to allthe assets and liabilities of Dolphin as if the reporting unit had beenacquired in a business combination. Based on its review, the Company recorded an impairment to goodwill of$10.6 million.

 

The Company amortizes definite-life intangibleassets, such as customer relationships, patents and trademarks on thestraight-line method over their estimated useful lives.  The Company assessed the potential impairmentof intangible assets subject to amortization based upon the factors identifiedabove.  The Company determined that thecarrying value of the Dolphin customer relationships and trademarks 

 

58

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for the non-gaming products segment would berecoverable but not recoverable for the gaming products segment, based upon theCompany’s calculation of the assets’ fair value based on the discounted projectednet cash flows expected to result from those assets, including any eventualdisposition.  Accordingly, the Companyrecorded impairments to customer relationships and trademarks of the gamingproducts segment of $2.6 million for the year ended December 31, 2007.

 

The following table summarizes the goodwill andintangible impairments:

 
| Goodwill                |   | $         | 10,576,526 |   |
|-------------------------|--------|-----------|------------|--------|
| Customer  relationships |   | 2,535,898 |       |
| Trademarks              |   | 45,000    |       |
|                    |   | $         | 13,157,424 |   |

 

Impairment charges have been presented in theconsolidated statement of operations for the year ended December 31, 2007.

 

**NOTE  9.               PREPAID COMMISSIONS, DEPOSITS ANDOTHER ASSETS**

 

*PrepaidCommissions*

 

OnJanuary 25, 2007, the Company issued warrants to purchase up to 16,000,000shares of its common stock (the “2006 Warrants”) to Elixir Group, which at thetime was its Asian distributor of table game products, as an incentive to meetcertain sales targets.  These warrantswere accounted for in accordance with the EITF No. 96-18.  The 2006 Warrants had a fair market value of$6,147,000 as of January 25, 2007 and were classified in the Company’sbalance sheet as prepaid commissions subject to amortization to commissionexpense at a rate of 8% of the gross revenue generated by the distributor.

 

InSeptember 2007, the Company conducted the initial closing of thetransactions under the Participation Agreement between it and ElixirGroup.  In accordance with theParticipation Agreement, the Company agreed that upon the initial placement of1,000 electronic gaming machines with gaming operators identified by ElixirGroup, we would reduce by $1.00 the exercise price of 10 million of the 2006Warrants, which originally had exercise prices ranging from $2.65 per share to$5.50 per share.  When the cumulativenumber of electronic gaming machines under contract reached 2,000 units and thecumulative number of electronic gaming machines placed in operation reaches1,000 units, the Company agreed to further reduce by $1.00 the exercise pricesof the 10 million warrants. When the cumulative number of electronic gamingmachines under contract reaches 3,000 units and the cumulative number ofelectronic gaming machines placed in operation reaches 2,000 units, the Companywill further reduce by $1.00 the exercise prices of the 10 million 2006Warrants. As of the date of this report, the Company has reduced the exerciseprice of the 10 million 2006 Warrants by $2.00 based on the achievement of therelated performance milestones.

 

Inaccordance with SFAS No. 123R, the reduction in exercise price constituteda modification in terms of the 2006 Warrants and required a recalculation offair value.  The modification increasedthe fair value of the warrants by $22.7 million bringing the unamortized balanceof the prepaid sales commission to $28.8 million. Per SFAS No. 144, along-lived asset (asset group) shall be tested for recoverability wheneverevents or changes in circumstances indicate that its carrying amount may not berecoverable including an accumulation of costs significantly in excess of theamount originally expected for the acquisition.

 

TheCompany estimated fair value using present value techniques based on estimatesof cash flows.  In accordance with SFAS No. 144,an impairment loss shall be recognized if the carrying amount of an 

 

59

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intangibleasset is not recoverable and its carrying amount exceeds its fair value. Afteran impairment loss is recognized, the adjusted carrying amount of theintangible asset shall be its new accounting basis.  Based upon the above, the Company recorded animpairment to the asset of $27.3 million and included the amount in loss fromoperations in our consolidated statement of operations and deficit.  As of December 31, 2007, the Company hadprepaid commissions of $1.4 million.

 

*Deposits and Other Assets*

 

Deposits and other assetsat December 31, 2007 and 2006 consist of the following:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Office  and equipment rental deposits |       | $                     | 67,505     |   | $ | 185,816 |   |
| Sales  tax in dispute (see Note 18)   |       | 418,449               |       | 430,404 |   |
| Restricted  cash                      |       | 104,363               |       | — |   |
| Other                                 |       | 27,577                |       | 119,466 |   |
| Total                                 |       | $                     | 617,894    |   | $ | 735,686 |   |

 

**NOTE 10.              ACCRUEDEXPENSES**

 

Accrued expenses at December 31,2007 and 2006 consist of the following:

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Payroll  and related costs         |       | $                     | 1,832,175  |   | $ | 744,861 |   |
| Interest                           |       | —                |       | 606,904 |   |
| Restructuring  and severance costs |       | 1,290,837             |       | — |   |
| Legal,  accounting and tax         |       | 419,516               |       | 1,445,260 |   |
| Litigation  (see Note 18)          |       | 1,318,994             |       | 535,000 |   |
| Other                              |       | 386,936               |       | 412,565 |   |
| Total                              |       | $                     | 5,248,458  |   | $ | 3,744,590 |   |

 

Included in accruedliabilities at December 31, 2007 is $1.3 million related to potentialcharges in relation to a lawsuit with the former owner of Dolphin (see Note18).  See discussion of restructuring andseverance costs at Note 17.

 

60

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**NOTE 11.              NOTESPAYABLE AND CAPITAL LEASE OBLIGATIONS**

 

Asof December 31, 2007 and 2006, our notes payable and capital leaseobligations are as follows:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **2007**              | ** ** | **2006** | ** ** |
| 8% senior secured promissory notes including detachable warrants to  purchase 3.2 million shares at $2.50 per share, some of which are recallable  based on early retirement of $6 million of the debt portion of the  transaction. In September 2006, the amount of detachable warrants were  reduced to 2.6 million shares at $2.00 per share, some of which were  recallable based on early retirement of $6 million of the debt portion of the  transaction. Interest at 8% was due semi-annually on July 1, and  December 1, each year until repayment. The note was repaid in full on  November 1, 2007(1). |       | $                     | —     |   | $ | 13,000,000 |   |
| Short-term line of credit at an Australian bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 31,893                |       | 676,597 |   |
| Short-term convertible notes classified as  long-term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | —                |       | 5,782,168 |   |
| Capital lease obligation to an Australian bank at various interest  rates collateralized by equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 1,051,713             |       | 1,310,852 |   |
| Capital lease obligations for furniture, tooling  and equipment(2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 345,394               |       | 709,992 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 1,429,000             |       | 21,479,609 |   |
| Less debt discount                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | —                |       | (2,837,911 | ) |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | (512,556              | )          | (1,416,810 | ) |
| Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | $                     | 916,444    |   | $ | 17,224,888 |   |

----

(1)          On November 1,2007, the Company paid in cash approximately $11.0 million in full repayment ofits obligations under its debt agreement, which included accrued interest of$0.4 million. The Company recorded a non-cash loss on extinguishment of debt inthe amount of $1,366,083.

