**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-QSB**

 
| x                                                      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES  EXCHANGE ACT OF 1934** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|
|                                                   |       |                                                                                             |
| **For  the Quarterly Period Ended September 30, 2007** |
|                                                   |       |                                                                                             |
| **OR**                                                 |
|                                                   |       |                                                                                             |
| o                                                      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |

 

**Forthe transition period from            to            .**

 

**Commissionfile number: 001-32161**

 

**ElixirGaming Technologies, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Nevada**                                                        | ** ** | **91-1696010**                          |
|-------------------------------------------------------------------|------------|-----------------------------------------|
| (State or other  jurisdiction of   incorporation or organization) |       | (I.R.S. Employer    Identification no.) |

 

**1120Town Center Drive, Suite 260Las Vegas, NV  89144**

(Address ofprincipal executive offices, including zip code)

 

**(702)733-7195**(Registrant’s telephone number, including area code)

 

Check whether theissuer  (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. YES  x  NO  o

 

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

 

YES  o   NO x

 

The number ofshares of registrant’s common stock outstanding as of November 9, 2007 was93,389,211

 

Transitional Smallbusiness disclosure Format (check one):     YES  o  NO  x

 

 

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**ELIXIRGAMING TECHNOLOGIES, INC.**

**FORM10-QSB**

**TABLE OF CONTENTS**

 
|                                    |                                                                 | **Page** |
|-----------------------------------------|----------------------------------------------------------------------|----------|
|                                    |                                                                 |     |
| **PART I – FINANCIAL INFORMATION** | 1                                                                    |
|                                    | ** **                                                           |     |
| **Item 1.**                             | **FINANCIAL STATEMENTS**                                             | 1        |
|                                    |                                                                 |     |
|                                    | Consolidated Balance Sheets                                          | 1        |
|                                    |                                                                 |     |
|                                    | Consolidated Statements of  Operations and Deficit                   | 2        |
|                                    |                                                                 |     |
|                                    | Consolidated Statements of  Cash Flows                               | 3        |
|                                    |                                                                 |     |
|                                    | Notes to Consolidated  Financial Statements                          | 4        |
|                                    |                                                                 |     |
| **Item 2.**                             | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS** | 17       |
|                                    |                                                                 |     |
|                                    | Overview                                                             | 18       |
|                                    |                                                                 |     |
|                                    | Results of Operations                                                | 22       |
|                                    |                                                                 |     |
|                                    | Liquidity and Capital Resources                                      | 28       |
|                                    |                                                                 |     |
|                                    | Critical Accounting  Policies and Estimates                          | 29       |
|                                    |                                                                 |     |
|                                    | Risk Factors                                                         | 31       |
|                                    |                                                                 |     |
| **Item 3.**                             | **CONTROLS AND  PROCEDURES**                                         | 36       |
|                                    |                                                                 |     |
| **PART II – OTHER  INFORMATION**   | 37                                                                   |
|                                    |                                                                 |     |
| **Item 4.**                             | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**             | 37       |
| ** **                              | ** **                                                           |     |
| **Item 6.**                             | **EXHIBITS**                                                         | 38       |

 

i

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# **PART I – FINANCIAL INFORMATION**

# ** **

**Item 1.       FINANCIAL STATEMENTS**

 

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

### **Consolidated Balance Sheets**

** **
| ** **                                                                                                    | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                    | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                    | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| **Current assets:**                                                                                           |       |                             |       |                            |       |
| Cash and cash equivalents                                                                                     |       | $                                | 1,070,685  |                            | $          | 333,888 |   |
| Current portion of accounts receivable, net of  allowance for uncollectibles of $103,140 and $267,154         |       | 2,235,037                        |       | 1,856,898                       |       |
| Other receivables                                                                                             |       | 507,600                          |       | 514,260                         |       |
| Inventories                                                                                                   |       | 2,438,568                        |       | 3,407,361                       |       |
| Prepaid expenses and other current assets                                                                     |       | 724,206                          |       | 66,494                          |       |
|                                                                                                          |       | 6,976,096                        |       | 6,178,901                       |       |
|                                                                                                          |       |                             |       |                            |       |
| Equipment rented to customers, net of accumulated  depreciation of $69,598 and $67,673                        |       | 39,859                           |       | 94,777                          |       |
| Property and equipment, net of accumulated  depreciation of $3,158,514 and $2,472,897                         |       | 18,176,838                       |       | 3,493,817                       |       |
| Intangible assets, net of accumulated amortization  of $1,482,620 and $819,753                                |       | 7,850,694                        |       | 8,936,561                       |       |
| Goodwill                                                                                                      |       | 7,131,999                        |       | 11,195,737                      |       |
| Accounts receivable, net of current portion, less  unamortized discount                                       |       | 709,578                          |       | 350,564                         |       |
| Prepaid sales incentive                                                                                       |       | 1,398,800                        |       | —                          |       |
| Other assets                                                                                                  |       | 733,340                          |       | 735,686                         |       |
| Total assets                                                                                                  |       | $                                | 43,017,204 |                            | $          | 30,986,043 |   |
|                                                                                                          |       |                             |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                 |       |                             |       |                            |       |
| **Current liabilities:**                                                                                      |       |                             |       |                            |       |
| Deferred revenues, current portion                                                                            |       | $                                | 34,190     |                            | $          | 43,599 |   |
| Short-term debt                                                                                               |       | 547,937                          |       | 676,597                         |       |
| Capital leases payable, current portion                                                                       |       | 309,715                          |       | 440,719                         |       |
| Notes payable, current portion                                                                                |       | 1,500,000                        |       | 299,494                         |       |
| Accounts payable                                                                                              |       | 3,231,617                        |       | 2,354,163                       |       |
| Accounts payable to related party                                                                             |       | 15,220,183                       |       | —                          |       |
| Accrued expenses                                                                                              |       | 4,201,418                        |       | 3,847,311                       |       |
| Customer deposits                                                                                             |       | 175,567                          |       | 14,257                          |       |
|                                                                                                          |       | 25,220,627                       |       | 7,676,140                       |       |
| Deferred revenues, net of current portion                                                                     |       | 13,020                           |       | 43,199                          |       |
| Capital leases payable, net of current portion                                                                |       | 1,215,761                        |       | 1,580,124                       |       |
| Deferred tax liability                                                                                        |       | 1,417,810                        |       | 1,765,383                       |       |
| Notes payable, net of current portion and debt  discount of $2,007,834 and $2,837,911                         |       | 7,329,978                        |       | 15,823,047                      |       |
|                                                                                                          |       | 35,197,196                       |       | 26,887,893                      |       |
| **Stockholders’ equity:**                                                                                |       |                             |       |                            |       |
| Preferred stock, $.001 par value, 10,000,000 shares  authorized, no shares issued and outstanding             |       | —                           |       | —                          |       |
| Common stock, $.001 par value, 300,000,000 shares  authorized, 77,701,988 shares and 30,015,099 shares issued |       | 77,702                           |       | 30,016                          |       |
| Treasury stock 448,053 common shares at cost                                                                  |       | —                           |       | (846,820                        | )          |
| Additional paid-in capital                                                                                    |       | 322,572,484                      |       | 97,872,787                      |       |
| Accumulated other comprehensive loss                                                                          |       | (75,336                          | )          | —                          |       |
| Deficit                                                                                                       |       | (314,754,842                     | )          | (92,957,833                     | )          |
| Total stockholders’ equity                                                                               |       | 7,820,008                        |       | 4,098,150                       |       |
| Total liabilities and stockholders’ equity                                                               |       | $                                | 43,017,204 |                            | $          | 30,986,043 |   |