 

(2)          In prior years,the Company entered into certain sale-leaseback transactions primarily forassets rented to, or intended to be rented to, customers under operatingleases. The leases expire between March 2007 and April 2009.  In January 2008, the outstanding balancewas paid in full.

 

Scheduled maturities ofshort-term debt and capital lease obligations as of December 31, 2007, aresummarized as follows:

 
| ** **                     | ** ** | **Capital Leases** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------|------------|-----------|------------|
| 2008                           |       | $                  | 569,494    |      | $          | 31,893    |       | $ | 601,387 |   |
| 2009                           |       | 399,798            |       | —    |       | 399,798   |       |
| 2010                           |       | 242,710            |       | —    |       | 242,710   |       |
| 2011                           |       | 188,034            |       | —    |       | 188,034   |       |
| 2012                           |       | 287,978            |       | —    |       | 287,978   |       |
| Thereafter                     |       | —             |       | —    |       | —    |       |
| Future  minimum lease payments |       | 1,688,014          |       | 31,893    |       | 1,719,907 |       |
| Less  interest component       |       | (290,907           | )          | —    |       | (290,907  | )          |
|                           |       | 1,397,107          |       | 31,893    |       | 1,429,000 |       |
| Current  portion               |       | (480,663           | )          | (31,893   | )          | (513,556  | )          |
| Long-term  portion             |       | $                  | 916,444    |      | $          | —    |       | $ | 916,444 |   |

** **

**NOTE 12.              SECURITIESPURCHASE AND PRODUCT PARTICIPATION AGREEMENT**

 

OnJune 12, 2007, the Company entered into the Participation Agreement withElixir Group Limited (“Elixir Group”). Pursuant to the Participation Agreement,the Company agreed to issue to Elixir Group its common shares and warrants topurchase its 

 

61

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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.  TheCompany agreed to place electronic gaming machines with venue owners pursuantto lease agreements between it and the venue owners under what are commonlyreferred to as revenue sharing arrangements, which provide for the Company toreceive variable rental payments for its electronic gaming machines aslessor.  Elixir Group also agreed to sellto the Company the electronic gaming machines to be placed under the leaseagreements at its cost plus fifteen percent (15%). According to the terms ofthe Participation Agreement, Elixir Group has the right to “earn-in” an equityinterest in the Company based on the achievement of various performancemilestones in terms of (a) the cumulative number of electronic gamingmachines contracted to be placed and leased pursuant to lease agreementsentered into between the Company and the venue owners sourced and identified byElixir Group (the “gaming machines under contract”) and (b) the cumulativenumber of electronic gaming machines physically placed by the Company and inoperation in the gaming premises of venue owners pursuant to the leaseagreements (the “gaming machines in operation”).

 

OnSeptember 10, 2007, the Company conducted an initial closing of thetransactions under the Participation Agreement. At the initial closing, theCompany issued to Elixir Group, 25,000,000 common shares of the Company’ commonstock based on Elixir Group’s placement of electronic gaming machines andwarrants, with an exercise price of $2.65 per share, to purchase up to88,000,000 additional shares of the Company’s common stock. The warrants vestand first become exercisable based on the achievement of certain performancemilestones with respect to the number of gaming machines under contract andgaming machines in operation. On September 13, 2007, the Company issued anadditional 15,000,000 shares of the Company’s common stock to Elixir Groupbased on Elixir Group’s placement of additional electronic gamingmachines.  Elixir Group is entitled toearn a total of 55,000,000 shares of the Company’s common stock (inclusive ofthe 25,000,000 shares issued at the initial closing and the 15,000,000 sharesissued on September 13, 2007) and the 88,000,000 warrants will vest andbecome exercisable subject to achieving the following performance milestoneswith respect to the cumulative number of gaming machines under contract andgaming machines in operation.

 
| ** ** | ** ** | **Cumulative  Gaming Machines  Under Contract** | ** ** | **Cumulative  Gaming Machines  in Operation** | ** ** | **Shares  Earned  by Elixir Group** | ** ** | **Vesting of  Warrants  Earned by  Elixir Group** | ** ** |
|------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------|------------|---------------------------------------------------|------------|
|       |       | 1,000                                           |       | 1,000                                         |       | 25,000,000                          |       | —                                            |       |
|       |       | 2,000                                           |       | 1,000                                         |       | 15,000,000                          |       | 22,000,000                                        |       |
|       |       | 3,000                                           |       | 2,000                                         |       | 10,000,000                          |       | 22,000,000                                        |       |
|       |       | 4,000                                           |       | 3,000                                         |       | 5,000,000                           |       | 22,000,000                                        |       |
|       |       | 5,000                                           |       | 4,000                                         |       | —                              |       | 22,000,000                                        |       |
| Total      |       | 5,000                                           |       | 4,000                                         |       | 55,000,000                          |       | 88,000,000                                        |       |

 

Inaddition to the above, the Company agreed that upon the initial placement of1,000 gaming machines with venue owners identified by Elixir Group, the Companywould reduce by $1.00 the exercise price of all warrants (other than 6,000,000common share warrants priced at $2.65) sold to Elixir Group pursuant to asecurities purchase agreement entered into in October 2006 (the “2006Warrants”). When the cumulative number of gaming machines under contractreaches 2,000 units and the cumulative number of gaming machines in operationreaches 1,000 units, the Company agreed to further reduce by $1.00 the exerciseprices of the 2006 Warrants. When the cumulative number of gaming machinesunder contract reaches 3,000 units and the cumulative number of gaming machinesin operation reaches 2,000 units, the Company will further reduce by $1.00 theexercise prices of the 2006 Warrants.

 

62

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Inconnection with the initial closing of the transactions under the ParticipationAgreement, the Company entered into a registration rights agreement with ElixirGroup. The registration rights agreement, as amended, requires the Company to filea selling shareholder registration statement with the SEC, within 30 daysfollowing the initial closing of the transactions under the ParticipationAgreement, for purposes of registering the resale of the shares of the Company’scommon stock issued to Elixir Group pursuant to the transaction, including allshares that are issued, or may be issued, upon exercise of the warrants.Pursuant to the registration rights agreement, as amended, the holders of thecommon stock are also entitled to certain demand and piggyback registrationrights.  In conjunction with a SecuritiesAmendment and Exchange Agreement (the “Exchange Agreement”) entered into withElixir Group in October 2007, Elixir Group agreed to defer itsregistration rights for one year (see Note 14).

 

Thetransactions under the Participation Agreement are accounted for pursuant toEITF 96-18*. *In accordance with EITF 96-18, we valued the initial 25,000,000 commonshares and 88,000,000 unvested warrants at fair value on the measurement datewhich occurred when the first performance milestone was achieved.  The common shares were initially capitalizedin a manner consistent with the guidance provided in SFAS No. 91, *Accounting for Nonrefundable Fees and Costs Associated with Originatingor Acquiring Loans and Initial Direct Costs of Leases — An Amendment of FASBStatements No. 13, 60, and 65 and a Rescission of FASB Statement No. 17*,and fair value of the warrants was deferred. The fair value of the common shares totaled $77.8 million and the fairvalue of the warrants totaled $160.0 million.

 

In accordance with SFAS No. 144,the Company tested this asset for recoverability using present value techniquesbased on estimated future cash flows and accordingly recorded an impairment of$77.8 million of contract acquisition fees in the consolidated statement ofoperations for the year ended December 31, 2007.

 

Theinitial closing of the transactions under the Participation Agreement,including the issuance of the Company’s common shares and warrants to Elixir Group,were approved by the Company’s shareholders at a special meeting ofshareholders held on September 10, 2007. Based on the aforementioned common stock issuances, as of December 31,2007, the Company had 114,914,934 shares of its common stock issued andoutstanding, of which 45,800,000 (or 39.86%) were held by Elixir Groupincluding 1,000,000 shares purchased by Elixir Group in January 2007 and4,800,000 shares issued in the warrant exchange transaction in December 2007(see Note 14).

 

Immediatelyfollowing the initial closing of the transactions under the ParticipationAgreement Elixir Group became a related party (see Note 15) and in accordancewith SFAS No. 13, initial direct costs between related parties should notbe capitalized.  Accordingly, upon theachievement of the second performance milestone by Elixir Group on September 13,2007, the 15,000,000 shares of the Company’s common stock that were issued(valued at $53.1 million based on market price of our stock) and the vesting ofthe 22,000,000 warrants (valued at $40.0 million based on a Black-Scholesoption-pricing model calculation (see Note 13 for valuation assumptions)) wasrecorded as contract acquisition fees in the consolidated statement ofoperations for the year ended December 31, 2007.

 

InOctober 2007, the Company entered into the Exchange Agreement with ElixirGroup, pursuant to which the Company 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 theParticipation Agreement.  At the annualmeeting of shareholders held on December 17, 2007, a majority of our voting shares(excluding shares held by Elixir Group) voted to approve the ExchangeAgreement.  Elixir immediatelysurrendered 12 million vested warrants in exchange for 4.8 million shares ofour common stock.  In accordance withSFAS No. 123R, this exchange represented a modification of the originalissuance of the warrants.  We re-valuedthe shares based upon the fair value at the date of 

 

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modification.  The fair value of the modified award was lessthen the fair value of the original award immediately before the modificationthus in accordance with SFAS No. 123R, no additional costs were recorded.

 

**NOTE13.              STOCK-BASED COMPENSATION**

** **

*Options*

 

TheCompany has two stock options plans: the Amended and Restated 1999 Stock OptionPlan and the Amended and Restated 1999 Directors’ Stock Option Plan (the “StockOption Plans”), through which 15,000,000 shares and 300,000 shares areauthorized, respectively. As of December 31, 2007, there were options for thepurchase of 3,218,369 shares of common stock issued under the two plans.

 

InMay 2007, stock options for the purchase of 5,000,000 of common stock weregranted by the board of directors pursuant to the initial closing of thetransactions under the Participation Agreement to certain employees andnon-employees.  Each option had anexercise price of $2.90 per share and will vest over a three-year period andhave a five-year term.  The fair value ofthe shares is $11.0 million and the Company recorded expense of $1.1 million(representing the vesting of options over the requisite service period) for theyear ended December 31, 2007.

 

Asummary of the Stock Option Plans as of December 31, 2007, and changesduring the year then ended, is presented below:

 
| ** **                                | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|---------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------|------------|
| Outstanding  as of December 31, 2006 |       | 4,807,762             |       | $                                     | 1.97       |                                                          | —     |                           |       |   |
| Granted                                   |       | 5,585,000             |       | 2.85                                  |       | —                                                        |       |                           |       |
| Exercised                                 |       | (2,050,944            | )          | 1.99                                  |       | —                                                        |       |                           |       |
| Forfeited or expired                      |       | (123,449              | )          | 2.08                                  |       | —                                                        |       |                           |       |
| Outstanding  as of December 31, 2007 |       | 8,218,369             |       | $                                     | 2.56       |                                                          | 3.92       |                           | $          | 14,311,016 |   |
| Exercisable  as of December 31, 2007 |       | 3,202,369             |       | $                                     | 2.03       |                                                          | 3.16       |                           | $          | 7,291,976 |   |

 

Theweighted average fair value at the date of grant for options granted during2007 and 2006 as described above was $1.59 per share in 2007 and $1.51 pershare in 2006.

 

Duringthe year ended December 31, 2007, options with a fair value of $3.7million vested, and options with an intrinsic value of $3.9 million wereexercised.

 

Theoptions outstanding at December 31, 2006 included 1,050,000 options that vestedand became exercisable upon a change in control of the Company.  The initial closing of the transactions underthe Participation Agreement with Elixir Group represented a change of control,resulting in the vesting of these options.

 

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*Recognition and Measurement*

 

Thefair value of each stock-based award to employees and non-employee directors,is estimated on the measurement date which generally is the grant date usingthe Black-Scholes-Merton option-pricing model. Option valuation models requirethe input of highly subjective assumptions, and changes in assumptions used canmaterially affect the fair value estimates. The Company estimates the expectedlife of the award by taking into consideration the vesting period, contractualterm, historical exercise data, expected volatility, blackout periods and otherrelevant factors. Volatility is estimated by evaluating the Company’shistorical volatility data. The risk-free interest rate at the date of grant isbased on U.S. Treasury constant maturity rates for a period approximating theexpected life of the award. The Company historically has not paid dividends,nor does it expect to pay dividends in the foreseeable future; therefore, theexpected dividend rate is zero.

 

Thefollowing table summarizes the range of assumptions utilized in theBlack-Scholes-Merton option-pricing model for the valuation of stock options andwarrants granted during the years ended December 31, 2007 and 2006:

 
| ** **               | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| **Range of values:**     | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** |
| Expected volatility      |       | 60.00    | %          | 60.00    | %          | 67.06 | % | 93.41 | % |
| Expected dividends       |       | —   |       | —   |       | — |   | — |   |
| Expected term (in years) |       | 3.01     |       | 5.00     |       | 0.60 |   | 6.00 |   |
| Risk free rate           |       | 3.86     | %          | 4.92     | %          | 4.35 | % | 5.07 | % |

 

TheCompany recognizes stock-based compensation expense for all service-basedawards with graded vesting schedules on a straight-line basis over therequisite service period for the entire award. Initial accruals of compensationexpense are based on the estimated number of shares for which requisite serviceis expected to be rendered. Estimates are revised if subsequent informationindicates that forfeitures will differ from previous estimates, and thecumulative effect on compensation cost of a change in the estimated forfeituresis recognized in the period of the change.