 

See accompanyingnotes to consolidated financial statements.

 

1

----

 

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

### **Consolidated Statements of Operations and Deficit**

**(Unaudited)**

** **
| ** **                               | ** ** | **Three Months Ended September 30,** | ** **   | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|--------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                                 | ** **   | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                               | ** ** | ** **                                               | ** **   | **(As restated)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Gaming product sales                     |       | $                                                        | 774,569      |                                                    | $          | 267,889 |   | $ | 3,952,262 |   | $ | 2,348,753 |   |
| Participation revenue                    |       | 131,356                                                  |         | —                                                  |       | 131,356 |   | — |   |
| Gaming product rentals                   |       | 49,344                                                   |         | 75,601                                                  |       | 166,487 |   | 266,850 |   |
| Non-gaming product sales                 |       | 1,669,445                                                |         | 1,850,043                                               |       | 4,830,170 |   | 1,850,043 |   |
| Other                                    |       | 189,684                                                  |         | 159,816                                                 |       | 636,986 |   | 287,018 |   |
|                                     |       | 2,814,398                                                |         | 2,353,349                                               |       | 9,717,261 |   | 4,752,664 |   |
| **Operating costs and expenses:**        |       |                                                     |         |                                                    |       |   |   |   |   |
| Cost of sales – gaming products     |       | 799,337                                                  |         | 467,360                                                 |       | 3,835,156 |   | 2,402,390 |   |
| Cost of sales – participation       |       | 156,645                                                  |         | —                                                  |       | 156,645 |   | — |   |
| Cost of sales – non-gaming products |       | 1,657,772                                                |         | 1,866,735                                               |       | 4,926,980 |   | 1,866,735 |   |
| Selling, general and administrative      |       | 2,445,762                                                |         | 2,770,457                                               |       | 8,000,888 |   | 6,029,594 |   |
| Stock option expense                     |       | 4,403,048                                                |         | 224,410                                                 |       | 6,168,507 |   | 837,349 |   |
| Impairment writedowns                    |       | 29,609,085                                               |         | —                                                  |       | 29,609,085 |   | — |   |
| Participation agreement acquisition fees |       | 175,070,000                                              |         | —                                                  |       | 175,070,000 |   | — |   |
| Restructuring charges                    |       | 1,622,532                                                |         | —                                                  |       | 1,622,532 |   | — |   |
| Research and development                 |       | 328,981                                                  |         | 448,105                                                 |       | 739,612 |   | 1,260,341 |   |
|                                     |       | 216,093,162                                              |         | 5,777,067                                               |       | 230,129,405 |   | 12,396,409 |   |
|                                     |       |                                                     |         |                                                    |       |   |   |   |   |
| Loss from operations                     |       | (213,278,764                                             | )            | (3,423,718                                              | )          | (220,412,144 | ) | (7,643,745 | ) |
|                                     |       |                                                     |         |                                                    |       |   |   |   |   |
| Other income (expense):                  |       |                                                     |         |                                                    |       |   |   |   |   |
| Interest expense and finance fees        |       | (708,358                                                 | )            | (995,373                                                | )          | (1,820,034 | ) | (2,119,766 | ) |
| Acquisition costs                        |       | (4,178                                                   | )            | (37,689                                                 | )          | (451,184 | ) | (37,689 | ) |
| Other                                    |       | (9,337                                                   | )            | (928                                                    | )          | 457,588 |   | (12,999 | ) |
|                                     |       | (721,873                                                 | )            | (1,033,990                                              | )          | (1,813,630 | ) | (2,170,454 | ) |
|                                     |       |                                                     |         |                                                    |       |   |   |   |   |
| Income tax benefit                       |       | 347,573                                                  |         | —                                                  |       | 347,573 |   | — |   |
|                                     |       |                                                     |         |                                                    |       |   |   |   |   |
| **Net loss**                             |       | $                                                        | (213,653,064 | )                                                       | $          | (4,457,708 | ) | $ | (221,878,201 | ) | $ | (9,814,199 | ) |
|                                     |       |                                                     |         |                                                    |       |   |   |   |   |
| Basic and dilutive loss per share        |       | $                                                        | (4.67        | )                                                       | $          | (0.16 | ) | $ | (5.88 | ) | $ | (0.44 | ) |
|                                     |       |                                                     |         |                                                    |       |   |   |   |   |
| Weighted average shares outstanding      |       | 45,780,514                                               |         | 27,629,090                                              |       | 37,765,328 | ) | 22,430,475 |   |

 

See accompanyingnotes to consolidated financial statements.

 

2

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

 

**Consolidated Statementsof Cash Flows**

**(Unaudited)**

** **
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** **   |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|--------------|
| ** **                                                                   | ** ** | **2007**                                                | ** **   | **2006** | ** ** |
| ** **                                                                   | ** ** | ** **                                              | ** **   | **(As restated)** | ** ** |
| **Cash flows from operating activities:**                                    |       |                                                    |         |   |   |
| Net loss                                                                     |       | $                                                       | (221,878,201 | ) | $ | (9,814,199 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                                    |         |   |   |
| Impairment of goodwill and intangibles                                       |       | 4,486,737                                               |         | — |   |
| Impairment of prepaid sales incentive                                        |       | 25,122,348                                              |         | — |   |
| Participation agreement acquisition costs                                    |       | 175,070,000                                             |         | — |   |
| Income tax benefit                                                           |       | (347,573                                                | )            | — |   |
| Depreciation and amortization of property and  equipment                     |       | 565,610                                                 |         | 285,144 |   |
| Amortization of intangible assets                                            |       | 662,867                                                 |         | 326,498 |   |
| Amortization of debt discount                                                |       | 872,077                                                 |         | 573,479 |   |
| Stock-based compensation expense                                             |       | 6,249,507                                               |         | 1,171,364 |   |
| Loss on disposition of assets                                                |       | 42,412                                                  |         | 12,999 |   |
| Write down of inventory                                                      |       | 582,799                                                 |         | — |   |
| Increase in operating (assets) liabilities:                                  |       |                                                    |         |   |   |
| Accounts receivable                                                          |       | (708,241                                                | )            | 1,074,365 |   |
| Inventory                                                                    |       | 459,549                                                 |         | 894,695 |   |
| Prepaid expenses and other current                                           |       | (681,735                                                | )            | (67,341 | ) |
| Deposits with vendors and other long term assets                             |       | 121,221                                                 |         | 300,316 |   |
| Accounts payable                                                             |       | 1,640,291                                               |         | 68,586 |   |
| Accrued expenses, deferred revenues and other  current liabilities           |       | 475,829                                                 |         | 1,398,543 |   |
| Net cash used in operating activities                                        |       | (7,264,503                                              | )            | (3,775,551 | ) |
|                                                                         |       |                                                    |         |   |   |
| **Cash flows from investing activities:**                                    |       |                                                    |         |   |   |
| Acquisition of intangibles                                                   |       | —                                                  |         | (716,500 | ) |
| Deposit in connection with business combination                              |       | —                                                  |         | (1,350,000 | ) |
| Acquisition of property, plant and equipment                                 |       | (931,413                                                | )            | (714,670 | ) |
| Sale of property, plant and equipment                                        |       | —                                                  |         | 103,382 |   |
| Net cash used in investing activities                                        |       | (931,413                                                | )            | (2,677,788 | ) |
|                                                                         |       |                                                    |         |   |   |
| **Cash flows from financing activities:**                                    |       |                                                    |         |   |   |
| Proceeds from sale of stock, warrants and options                            |       | 9,184,529                                               |         | 5,970,899 |   |
| Proceeds from notes payable and leases                                       |       | —                                                  |         | 14,948,156 |   |
| Repayment of notes payable and leases                                        |       | (2,901,816                                              | )            | (14,898,781 | ) |
| Proceeds from stock subscriptions receivable                                 |       | 2,650,000                                               |         | — |   |
| Net cash provided by financing activities                                    |       | 8,932,713                                               |         | 6,020,274 |   |
| Increase (decrease) in cash and cash equivalents                             |       | 736,797                                                 |         | (433,065 | ) |
| Cash and cash equivalents at beginning of period                             |       | 333,888                                                 |         | 935,243 |   |
| Cash and cash equivalents at end of period                                   |       | $                                                       | 1,070,685    |   | $ | 502,178 |   |
|                                                                         |       |                                                    |         |   |   |
| **Supplemental cash flow information:**                                      |       |                                                    |         |   |   |
| **Non-cash investing and financing activities:**                             |       |                                                    |         |   |   |
| Intangible assets acquired with stock                                        |       |                                                    |         | $ | 2,690,000 |   |
| Stock issued in connection with business combination                         |       |                                                    |         | $ | 13,600,001 |   |
| Notes payable settled with stock                                             |       |                                                    |         | $ | 9,154,500 |   |
| Loans converted into common stock                                            |       | $                                                       | 5,782,168    |   |   |   |
| Gaming machines purchased through related party  payable                     |       | $                                                       | 15,144,794   |   |   |   |
| Non-cash issuance of warrants                                                |       | $                                                       | 176,880,000  |   |   |   |
| Increase is prepaid sales incentive                                          |       | $                                                       | 20,511,000   |   |   |   |

 

See accompanyingnotes to consolidated financial statements.

 

3

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

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**1.****                                     ****Basis of Presentation**

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles pursuantto the rules and regulations incorporated in Regulation SB of theSecurities and Exchange Commission (“SEC”) and reflect all adjustments,consisting of normal recurring adjustments, which management believes arenecessary to fairly present the financial position, results of operations andcash flows of Elixir Gaming Technologies, Inc., a Nevada corporation and itssubsidiaries (“the Company”), for the respective periods presented. The resultsof operations for an interim period are not necessarily indicative of theresults that may be expected for any other interim period or the year as awhole. The accompanying unaudited condensed consolidated financial statementsshould be read in conjunction with the consolidated financial statements andnotes thereto in the Company’s Amendment No. 1 to Annual Report on Form10-KSB/A for the year ended December 31, 2006, filed with the SEC on November13, 2007.

 

**Reclassification**

 

Certain minor balance sheet reclassificationshave been made to the December 31, 2006 balance sheet to conform to the currentperiod presentation.

 

**Restatement**

 

On August 11, 2007, the Company’s auditcommittee concluded, after consultation with its independent registered publicaccounting firm, that errors in the Company’s expensing of warrants granted inthe fourth quarter of 2006 require the Company to restate previously reportedfinancial results for the year ended December 31, 2006 and for the three andnine months period ended September 30, 2006. In addition, the Companydetermined that certain previously recorded debt discounts should have beenexpensed in the quarter ended September 30, 2006.

 

All of the above-described restatements represent non-cash, non-operatingcharges.

 

4

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Theeffects of these adjustments for the periods presented are summarized asfollows:

 
| **Consolidated Statements of Operations and Deficit** | ** ** | **Three Months Ended September 30, 2006** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **As previously  reported**                                   | ** ** | **As restated** | ** ** | **Difference** | ** ** |
| Interest expense and finance  fees                                             |       | $                                                                  | 690,008    |   | $ | 954,629 |   | $ | 264,621 |   |
| Net loss                                                                       |       | 4,110,395                                                          |       | 4,457,708 |   | 347,313 |   |
| Net loss per share                                                             |       | (0.15                                                              | )          | (0.16 | ) | (0.01 | ) |
|                                                                                |            |                                                                    |            |  |  |  |  |  |  |  |

 
| ** **                         | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                         | ** ** | **As previously  reported**                                  | ** ** | **As restated** | ** ** | **Difference** | ** ** |
| Interest expense and finance  fees |       | $                                                                 | 1,546,652  |   | $ | 1,987,687 |   | $ | 441,035 |   |
| Net loss                           |       | 9,290,472                                                         |       | 9,814,199 |   | 523,727 |   |
| Net loss per share                 |       | (0.41                                                             | )          | (0.44 | ) | (0.03 | ) |
| Deficit                            |       | 80,978,249                                                        |       | 88,166,270 |   | 7,188,021 |   |
|                                    |            |                                                                   |            |  |  |  |  |  |  |  |

 
| **Consolidated Statements of Cash Flows** | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **As previously  reported**                                  | ** ** | **As restated** | ** ** | **Difference** | ** ** |
| Net cash used in operating  activities                        |       | $                                                                 | (7,149,732 | ) | $ | (3,775,551 | ) | $ | 3,374,181 |   |
| Net cash used in investing  activities                        |       | (3,186,295                                                        | )          | (2,677,788 | ) | 508,507 |   |
| Net cash provided by  financing activities                    |       | 9,902,962                                                         |       | 6,020,274 |   | (3,882,688 | ) |
|                                                               |            |                                                                   |            |  |  |  |  |  |  |  |

 

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

 

The Company currentlyoperates in two business segments: (i) gaming operations and (ii) non-gamingoperations, consisting primarily of the Dolphin Advanced Technologies Pty Ltd (“Dolphin”)automotive sector. The accounting policies of these segments are consistentwith the Company’s policies for the unaudited condensed consolidated financialstatements.