 

Forawards with service conditions and graded vesting that were granted prior tothe adoption of SFAS No. 123R, the Company estimates the requisite serviceperiod and the number of shares expected to vest, and recognizes compensationexpense for each tranche on a straight-line basis over the estimated requisiteservice period.

 

*Warrants*

 

Asummary of the status of the Company’s warrants outstanding at December 31,2007 and changes during year then ended is presented in the table below:

 
| ** **                   | ** ** | **Warrants** | ** ** | **Weighted Average Exercise Price** | ** ** | **Weighted Average Contractual life (in years)** | ** ** | **Aggregate Intrinsic Value** | ** ** |
|------------------------------|------------|--------------|------------|-------------------------------------|------------|--------------------------------------------------|------------|-------------------------------|------------|
| Warrants, beginning of  year |       | 5,990,000    |       | $                                   | 1.79       |                                             |       |                          |       |   |
| Granted                      |       | 105,625,000  |       | 2.57                                |       |                                             |       |                          |       |
| Exercised                    |       | 31,528,625   |       | 2.58                                |       |                                             |       |                          |       |
| Cancelled                    |       | 325,000      |       | 2.00                                |       |                                             |       |                          |       |
| Warrants, end of year        |       | 79,761,375   |       | $                                   | 2.51       |                                             | 4.76       |                          | $          | 142,505,069 |   |
| Exercisable at end of year   |       | 13,761,375   |       | $                                   | 1.86       |                                             | 3.60       |                          | $          | 33,605,069 |   |

 

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Warrantsgranted during the years ended December 31, 2007 include the following:

 

·      16 million warrants granted to Elixir Group on January 25,2007 and modified in September 2007 (see Note 9).

 

·      88 million warrants granted to Elixir Group in September 2007,of which 22 million vested in September 2007 (see Note 12).

 

·      1,625,000 warrants sold to an institutional investor in March2007 (see Note 14).

 

Theamount recorded as an expense in the consolidated statement of operations forthe year ended December 31, 2007 related to warrants issued in fiscal 2007was $67.3 million.

 

**NOTE 14.              EQUITYTRANSACTIONS**

 

On October 19, 2007, the Company entered into a securitiespurchase agreement and a registration rights agreement with certain accreditedinvestors for the private placement of 15,000,000 shares of its common stock ata price of $3.50 per share, for aggregate gross proceeds of $52.5 million.  The purchase and sale of the common sharesclosed on October 25, 2007. The securities purchase agreement includescustomary representations, warranties, and covenants by the investors and theCompany and an indemnity from the Company. Pursuant to the terms of theregistration rights agreement, the Company agreed to cause a resaleregistration statement covering the shares to be filed within 30 days afterclosing.

 

OnSeptember 7, 2007, the Company entered into a Waiver and Amendment toWarrants (the “Amendment”) with four investment funds managed by BricoleurCapital Management, of San Diego, California (the “Bricoleur Funds”). TheAmendment modified certain terms of the notes and warrants the Company issuedto the Bricoleur Funds pursuant to an 8% Senior Secured Note Purchase Agreementdated May 1, 2006 (the “Note Purchase Agreement”). Pursuant to the NotePurchase Agreement, the Bricoleur Funds purchased from the Company 8% seniorsecured notes (the “Notes”) in the principal amount of $13,000,000 and warrants(“Warrants”) to purchase up to 2,600,000 shares of the Company’s common stockat an exercise price of $2.00 per share. The fair value of the warrants at issuance was $3,380,000, using therelative fair value method, and recorded as a debt discount.

 

TheNotes included a change in control provision that would have allowed theBricoleur Funds to accelerate the payment of the outstanding principal amountunder the Notes upon the issuance of the Company’s equity securities pursuantto the Participation Agreement dated June 12, 2007 between the Company andElixir Group. In addition, 50% of the net proceeds from certain equityissuances by the Company were to be used to reduce the principal balance of theNotes and, accordingly, the Company owed the Bricoleur Funds $825,000 inprincipal as a result of an equity issuance by the Company in September 2007.

 

Pursuantto the Amendment, the Company agreed with the Bricoleur Funds to (a) amendthe Warrants to add net exercise provisions to the Warrants, (b) effect anet exercise of Warrants representing the right to purchase 2,275,000 shares ofthe Company’s common stock at a mutually agreed value of $3.50 per share forpurposes of effecting such net exercise, resulting in the issuance of 975,000shares of the Company’s common stock to the Bricoleur Funds in exchange for thecancellation of 2,275,000 Warrants, (c) waive any application of thechange in control provision of the Notes with respect to the transactions underthe Participation Agreement, and (d) defer the $825,000 in principalamount currently owed by the Company and allow the Company to pay such amountin accordance with the payment terms of the Notes as though the September 2007equity issuance had not occurred.

 

Inaccordance with SFAS No. 123R, the amendment has been treated as amodification to the equity instrument and incremental compensation costsmeasured as the excess, if any, of the fair value 

 

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ofthe modified award over the original fair value.  The estimated fair value of the award asmodified was less than the original estimated fair value, and accordingly,there was no accounting effect due to the modification of the terms.

 

OnMay 3, 2007, the Company entered into an agreement with four investors forthe Company’s sale of 600,000 shares of its common stock for the aggregateprice of $1,650,000 ($2.75 per share) paid in cash.

 

OnMarch 28, 2007, the Company completed the sale of 1,625,000 shares of theCompany’s common stock and warrants to purchase 1,625,000 shares of commonstock to an institutional investor for the aggregate price of $4,306,250. Thewarrants are exercisable at an exercise price of $2.65 per share for a periodof five years beginning on March 28, 2007. The relative fair value of the stock and warrants were classified inequity in accordance with Accounting Principals Board (“APB”) No.14, *Accounting for Convertible Debt Issued with Stock Purchase Warrants*and EITF 00-19, *Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in a Company’s Own Stock*.The Company also granted the investor certain registration rights requiring theCompany to file a selling shareholder registration statement with the SEC, forpurposes of registering the resale of the shares of the Company’s common stockissued to the investor pursuant to the transaction, including all shares thatare issued, or may be issued, upon exercise of the warrants. The Company was requiredto pay the investor a cash penalty in the event of a failure to file theregistration statement by June 15, 2007 or the Company’s failure toachieve and maintain the effectiveness of the registration statement asprovided in the registration rights agreement, however the investor agreed towaive the penalty for failure to file by June 15, 2007 and to extend thefiling deadline to November 23, 2007. The Company complied with the filing date and no penalty was assessed.

 

**NOTE 15.              RELATEDPARTY TRANSACTIONS**

** **

On September 13, 2007, the second performancemilestone was achieved by Elixir Group and 15,000,000 shares of the Company’scommon stock were issued and 22,000,000 of the 88,000,000 warrants to purchasecommon stock vested.  As this transactionwas between related parties and in accordance with SFAS No. 13, and SFAS No. 91,the fair value of the common shares and the vested portion of the warrants wererecorded as expense when incurred. Accordingly, the Company recorded $93.1 million of contract acquisitionfees in the consolidated statement of operations for the year ended December 31,2007.

 

During the year ended December 31, 2007, theCompany purchased $39.8 million of electronic gaming machines and systems fromElixir Group, at cost plus fifteen percent (15%).  At December 31, 2007, the Company hadaccounts payable of $29.6 million due to Elixir Group for these purchases.  The payables have cash terms of fifty percent(50%) due upon placement and the balance 45 days thereafter with no requiredinterest payments.  The Company recordedsales of $193,700 to Elixir Group after becoming related parties.

 

**NOTE 16.              INCOME TAXES**

** **

The components of the provision for income taxes are as follows:

 
| **Federal**       | ** ** | ** ** | ** ** |
|-------------------|------------|------------|------------|
| Current           |       | —     |       |
| Deferred          |       | —     |       |
|              |       |       |       |
| **State**         | ** ** | ** ** | ** ** |
| Current           |       | —     |       |
| Deferred          |       | —     |       |
|              |       |       |       |
| **Foreign**       | ** ** | ** ** | ** ** |
| Current           |       | 80,324     |       |
| Deferred          |       | (833,449   | )          |
|              |       |       |       |
| Total Tax Benefit |       | $          | (753,125   | ) |
|                   |            |            |            |  |

 

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Thereconciliation of the statutory federal income tax rate and the Company’seffective tax rate is as follows:

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                           |       |                  |       |   |   |   |   |   |   |
| Federal benefit at  statutory rates            |       | $                     | 80,019,580 |   | 34.0 | % | $ | 4,965,959 |   | 34.0 | % |
| Difference in  jurisdictional tax rates        |       | (1,117,080            | )          | (0.5 | )% | (621,625 | ) | (4.3 | )% |
| Participation agreement warrant expense        |       | (5,591,300            | )          | (2.4 | )% | — |   | — |   |
| Prepaid distribution agreement warrant expense |       | (6,089,926            | )          | (2.6 | )% | — |   | — |   |
| Goodwill impairment                            |       | (3,806,154            | )          | (1.9 | )% | — |   | — |   |
| Write of net operating losses                  |       | (41,591,395           | )          | (17.7 | )% | — |   | — |   |
| Change in valuation  allowance                 |       | (21,220,683           | )          | (11.7 | )% | (4,320,080 | ) | (29.6 | )% |
| Other                                          |       | 132,083               |       | (0.2 | )% | (24,254 | ) | (0.1 | )% |
|                                           |       |                  |       |   |   |   |   |   |   |
| Total tax benefit                              |       | $                     | 753,125    |   | (0.3 | )% | $ | — |   | — |   |

 

Theeffective tax rate for the year was significantly lower than the federalstatutory rate due primarily to the valuation allowance against the Company’sdeferred tax assets.  Some prior yearamounts in the table above have been reclassified between individual lines toappropriately reflect the Company’s income tax expense/benefit.

 

Consolidatedloss before taxes for domestic and international operations is as follows:

 
| ** **    | ** ** | **December 31,** | ** **   |
|---------------|------------|-----------------------|--------------|
| ** **    | ** ** | **2007**              | ** **   | **2006** | ** ** |
| Domestic      |       | $                     | (231,461,115 | ) | $ | (12,777,453 | ) |
| International |       | (3,890,590            | )            | (1,828,309 | ) |
|          |       |                  |         |   |   |
| Total         |       | $                     | (235,351,705 | ) | $ | (14,605,762 | ) |

 

Theeffective tax rate for the year was significantly lower than the federalstatutory rate due primarily to the valuation allowance against the Company’sdeferred tax assets.

 

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Theprimary tax affected components of the Company’s net deferred tax assets are asfollows:

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Deferred Tax Assets**        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Prepaid commission agreement   |       | $                     | 2,581,021  |   | — |   |
| Net operating losses           |       | 48,645,024            |       | 29,472,685 |   |
| Other                          |       | 1,863,053             |       | 1,845,315 |   |
| Valuation allowance            |       | (52,538,683           | )          | (31,318,000 | ) |
|                           |       | 550,415               |       | — |   |
|                           |       |                  |       |   |   |
| **Deferred Tax Liabilities**   | ** ** | ** **            | ** ** | ** ** | ** ** |
| Goodwill                       |       | (709,478              | )          | (1,765,383 | ) |
| Other                          |       | (772,871              | )          | — |   |
|                           |       | (1,482,349            | )          | (1,765,383 | ) |
|                           |       |                  |       |   |   |
| **Net Deferred Tax Liability** |       | $                     | (931,934   | ) | $ | (1,765,383 | ) |
|                                |            |                       |            |  |  |  |  |  |

 

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 adopted theprovisions of FIN No. 48 on January 1, 2007. As a result of theimplementation of FIN No. 48, the Company determined that theadoption did not have a material impact to its financial statements.

 

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

 
| **Balance at January 1, 2007**            |   | — |   |
|------------------------------------------------|--------|--------|--------|
|                                           |   |   |   |
| Increases in tax positions  from prior years   |   | 62,398 |   |
| Decreases in tax positions  from prior years   |   | — |   |
| Increases in tax positions  from current years |   | 37,658 |   |
| Decreases in tax positions  from current years |   | — |   |
| Settlements with taxing  authorities           |   | — |   |
| Lapses of statutes of  limitations             |   | — |   |
|                                           |   |   |   |
| **Balance at December 31,  2007**         |   | 99,966 |   |

 

The amount of uncertain taxbenefits at December 31, 2007 that would affect the effective income tax rateif recognized is $99,966.

 

The Company files income taxreturns in the U.S., various states and foreign jurisdictions. The Company issubject to federal, state and local, or foreign income tax examinations by taxauthorities in jurisdictions which it operates. The Company is not presentlyunder examination by any major tax jurisdiction.  The Company’s 2003 to 2006 domestic incometax returns remain subject to examination by the IRS and the Company’s 2003 to2006 Australian income tax returns remain subject to examination by theAustralian Tax Office.

 

The Company recognizesinterest and penalties, if any, related to unrecognized tax benefits in theprovision for income taxes on the statement of operations. At December 31,2007, the date of adoption, the Company did not have any interest or penaltiesaccrued in the balance sheet or statement of operations.  The Company does not expect a significantincrease or decrease in unrecognized tax benefits over the next twelve months.

 

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Domesticoperating loss carryforwards were $159.0 million and $97.2 million for theyears ended December 31, 2007 and 2006, respectively, which are subject tolimitations under Section 382 of the Internal Revenue Code. These domesticoperating losses begin to expire in 2016. During 2007, the Company wrote off $41.6 million of domestic operatinglosses that it determined would expire as a result of limitations under Section 382of the Internal Revenue Code.  Operatingloss carryforwards of the foreign subsidiaries were $0.1 million and $0.5million for the years ended December 31, 2007 and 2006 respectively, whichbegin to expire in 2008.