 

The table below presents informationas to the Company’s revenues and operating loss by segment:

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** **   | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|--------------|---------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                                 | ** **   | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                            |       |                                                     |         |                                                    |       |   |   |   |   |
| Gaming operations                   |       | $                                                        | 1,144,953    |                                                    | $          | 503,306 |   | $ | 4,887,091 |   | $ | 2,902,621 |   |
| Non-gaming operations               |       | 1,669,445                                                |         | 1,850,043                                               |       | 4,830,170 |   | 1,850,043 |   |
| Total Revenues                      |       | $                                                        | 2,814,398    |                                                    | $          | 2,353,349 |   | $ | 9,717,261 |   | $ | 4,752,664 |   |
| Operating income (loss)             |       |                                                     |         |                                                    |       |   |   |   |   |
| Gaming operations gross  margin     |       | $                                                        | 188,973      |                                                    | $          | 35,946 |   | $ | 895,290 |   | $ | 500,231 |   |
| Non-gaming operations gross  margin |       | 11,673                                                   |         | (16,692                                                 | )          | (96,810 | ) | (16,692 | ) |
| Corporate/other                     |       | (213,479,410                                             | )            | (3,442,972                                              | )          | (221,210,624 | ) | (8,127,284 | ) |
| Total operating loss                |       | $                                                        | (213,278,764 | )                                                       | $          | (3,423,718 | ) | $ | (220,412,144 | ) | $ | (7,643,745 | ) |

 

5

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Thesegment revenues identified for geographic region-based enterprise-wide dataare as follows:

 
| ** **    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **    | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Asia          |       | $                                                        | 230,166    |                                                    | $          | — |   | $ | 2,865,803 |   | $ | 1,849,738 |   |
| United States |       | 826,690                                                  |       | 440,425                                                 |       | 1,693,757 |   | 990,002 |   |
| Australia     |       | 1,757,542                                                |       | 1,912,924                                               |       | 4,981,477 |   | 1,912,924 |   |
| Europe        |       | —                                                   |       | —                                                  |       | 143,012 |   | — |   |
| Other         |       | —                                                   |       | —                                                  |       | 33,212 |   | — |   |
|          |       | $                                                        | 2,814,398  |                                                    | $          | 2,353,349 |   | $ | 9,717,261 |   | $ | 4,752,664 |   |

 

Forthe nine month period ended September 30, 2007, in the gaming sector, onecustomer represented 54% of total gaming sales. Within the non-gaming sector,during the nine month period ended September 30, 2007, one customerrepresented 39% of total non-gaming sales.

 

**3.****                                     ****LossPer Share**

 

Basicloss per share is computed by dividing the reported net loss for the period bythe weighted average number of common shares outstanding during the period. Theshares issuable as a result of prepayment prior to issuance of such shares wereincluded in the weighted average number of shares outstanding for the periods. Lossper share is unchanged on a diluted basis since the assumed exercise of commonstock equivalents would have an anti-dilutive effect.

 

**4.****                                     ****StockOptions**

 

Stock option activityfor the nine-month periods ended September 30, 2007 and 2006 is summarizedbelow:

 
| ** **                                         | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Remaining  Contractual Term** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | **(per share)**                           | ** ** | **(years)**                          | ** ** |
| Balance outstanding as of  December 31, 2005  |       | 3,953,472  |       | $                                              | 3.55       |                                 | 4.61       |   |
| Granted                                            |       | 1,605,000  |       |                                           |       |                                 |       |
| Exercised                                          |       | (360,000   | )          |                                           |       |                                 |       |
| Forfeited or expired                               |       | (348,940   | )          |                                           |       |                                 |       |
| Balance outstanding as of  September 30, 2006 |       | 4,849,532  |       | $                                              | 2.19       |                                 | 4.55       |   |
|                                               |       |       |       |                                           |       |                                 |       |
| Balance outstanding as of  December 31, 2006  |       | 4,654,412  |       | $                                              | 2.17       |                                 | 4.52       |   |
| Granted                                            |       | 5,719,000  |       |                                           |       |                                 |       |
| Exercised                                          |       | (1,328,066 | )          |                                           |       |                                 |       |
| Forfeited or expired                               |       | (161,160   | )          |                                           |       |                                 |       |
| Balance outstanding as of  September 30, 2007 |       | 8,884,186  |       | $                                              | 2.52       |                                 | 4.31       |   |
|                                               |       |       |       |                                           |       |                                 |       |
| Exercisable as of  September 30, 2007         |       | 3,884,186  |       | $                                              | 2.04       |                                 |       |   |

 

Total optionsoutstanding at September 30, 2007 and 2006, includes 1,050,000 optionsthat vested and became exercisable upon a change in control of the Company. Theinitial transaction under the June 2007 Securities Purchase and ProductParticipation Agreement (the “Participation Agreement”) with Elixir GroupLimited (“Elixir Group”), a Hong Kong company, which was consummated on September 10,2007, represented a change in control resulting in the vesting of these options(see Notes 8 and 10).

 

In May 2007,5,000,000 stock options were granted by the board of directors subject to theclosing of the initial transaction pursuant to the Participation Agreement tocertain employees and affiliates of Elixir

 

6

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Group. Each option hadan exercise price of $2.90 per share and will vest over a three year period. Thefair value of the shares is $9.0 million. The Company recorded expense of $1.2million for the quarter ended September 30, 2007.

 

**5.****                                     ****Goodwilland Intangible Assets**

 

*Finite lived intangible assets*

 

Substantially all ofthe Company’s recorded intangible assets are subject toamortization. Finite lived intangible assets are comprised of thefollowing:

 
| ** **                            | ** ** | **Useful Life** | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------|------------|----------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **(years)**          | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Amortizable intangible  assets:       |       |                 |       |                             |       |                            |       |
| Patents                               |       | 10                   |       | $                                | 4,986,314  |                            | $          | 4,986,314 |   |
| Less:  accumulated  amortization |       |                 |       | (1,018,243                       | )          | (638,702                        | )          |
|                                  |       |                 |       |                             |       |                            |       |
| Customer relationships                |       | 10-13                |       | 3,842,000                        |       | 4,220,000                       |       |
| Less:  accumulated  amortization |       |                 |       | (410,884                         | )          | (160,154                        | )          |
|                                  |       |                 |       |                             |       |                            |       |
| Trademarks                            |       | 10-13                |       | 505,000                          |       | 550,000                         |       |
| Less:  accumulated  amortization |       |                 |       | (53,493                          | )          | (20,897                         | )          |
|                                  |       |                 |       |                             |       |                            |       |
| Total                                 |       |                 |       | $                                | 7,850,694  |                            | $          | 8,936,561 |   |

 

*Impairment of Intangible Assets and Goodwill*

 

In accordance with Statement of Financial Accounting Standards (“SFAS”)No. 142, *Goodwill and Other IntangibleAssets*, the Company reviews goodwill for impairment on an annualbasis or more frequently if events or circumstances indicate that the carryingvalue may not be recoverable. Dolphin, which was acquired in July 2006,has not met expectations to date due to a number of factors one of whichincludes the loss of a general manager and sales staff in early 2007 and todate the Company has not found a suitable replacement. As such, the Companybelieves that original forecast needed to be adjusted downward and a test forimpairment was warranted.

 

In accordance with SFAS 142, the Company performed a two-stepimpairment test which compares the fair value of a reporting unit with itscarry amount, including goodwill and allocating the fair value to all the assetsand liabilities of Dolphin as if the reporting unit had been acquired in abusiness combination.

 

Based on its review, the Company recorded an impairment writedown togoodwill of $1.5 million for the non-gaming products segment and $2.6 millionfor the gaming products segment, for a total impairment writedown of $4.1million.

 

The Company amortizes other identifiable intangible assets, such ascustomer relationships and trade names, on the straight-line method over theirestimated useful lives. The Company assessed the potential impairment ofintangible assets subject to amortization based upon the events identifiedabove. The Company determined that the carrying value of the Dolphin customerrelationships and trade names for the non-gaming products segment would berecoverable but not recoverable for the gaming segment, based upon the Company’scalculation of the asset’s fair value based on the projected net cash flowsexpected to result from that asset, including eventual disposition. Based uponthe above, the Company recorded impairment writedowns to other identifiableintangible assets of the gaming product segment of $423,000, $378,000 forcustomer relationships and $45,000 for trademarks, as of September 30,2007.

 

7

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The following table summarizes the goodwill and intangible impairmentwritedowns:

 
| Goodwill               |   | $       | 4,063,737 |   |
|------------------------|--------|---------|-----------|--------|
| Customer relationships |   | 378,000 |      |
| Trademarks             |   | 45,000  |      |
|                   |   | $       | 4,486,737 |   |

 

On January 25,2007, the Company issued warrants to purchase up to 16,000,000 shares of theCompany to Elixir Group, which at the time was the Company’s Asian distributor,as an incentive to meet certain sales targets. These warrants were accountedfor in accordance with Financial Accounting Standards Board (“FASB”) EmergingIssues Task Force Issue (“EITF”) No. 96-18, *Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services*. The warrants hada fair market value of $6,147,000 as of January 25, 2007 and wereclassified in the balance sheet as prepaid commissions subject to amortizationto commission expense at a rate of 8% of the gross revenue generated by thedistributor.

 

In September 2007,the Company conducted the initial closing of the transactions under theParticipation Agreement between the Company and Elixir Group (see Note 8). As part ofthe Participation Agreement, the Company agreed that upon the initial placementof 1,000 gaming machines in operation with gaming operators identified byElixir Group, the Company would reduce by $1.00 the exercise price of 10million of the above referenced warrants, which originally had exercise pricesranging from $3.00 per share to $5.50 per share. When the cumulative number ofgaming machines under contract reached 2,000 units and the cumulative number ofgaming machines in operation reaches 1,000 units, the Company agreed to furtherreduce by $1.00 the exercise prices of the 10 million warrants. When thecumulative number of machines under contract reaches 3,000 units and thecumulative number of machines in operation reached 2,000 units, the Companywill further reduce by $1.00 the exercise prices of the 10 million warrants. Asof the date of this report, the Company has reduced the exercise price of the10 million warrants by $2.00 based on the achievement of the relatedperformance milestones

 

In accordance withSFAS 123R, *Share-based Payments,*the reduction inexercise price constituted a modification in terms and the warrants andrequired a recalculation of fair value. The modification increased the fairvalue of the warrants by $21.0 million bringing the unamortized balance of theprepaid sales incentive account to $25.9 million. Per SFAS 144, *Accounting for the Impairment or Disposal of Long Lived Assets*,a long-lived asset (asset group) shall be tested for recoverability wheneverevents or changes in circumstances indicate that its carrying amount may notbe recoverable including an accumulation of costs significantly in excess ofthe amount originally expected for the acquisition.

 

The Company estimatedfair value using present value techniques based on estimates of cash flows. Inaccordance with SFAS 144, an impairment loss shall be recognized if thecarrying amount of an intangible asset is not recoverable and its carryingamount exceeds its fair value. After an impairment loss is recognized, theadjusted carrying amount of the intangible asset shall be its new accountingbasis. Based upon the above the Company will record impairment to the asset of$25.1 million and presented in loss from operations in our consolidatedstatement of operations and deficit.

 

On September 10,2007, the Company issued Elixir Group 25,000,000 shares of its common stock and88,000,000 warrants, subject to certain performance criteria, to purchase theCompany’s common stock pursuant to the Participation Agreement. Based on marketquotes, the shares had a fair value of $77.8 million (see Note 8) which wascapitalized in accordance with SFAS 91, *Accounting for Non-RefundableFees and Costs Associated with Originating or Acquiring Loan and Initial DirectCosts of Leases*, and the warrants have an estimated fair value of$176.9 million which were deferred in equity as deferred contract acquisitionfees until vested in accordance with EITF 96-18. In accordance with SFAS 144,the Company tested this asset for recoverability using present value techniquesbased on estimated future of cash flows.

 

8

----

 

Basedupon this assessment, the Company will record an impairment loss of $77.8million recorded as participation agreement acquisition fees in theconsolidated statement of operations for the 25,000,000 shares.