 

AtDecember 31, 2007 and 2006, there was a valuation allowance of $58.8million and $31.3 million, respectively, provided on the domestic and foreignoperating loss carryforwards and other deferred tax assets because managementbelieves these assets do not meet the “more likely than not” criteria forrecognition under SFAS No. 109.

 

Asof December 31, 2007 there were no material undistributed earnings ofsubsidiaries.

 

**NOTE 17.              RESTRUCTURING CHARGES**

 

In accordance with SFAS 146,*Accounting for Cost Associated with Exit orDisposal Activities*, the Company incurred restructuring charges of$1.4 million for severance wages and benefits based upon contractual and otheragreements with employees which only includes charges for termination benefitsmeasured at the estimated fair value at the termination date.  It does not include charges for services yetto be rendered.  The total reduction inheadcount is 21 people.  On September 10,2007, as part of the initial closing of the transactions under theParticipation Agreement with Elixir Group, the Company announced a change inexecutive management.  As part of therestructuring, in October 2007 the Company gave termination notice to allservice technicians, inventory management personnel, some regulatory compliancepersonnel and some administrative staff. Subsequent to December 31, 2007 all of these costs were paid.  Restructuring charges of $1.4 million arereported in the consolidated statement of operations for the year ended December 31,2007.

 

**NOTE 18.              COMMITMENTSAND CONTINGENCIES**

** **

*Leases*

 

The Company is obligatedunder non-cancelable leases for office and warehouse facilities expiring in2011 and 2009, respectively. The Company also leases office space in otherlocations including China, Australia and Philippines and certain officeequipment under non-cancelable operating leases with remaining terms in excessof one year.

 

In March 2008, theCompany moved its headquarters and entered in a new non-cancelable lease forthe new office space.  In February 2008,the Company entered into a sublease for the balance of the remaining term onthe previous office space.  The proceedsfrom the sublease have been netted against the future minimum lease payments.

 

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Future minimum lease paymentcommitments, net of sublease proceeds and including scheduled escalationprovisions as of December 31, 2007, under the leases are as follows:

 
| ** ** | ** ** | **Total Payments** | ** ** | **Sublease Proceeds** | ** ** | **Net Payments** | ** ** |
|------------|------------|--------------------|------------|-----------------------|------------|------------------|------------|
| 2008       |       | $                  | 1,011,100  |                  | $          | 251,764          |       | $ | 759,336 |   |
| 2009       |       | $                  | 992,845    |                  | $          | 305,675          |       | $ | 687,170 |   |
| 2010       |       | $                  | 856,938    |                  | $          | 316,674          |       | $ | 540,264 |   |
| 2011       |       | $                  | 860,515    |                  | $          | 317,061          |       | $ | 543,454 |   |
| 2012       |       | $                  | 584,647    |                  | $          | 16,462           |       | $ | 568,185 |   |
| Thereafter |       | $                  | 575,160    |                  | $          | —           |       | $ | 575,160 |   |
|            |            |                    |            |                       |            |                  |            |  |  |  |  |

 

Rentexpense on all operating leases was $918,215 and $891,989 for years ended December 31,2007 and 2006, respectively.

 

*Legal Matters*

 

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 discussed in the following paragraph. The Company cannot estimate theprobable loss, if any, or predict the likely outcome of any such matters andaccordingly, no accrual has been made for them.

 

On October 5, 2004, Shuffle Master filed a patent infringementaction in 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.The Company responded by denying Shuffle Master’s claim of patent infringement.On April 27, 2007, the Company filed a motion for summary judgment and on February 1,2008, the District Court granted the Company’s motion for summary judgment onall patent infringement claims.  Althoughthe District Court’s order is subject to appeal by Shuffle Master, the Companybelieves that the order effectively settles the issue of infringement in theCompany’s favor.   On February 15,2008, the Company delivered a demand to Shuffle Master for $3.0 million indamages for the wrongful injunction it obtained in 2004.  The Company also filed a motion in DistrictCourt to recover its attorneys’ fees in the litigation.  The Company intends to vigorously pursuecollection of the $3.0 million bond and its attorneys’ fees from ShuffleMaster, however, there can be no assurances the Company will be successful indoing so.

 

OnOctober 5, 2007, William Purton filed an action against the Company in theSupreme Court of Victoria at Melbourne, Australia claiming he is owed moniesunder the July 2006 Share Sale Agreement by which the Company acquiredDolphin.  In addition, Purton is claiminghe is owed money for an independent contractor agreement that he claims he wasoffered.  The Company has filed acounterclaim.  The matter is proceedingtoward trial and the Company will vigorously defend its position.

 

*SalesTax Audit*

 

In February 2004, the State of Nevada initiated a sales/use taxaudit of the Company’s equipment lessors. As of the date of this filing, theState of Nevada has not made a determination if there has been a shortfall inthe payment of the sales/use tax. If the State of Nevada determines that thesales of the products to the equipment lessors is the level at which sales/usetax should have been collected, liability of the leasing companies could bepassed on to the Company and may not be recoverable. The outcome could rangefrom a refund of $144,000 to a potential liability with interest and penaltiesof up to $500,000. However, no probable loss, if any can be estimated.  Accordingly, no accrual has been made for anypossible losses in connection with this matter.

 

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** **

**NOTE 19.              RESTATEMENT TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

 

The Company restated its fiscal 2006consolidated financial statements by way of Amendment No. 1 to the Company’sForm 10-KSB for the year ended December 31, 2006 filed with the SEC on November13, 2007.  The restatement was to correcterrors that resulted from its failure to record debt issuance costs related towarrants issued in connection with debt financings completed during the yearended December 31, 2006.  The errors relate to the accounting treatmentthat the Company failed to apply with respect to warrants issued by it inconnection with certain debt financings the majority of which were issuedduring the second quarter of 2006.   In Amendment No. 1, the issuanceof warrants issued with debt were recorded as a debt discount in the totalamount of $3,380,000 and are being amortized as interest expense over the lifeof the debt.  Also by way of Amendment No. 1, the Company reclassified$4,300,000 from goodwill to other identifiable intangible assets and reversedcertain warrant related expenses, and recorded a tax liability in the amount of$1.8 million for the differences between the assigned values and the tax basisof recognized assets in a business combination and corrected the contingentliability by $301,000. Also, the Company had originally recorded in its 2006fiscal year consolidated financial statements certain expenses related towarrants issued during 2005 and 2004.  InAmendment No. 1, those warrant related expenses were reversed from the 2006consolidated financial statements.