 

Impairment charges have been presented within operating earnings in thecondensed consolidated statement of earnings.

 

**6.****                                     ****Inventory**

 

Inventory consisted ofthe following:

 
| ** **       | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw materials    |       | $                                | 1,291,983  |                            | $          | 633,185 |   |
| Work in progress |       | 144,484                          |       | 121,977                         |       |
| Finished goods   |       | 1,002,101                        |       | 2,652,199                       |       |
|             |       | $                                | 2,438,568  |                            | $          | 3,407,361 |   |

 

During the nine months ended September 30, 2007, the Companyrecorded an inventory writedown of $583,000.

 

**7.****                                     ****NotesPayable**

 

As ofSeptember 30, 2007 and December 31, 2006, our long-term obligationsconsist of convertible notes and other obligations as follows:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                             |       |                            |       |
| Note payable to previous  Dolphin shareholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | $                                | 190,937    |                            | $          | 59,812 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                             |       |                            |       |
| 8% senior secured promissory  notes included 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 are recallable based on early retirement of $6 million  of the debt portion of the transaction. Interest at 8% is due semi-annually  on July 1, and December 1, each year until repayment. Note was  repaid in full on November 1, 2007. |       | 10,646,875                       |       | 13,000,000                      |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                             |       |                            |       |
| Short-tem convertible notes  classified as long-term                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | —                           |       | 5,900,640                       |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 10,837,812                       |       | 18,960,452                      |       |
| Less debt discount                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | (2,007,834                       | )          | (2,837,911                      | )          |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | (1,500,000                       | )          | (299,494                        | )          |
| Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | $                                | 7,329,978  |                            | $          | 15,823,047 |   |

 

**8.****                                     ****SecuritiesPurchase and Product Participation Agreement**

 

On June 12, 2007,the Company entered into the Participation Agreement with Elixir Group.Pursuant to the Participation Agreement, the Company agreed to issue to ElixirGroup its common shares and warrants, subject to Elixir Group’s sourcing andidentification of gaming operators located in the general Asia region on theCompany’s behalf. The Company agreed to place electronic gaming machines withgaming operators pursuant to lease agreements between it and the operatorsunder what are commonly referred to as revenue sharing arrangements, whichprovide for the Company to receive variable rental payments for its gamingdevices as lessor. Elixir Group also agreed to sell to the Company the electronicgaming machines to be placed under the lease agreements.

 

9

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On September 10,2007, the Company conducted an initial closing of the transactions under theParticipation Agreement. At the initial closing, the Company issued to ElixirGroup 25,000,000 shares of the Company’s common stock and warrants to purchasean additional 88,000,000 shares subject to certain performance criteria of theCompany’s common stock. On September 13, 2007, the Company issued anadditional 15,000,000 shares of the Company’s 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 November 9, 2007, the Company had 93,389,211 shares of its common stockissued and outstanding, of which 41,000,000 (or 43.9%) were held by ElixirGroup including 1,000,000 shares purchased by Elixir Group in January 2007.

 

The closing of thetransactions under the Participation Agreement, including the issuance of theCompany’s common shares and warrants to Elixir Group, were approved by theCompany’s shareholders at a special meeting of shareholders held on September 10,2007.

 

According to the termsof the Participation Agreement, Elixir Group had the right to “earn-in” anequity interest 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 gaming operators sourced andidentified by Elixir Group (the “gaming machines under contract”) and (b) thecumulative number of electronic gaming machines physically placed by theCompany and in operation in the gaming premises of gaming operators pursuant tothe lease agreements (the “gaming machines in operation”). The initial close ofthe transactions, which took place on September 10, 2007, under theParticipation Agreement was a consequence of Elixir Group’s placement of atleast 1,000 gaming machines, which pursuant to the terms of the ParticipationAgreement includes gaming machines under lease agreements and in a publicgaming area subject to temporary closure for compliance or safety reasons. Asof the closing, 320 gaming machines were producing revenue and in excess of 680gaming machines were contracted for and shipped to or placed in a venue subjectto temporary close pending regulatory approval. Those 680 gaming machines areexpected to commence revenue producing operations by the end of fiscal 2007.

 

At the initial close,the Company issued to Elixir Group, 25,000,000 common shares and warrants, withan exercise price of $2.65 per share, to purchase up to 88,000,000 additionalshares of the Company’s common stock. The warrants vest and first becomeexercisable based on the achievement of certain milestones with respect to thenumber of gaming machines under contract and in operation. Elixir Group isentitled to earn a total of 55,000,000 shares of the Company’s common stock(inclusive of the 25,000,000 shares issued at the initial closing and the15,000,000 shares issued on September 13, 2007) and the warrants will vestand become exercisable subject to achieving the following milestones withrespect to the cumulative number of gaming machines under contract and inoperation 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 |   |
|                                                           |            |                                                         |            |                                               |            |                                                                  |            |  |

 

In addition to theabove, the Company agreed that upon the initial placement of 1,000 gamingmachines with gaming operators identified by Elixir Group, the Company wouldreduce by $1.00 the exercise price

 

10

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of all warrants (otherthan 6,000,000 common share warrants priced at $2.65) sold to Elixir Grouppursuant to a securities purchase agreement entered into in October 2006(the “2006 Warrants”). When the cumulative number of gaming machines undercontract reached 2,000 units and the cumulative number of gaming machines inoperation reached 1,000 units, the Company agreed to further reduce by $1.00the exercise prices of the 2006 Warrants. When the cumulative number ofmachines under contract reaches 3,000 units and the cumulative number ofmachines in operation reaches 2,000 units, the Company will further reduce by$1.00 the exercise prices of the 2006 Warrants. As of the date of this report,the Company has reduced the exercise price of the 2006 Warrants by $2.00 basedon the achievement of the related performance milestones.

 

In connection with theclosing of the transactions under the Participation Agreement, the Companyentered into a registration rights agreement with Elixir Group. Theregistration rights agreement requires the Company to file a sellingshareholder registration statement with the SEC, within 30 days followingthe initial closing of the transactions under the Participation Agreement, forpurposes of registering the resale of the shares of the Company’s common stockissued to Elixir Group pursuant to the transaction, including all shares thatare issued, or may be issued, upon exercise of the warrants. Pursuant tothe registration rights agreement, the holders of the securities are alsoentitled to certain demand and piggyback registration rights. In conjunctionwith an Exchange Agreement entered into with Elixir Group in October 2007,agreed to defer its registration rights for one year (see Note 16).

 

This transaction willbe accounted for pursuant to EITF 96-18*.*In accordance with EITF96-18, we valued the initial 25,000,000 common shares and 88,000,000 warrantsat fair value on the measurement date which occurred when the first performancemilestone was achieved. The common shares were initially capitalized inaccordance with SFAS 91 and the warrants were deferred in equity as deferredcontract acquisition fees until vested. The fair value of the common sharestotaled $77.8 million and the fair value of the warrants totaled $176.9 million.The initial direct costs associated with the issuance of the common stock aresubject to recoverability and impairment testing (see Note 9).

 

Once the first milestone was achieved, the Company and Elixir Groupbecome related parties (see Note 10).

 

11

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**9.             Summary of Changesin Stockholders’ Equity**

 
| ** **                                                            | ** ** | ** **            | ** ** | **Additional  Paid In Capita** | ** ** | ** **   | ** ** | ** **                          | ** ** | ** **   | ** ** | ** **                            | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|--------------------------------|------------|--------------|------------|-------------------------------------|------------|--------------|------------|---------------------------------------|------------|
| ** **                                                            | ** ** | **Common Stock** | ** ** | ** **                     | ** ** | **Deferred** | ** ** | **Deferred  Contract  Acquisition** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Shares**            | ** ** | **Dollars**                    | ** ** | **Capital**  | ** ** | **Compensation**                    | ** ** | **Fees**     | ** ** | **Stock**                             | ** ** | **Loss** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balances, January 1, 2007                                             |       | 30,015,099            |       | $                              | 30,016     |         | $          | 106,221,270                         |       | $            | (8,348,483 | )                                     | $          | — |   | $ | (846,820 | ) | $ | — |   | $ | (92,957,833 | ) | $ | 4,098,150 |   |
|                                                                  |       |                  |       |                           |       |         |       |                                |       |         |       |                                  |       |   |   |   |   | — |   |
| Options issued for employee compensation                              |       |                  |       |                           |       | 9,920,319    |       | (9,920,319                          | )          |         |       |                                  |       |   |   |   |   | — |   |
| Exercise of employee options                                          |       | 1,355,787             |       | 1,356                          |       | 4,289,306    |       |                                |       |         |       |                                  |       |   |   |   |   | 4,290,662 |   |
| Exercise of warrants                                                  |       | 4,525,554             |       | 4,525                          |       | 4,889,341    |       |                                |       |         |       |                                  |       |   |   |   |   | 4,893,866 |   |
| Stock issued for conversion of debt                                   |       | 1,652,048             |       | 1,652                          |       | 8,430,516    |       |                                |       |         |       |                                  |       |   |   |   |   | 8,432,168 |   |
| Amortization or deferred compensation expense                         |       |                  |       |                           |       | (4,680,904   | )          | 4,680,904                           |       |         |       |                                  |       |   |   |   |   | — |   |
| Stock issued for services                                             |       | 153,500               |       | 153                            |       | 472,627      |       | (472,780                            | )          |         |       |                                  |       |   |   |   |   | — |   |
| Exchange of treasury warrants for stock                               |       |                  |       |                           |       | (846,820     | )          |                                |       |         |       | 846,820                               |       |   |   |   |   | — |   |
| Stock issued pursuant to participation agreement                      |       | 40,000,000            |       | 40,000                         |       | 130,810,000  |       |                                |       |         |       |                                  |       |   |   |   |   | 130,850,000 |   |
| Warrants issued pursuant to participation agreement  (88 million)     |       |                  |       |                           |       | 176,880,000  |       |                                |       | (176,880,000 | )          |                                  |       |   |   |   |   | — |   |
| Vesting of warrants pursuant to participation  agreement (22 million) |       |                  |       |                           |       |         |       |                                |       | 44,220,000   |       |                                  |       |   |   |   |   | 44,220,000 |   |
| Warrants issued as prepaid sales incentive                            |       |                  |       |                           |       | 26,658,000   |       |                                |       |         |       |                                  |       |   |   |   |   | 26,658,000 |   |
| Vesting of employee stock options                                     |       |                  |       |                           |       |         |       | 6,249,507                           |       |         |       |                                  |       |   |   |   |   | 6,249,507 |   |
| Foreign currency translation                                          |       |                  |       |                           |       |         |       |                                |       |         |       |                                  |       | (75,336 | ) | 81,192 |   | 5,856 |   |
| Net loss                                                              |       |                  |       |                           |       |         |       |                                |       |         |       |                                  |       |   |   | (221,878,201 | ) | (221,878,201 | ) |
|                                                                  |       |                  |       |                           |       |         |       |                                |       |         |       |                                  |       |   |   |   |   |   |   |
| Balances, September 30, 2007                                          |       | 77,701,988            |       | $                              | 77,702     |         | $          | 463,043,655                         |       | $            | (7,811,171 | )                                     | $          | (132,660,000 | ) | $ | — |   | $ | (75,336 | ) | $ | (314,754,842 | ) | $ | 7,820,008 |   |

 

12

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**10.          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 above referenced 88,000,000warrants vested. As this transaction was between related parties and inaccordance with SFAS 13, *Accounting for Leases*and SFAS 91, the fair value of the common shares and the vested portion of thewarrants were recorded as expense when incurred. Accordingly, the Companyexpensed $97.3 million to contract acquisition fees which is presented withinoperating earnings in the condensed consolidated statement of earnings.

 

The Company recorded $15.2 million in relatedparty accounts payable for the purchase of electronic gaming machines.

 

**11.          Sale and Issuance ofStock and Warrants**

 

On September 7, 2007, the Company entered into a Waiver and Amendmentto Warrants (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 (“Note Purchase Agreement”). Pursuant to the Note PurchaseAgreement, the Bricoleur Funds purchased from the Company 8% senior securednotes (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 stock at exerciseprice of $2.00 per share. The fair value of the warrants at issuance was$3,380,000, using the relative fair value method, and recorded as a debtdiscount.

 

The Notes included a change in control provision that would haveallowed the Bricoleur Funds to accelerate the payment of the outstandingprincipal amount under the Notes upon the issuance of the Company’s equitysecurities pursuant to the Participation Agreement dated June 12, 2007 betweenthe Company and Elixir Group. In addition, 50% of the net proceeds from certainequity issuances by the Company were to be used to reduce the principal balanceof the Notes, and accordingly, the Company owed the Bricoleur Funds $825,000 inprincipal as a result of an equity issuance by the Company in June 2007.

 

Pursuant to the Amendment, the Company agreed with the Bricoleur Fundsto (a) amend the Warrants to add net exercise provisions to the Warrants, (b)effect a net exercise of Warrants representing the right to purchase 2,275,000shares of the Company’s common stock at a mutually agreed value of $3.50 pershare for purposes of effecting such net exercise, resulting in the issuance of975,000 shares of the Company’s common stock to the Bricoleur Funds in exchangefor the cancellation 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 principal amountcurrently owed by the Company and allow the Company to pay such amount inaccordance with the payment terms of the Notes as though the June 2007 equityissuance had not occurred.