 

Following is a reconciliation of loss fromoperations as originally reported to the restated amounts reported in the 2006consolidated financial statements included in Amendment No. 1 to theCompany’s Form 10-KSB/A for the year ended December 31, 2006 filed with the SECon November 13, 2007.

 
| Loss from operations, as  originally reported |   | $        | (13,734,719 | ) |
|-----------------------------------------------|--------|----------|-------------|---|
| Amortization of  intangibles                  |   | (165,384 | )           |
| Finance Fee adjustments                       |   | (705,659 | )           |
| Loss from operations, as  restated            |   | $        | (14,605,762 | ) |

 

**NOTE 20.              LOSSPER SHARE**

** **

**Thefollowing table provides a reconciliation of basic and diluted loss per sharefor the years ended December 31, 2007 and 2006:**

 
| ** **                         | ** ** | **December 31,** | ** **   |
|------------------------------------|------------|-----------------------|--------------|
| ** **                         | ** ** | **2007**              | ** **   | **2006** | ** ** |
| Net loss                           |       | $                     | (234,598,580 | ) | $ | (14,605,762 | ) |
|                               |       |                  |         |   |   |
| Weighted average common  shares:   |       |                  |         |   |   |
| Basic and diluted                  |       | 51,574,786            |         | 24,270,827 |   |
|                               |       |                  |         |   |   |
| Basic and diluted loss per  share: |       | $                     | (4.55        | ) | $ | (0.60 | ) |

 

Dilutivestock options and warrants of 39.2 million and 6.5 million for the years ended December 31,2007 and 2006, respectively, have not been included in the computation ofdiluted loss per share as their effect would be antidilutive.

 

72

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**ITEM 9.****                                                    ****CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

Not applicable.

 

## **ITEM 9A(T).         CONTROLSAND PROCEDURES.**

## ** **

(a) *Evaluation of Disclosure Controls andProcedures*.

 

Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, evaluated the effectiveness of our disclosure controls andprocedures pursuant to Rule 13a-15 under the Securities Exchange Act of1934, as amended (the “Exchange Act”). The term “disclosure controls andprocedures” refers to the controls and procedures of our company that aredesigned to ensure that information required to be disclosed by us in thereports that we file under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified by the Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to our management, including our chief executive officer and chieffinancial officer, as appropriate, to allow timely decisions regarding requireddisclosures.  In designing and evaluatingthe disclosure controls and procedures, management recognizes that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives. In addition,the design of disclosure controls and procedures must reflect the fact thatthere are resource constraints and that management is required to apply itsjudgment in evaluating the benefits of possible controls and proceduresrelative to their costs.

 

Inlate January 2008, we became aware that a significant number of gamingmachines were purchased by us and placed in various gaming venues throughoutCambodia in the fourth quarter of 2007 without proper reporting to ourmanagement and other personnel within our finance and accountingdepartments.  This represented a breakdown in the operation of our internal control over fixed asset acquisitions inthat purchase orders and shipping documents were not properly obtained andforwarded to accounting to ensure proper financial statement recordation in atimely manner.  These fixed assetacquisitions in Cambodia represent approximately $20 million of acquisitioncosts.  This represented a materialweakness in our internal control over financial reporting at December 31,2007; however we mitigated the risk associated with this material weakness byperforming a full count of these fixed assets in February 2008 andverifying through examination of shipping documents and invoices that theseassets were purchased by us and placed in the gaming venues prior to December 31,2007.  Notwithstanding our subsequentverification that the gaming machines were acquired during fiscal 2007, basedon the foregoing, our management, including, our chief executive officer andchief financial officer, concluded that our disclosure controls and procedureswere not effective as of December 31, 2007.

 

(b)  *Changes in internalcontrol over financial reporting.*

 

There were no changes in our internal control over financial reportingthat occurred during the fourth quarter of 2007 that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

 

(c)  *Management’s report oninternal control over financial reporting.*

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as defined in Exchange Act Rule 13a-15(f).  Management conducted an evaluation of theeffectiveness of our internal control over financial reporting based on theframework in Internal Control 

 

73

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IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Management completed itsevaluation of effectiveness of our internal control over financial reporting inMarch 2008.  Based on itsevaluation, management concluded that we had a material weakness in ourinternal control over financial reporting as of December 31, 2007 due tothe breakdown of internal control over fixed asset acquisitions describedabove.  The breakdown of internal controlover fixed asset acquisitions was attributable to the rapid growth of ourgaming participation business in Asia and our lack of infrastructure in placeto train new personnel on our established procedures for procuring fixedassets.  During the first quarter of2008, we have hired a business process director, who is responsible fordocumenting and training personnel on the proper procedures required for gameplacements and movements between venues. We will continue to monitor and to test our internal controls to ensurethe material weakness has been cured.

 

This annual report does not include an attestation report of ourregistered public accounting firm regarding internal control over financialreporting.  Our management’s report wasnot subject to attestation by our registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit usto provide only management’s report in this annual report.

 

# **ITEM  9B.              OTHER INFORMATION.**

# ** **

# **Not applicable.**

 

74

# ****

 

 

 

# **PART III**

# ** **

**ITEM 10.****                                             ****DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.**

 

Theinformation required by this item regarding our directors and corporategovernance matters is included under the captions “Corporate Governance andBoard of Directors Matters” and “Proposals to be Voted On—Proposal Number1—Election of Directors” in our proxy statement for our 2008 annual meeting ofshareholders to be filed with the SEC within 120 days after the end of thefiscal year ended December 31, 2007 (the “2008 Proxy Statement”) and isincorporated herein by reference. The information required by this itemregarding delinquent filers pursuant to Item 405 of Regulation S-K is includedunder the heading “Section 16(a) Beneficial Ownership ReportingCompliance” in the 2008 Proxy Statement and is incorporated herein byreference.

 

Theinformation required by this item concerning our executive officers is setforth under the heading “Executive Officers of the Registrant” in Part Iof this annual report on Form 10-K.

 

**ITEM 11.****                                             ****EXECUTIVE COMPENSATION****.**

 

Theinformation required by this item is included under the captions “DirectorCompensation” and “Executive Compensation” in the 2008 Proxy Statement and isincorporate herein by reference.

 

**ITEM 12.****                                             ****SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND****RELATED STOCKHOLDER MATTERS**.

 

Theinformation required by this item is included under the captions “SecurityOwnership of Certain Beneficial Owners and Management” and “Executive Compensation—Equity Compensation Plan Information”in the 2008 Proxy Statement and is incorporated herein by reference.

 

**ITEM 13.****                                             ****CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.**

 

Theinformation required by this item is included under the captions “CertainRelationships and Related Party Transactions” and “Director Independence” inthe 2008 Proxy Statement and is incorporated herein by reference.

 

**ITEM 14.****                                             ****PRINCIPALACCOUNTING FEES AND SERVICES.**

 

Theinformation required by this item is included under the caption “IndependentPublic Accountants” in the 2008 Proxy Statement and is incorporated herein byreference.

 

75

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**PART IV**

 

**ITEM 15.****                                             ****EXHIBITSAND FINANCIAL STATEMENT SCHEDULES.**

 

(a) Financialstatements

 

Referenceis made to the Index and Financial Statements under Item 8 in Part IIhereof where these documents are listed

 

(b) Financialstatement schedules

 

Financial statement schedules are either not required or the requiredinformation is included in the consolidated financial statements or notesthereto filed under Item 8 in Part II hereof.

 

(c) Exhibits

 

The exhibits to this Annual Report on Form 10-K are set forthbelow. The exhibit index indicates each management contract or compensatoryplan or arrangement required to be filed as an 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.)                                          |
|       |       |                                                                                                                                                                                                                                                          |
| 10.1       |       | Shareholder Agreement dated December 14, 1998,  by and between registrant and Richard Huson, Bob Smith and Ron Keil.  (Incorporated by reference from the registrant’s annual report on  Form 10-KSB filed on March 26, 1999.)            |
|       |       |                                                                                                                                                                                                                                                          |
| 10.2       |       | Form of Warrant Associated with 9.5%  Convertible Note Due 2004. (Incorporated by reference from the registrant’s  quarterly report on Form 10-QSB filed on May 17, 1999.)                                                                |
|       |       |                                                                                                                                                                                                                                                          |
| 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.)                                                                                            |

 

76

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| 10.6   |   | Philadelphia Brokerage Corporation Warrant to  Purchase 25,000 Shares of Common Stock. (Incorporated by reference from the  registrant’s quarterly report on 10-QSB/A filed on August 19, 2003.)                                                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.7   |   | Triage Capital Management LP Warrant to Purchase  50,000 Shares of Common Stock. (Incorporated by reference from the  registrant’s quarterly report on 10-QSB/A filed on August 19, 2003.)                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.8   |   | Mellon HBV SBV, LLC Warrant to Purchase Shares of  Common Stock. (Incorporated by reference from the registrant’s quarterly report  on 10-QSB/A filed on August 19, 2003.)                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.9   |   | Amended and Restated 1999 Directors’ Stock Option  Plan.* (Incorporated by reference from the registrant’s registration  statement on Form S-8 filed on September 10, 2003.)                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.10  |   | Philadelphia Brokerage Corporation warrant to  Purchase 75,000 Shares of Common Stock. (Incorporated by reference from the  registrant’s registration statement on Form SB-2 filed on  September 25, 2003.)                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.11  |   | Distribution Agreement by and between the registrant  and TCS Aces Pty Limited. (Incorporated by reference from the registrant’s  registration statement on Form SB-2/A filed on December 10, 2003.)                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.12  |   | Distribution Agreement by and between the registrant  and Technical Casino Supplies Ltd. (Incorporated by reference from the  registrant’s current report on Form 8-K filed on February 15,  2005.)                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.13  |   | License and Manufacturing Agreement dated  February 27, 2006, between registrant and Dolphin Products Pty Limited.  (Incorporated by reference to Exhibit 10.26 to the registrant’s annual  report on Form 10-KSB filed on March 31, 2006.)                                                |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 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.) |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.15  |   | Form of Warrant. (Incorporated by reference to  Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-QSB  filed on November 14, 2005.)                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.16  |   | Employment Agreement dated September 29, 2005  between registrant and Mark Newburg.* (Incorporated by reference to  Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-QSB  filed on November 14, 2005.)                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.17  |   | Employment Agreement dated September 29, 2005  between registrant and Arnaldo Galassi.* (Incorporated by reference to  Exhibit 10.5 to the registrant’s Quarterly Report on Form 10-QSB  filed on November 14, 2005.)                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.18  |   | Employment Agreement dated October 3, 2005  between registrant and Peter Zee.* (Incorporated by reference from the  registrant’s annual report on Form 10-KSB/A filed on November 13,  2007.)                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 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.)                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 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.)                                                                                            |

 

77

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| 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.)                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 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.) |

 

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| 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 between  registrant and Suzo Happ Group                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                         |
| 14.1   |   | Code of Ethics. (Incorporated by reference from the  registrant’s annual report on 10-KSB filed March 30, 2004.)                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                         |
| 21.1   |   | List of subsidiaries of registrant                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                         |
| 23.1   |   | Consent of Ernst & Young, LLP                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                         |
| 23.2   |   | Consent of Consent of Piercy Bowler Taylor & Kern                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                         |
| 23.3   |   | Consent of BDO Kendalls Audit & Assurance  (VIC) Pty Ltd                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                         |
| 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.                                                                                                                                                                                 |

----

*****Indicates managementcompensatory plan, contract or arrangement.

 

79

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**SIGNATURES**

** **

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this annualreport on Form 10-K to be signed on its behalf by the undersigned,thereunto duly authorized.

 

|                            |   | **ELIXIR GAMING  TECHNOLOGIES, INC.** |
|---------------------------------|--------|---------------------------------------|
|                            |   | ** **                            |
|                            |   | ** **                            |
| Date:  March 31, 2008 |   | **By:**                               | **/s/Gordon Yuen** |
|                            |   | ** **                            | **Gordon Yuen** |
|                            |   | ** **                            | **Chairman of the Board of Directors, President, and  Chief Executive Officer** |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| **Signature**             | ** ** | **Title**                                                      | ** ** | **Date**            |
|---------------------------|------------|----------------------------------------------------------------|------------|---------------------|
|                      |       |                                                           |       |                |
| /s/Gordon  Yuen           |       | President,  Chief Executive Officer, and Chairman of the Board |       | March 31, 2008 |
| Gordon  Yuen              |       | (Principal Executive  Officer)                                 |       |                |
|                      |       |                                                           |       |                |
| /s/David  Reberger        |       | Treasurer,  Chief Financial Officer, and Secretary             |       | March 31, 2008 |
| David  Reberger           |       | (Principal Financial  Officer)                                 |       |                |
|                      |       |                                                           |       |                |
| /s/Martha  Vlcek          |       | Vice  President of Finance and Chief Accounting Officer        |       | March 31, 2008 |
| Martha  Vlcek             |       | (Principal Accounting  Officer)                                |       |                |
|                      |       |                                                           |       |                |
| /s/Joseph  Pisano         |       | Director  and Executive Vice President                         |       | March 31, 2008 |
| Joseph  Pisano            |       |                                                           |       |                |
|                      |       |                                                           |       |                |
| /s/Vincent  L. DiVito     |       | Director                                                       |       | March 31, 2008 |
| Vincent  L. DiVito        |       |                                                           |       |                |
|                      |       |                                                           |       |                |
| /s/Paul  A. Harvey        |       | Director                                                       |       | March 31, 2008 |
| Paul  A. Harvey           |       |                                                           |       |                |
|                      |       |                                                           |       |                |
| /s/  Robert L. Miodunski  |       | Director                                                       |       | March 31, 2008 |
| Robert  L. Miodunski      |       |                                                           |       |                |
|                      |       |                                                           |       |                |
| /s/  Lorna Patajo-Kapunan |       | Director                                                       |       | March 31, 2008 |
| Lorna  Patajo-Kapunan     |       |                                                           |       |                |
|                      |       |                                                           |       |                |
| /s/  Clarence Chung       |       | Director                                                       |       | March 31, 2008 |
| Clarence  Chung           |       |                                                           |       |                |
|                      |       |                                                           |       |                |
| /s/  John Crawford        |       | Director                                                       |       | March 31, 2008 |
| John  Crawford            |       |                                                           |       |                |

 

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