 

In accordance with SFAS 123R, *Share Based Payment*,the amendment has been treated as a modification to the equity instrument andincremental compensation costs shall be measured as the excess, if any, of thefair value of the modified award over the original fair value. The estimatedfair value of the award as modified was less than the original estimated fairvalue and accordingly there was no accounting effect due to the modification ofthe terms.

 

On May 3, 2007, the Company entered into an agreement with fourinvestors for the Company’s sale of 600,000 shares of its common stock for theaggregate price of $1,650,000 ($2.75 per share) paid in cash.

 

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On March 28, 2007, the Company completed the sale of 1,625,000shares of the Company’s common stock and warrants to purchase 1,625,000 sharesof common stock to an institutional investor for the aggregate price of$4,306,250. The warrants are exercisable at an exercise price of $2.65 pershare for a period of five years beginning on March 28, 2007, the relative fairvalue of the stock and warrants were classified in equity in accordance withAccounting Principals Board (“APB”) No.14, *Accounting for ConvertibleDebt Issued with Stock Purchase Warrants* and EITF 00-19, *Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in a Company’s Own Stock*. The Company alsogranted the investor certain registration rights requiring the Company to filea selling shareholder registration statement with the SEC, for purposes ofregistering the resale of the shares of the Company’s common stock issued tothe investor pursuant to the transaction, including all shares that are issued,or may be issued, upon exercise of the warrants. The Company was required topay the investor a cash penalty in the event of a failure to file theregistration statement by June 15, 2007 or the Company’s failure to achieve andmaintain the effectiveness of the registration statement as provided in theregistration rights agreement, however the investor has agreed to waive thepenalty for failure to file by June 15, 2007 and to extend the filing deadlineto November 23, 2007. The maximum penalty for a registration failure as definedin the agreement is $250,000. The Company believes it is probable that it willbe able to comply with this provision and accordingly, no liability is expectedto be re corded at this time.

 

On January 25, 2007, the Company issued warrants topurchase up to 16,000,000 shares of the Company to Elixir Group as an incentiveto meet certain sales targets under a sales representative agreement enteredinto in October 2006. These warrants were accounted for in accordance with FASBEITF No. 96.18*.*The warrants had a fair marketvalue of $6,147,000 at the time of issuance and were classified in the balancesheet as of March 31, 2007 as prepaid since amortization to commission expenseat a rate of 8% of the gross revenue generated by Elixir Group. As discussed inNote 5 above, the strike price of 10 million of these warrants were reduced by$2.00 as of September 13, 2007. Since the 10 million warrants have beenmodified, the Company performed a new fair value analysis of the warrants anddetermined that the fair value has increased by $20.6 million for a total valueof $26.6 million.

 

**12.          Acquisition**

 

InJuly 2006, the Company completed the acquisition of Dolphin. A portion of theconsideration included convertible debt issued to a former principal ofDolphin. The note was converted to shares in January 2007. Pursuant to aprice resale guarantee associated with the acquisition, the Company wasobligated if the holder sold such shares at market for less than the guaranteedprice 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, which hasbeen recorded in accrued expenses in the consolidated balance sheets.

 

The condensed pro forma,consolidated statement of operations for the nine month period ended September30, 2006; as if the Dolphin acquisition had taken place as of January 1, 2006,is as follows:

 
| Net Revenue                      |   | $          | 6,953,821   |   |
|----------------------------------|--------|------------|-------------|--------|
| Operating expenses               |   | 15,321,967 |        |
| Loss from operations             |   | (8,368,146 | )           |
| Other expenses                   |   | 1,956,438  |        |
| Net loss                         |   | $          | (10,324,584 | )      |
| Loss per share                   |   | (0.46      | )           |
| Weighted average number of share |   | 22,473,169 |        |

 

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**13.          Contingencies**

 

*Legal matters.*The Company isa party to certain claims, legal actions, and complaints, including a patentinfringement action between the Company and one of its main competitors and thesales tax dispute discussed in the following paragraph. The Company cannotpredict the minimum loss, if any or estimate the likely outcome of any suchmatters and accordingly, no provision has been made for them.

 

On October 5, 2004, Shuffle Master fileda patent infringement action in the United States District Court, District ofNevada (Case No. CV-S-04-1373-JCM-LRL) claiming that the use, importationand offering for sale of the Company’s PokerOne shuffler infringed ShuffleMaster’s United States Patent No. 6,655,684. The Company responded bydenying Shuffle Master’s claim of patent infringement and requesting that thecourt enter a declaratory judgment of non-infringement. On November 30,2004, the District Court granted Shuffle Master’s motion for preliminaryinjunction, prohibiting the Company from selling its PokerOne shuffler in theUnited States pending resolution of the lawsuit. On March 4, 2005, theFederal Circuit Court of Appeals issued an order staying the injunction pendingour appeal of the matter. On December 27, 2005, the Federal Circuit heldthat the District Court erred in failing to properly construe Shuffle Master’spatent claims before preliminarily enjoining us and on this basis vacated theorder. As a result, the Company may seek to recover from Shuffle Master anydamages we suffered as a result of the wrongful injunction. With respect to themerits of Shuffle Master’s action, a Magistrate Judge appointed by the DistrictCourt to conduct a Markman hearing to determine the proper construction ofShuffle Master’s patent claims recommended on September 26, 2005 that theCourt adopt the claim construction urged by the Company. On February 28,2007, the United States District Court for the District of Nevada entered anorder that adopted and affirmed the ruling by the Magistrate Judge in favor of theCompany and against Shuffle Master. On April 27, 2007, the Company filed amotion for summary judgment. On June 1, 2007, Shuffle Master filed a crossmotion for summary judgment. On October 19, 2007, a hearing was held in UnitedStates District Court, District of Nevada on the motions. The Company iscurrently awaiting the judge’s ruling in the matter.

 

On October 5, 2007, William Purton filed anaction against the Company in the Supreme Court of Victoria at Melbourne,Australia claiming he is owed monies under the July 2006 Share Sale Agreementby which the Company acquired Dolphin. In addition, Purton is claiming he isowed money for an independent contractor agreement that he claims he wasoffered. The Company’s response is due on November 23, 2007. The Companyintends to file a counterclaim and vigorously defend against these claims.

 

*Sales tax audit.*  InFebruary 2004, the State of Nevada initiated a sales/use tax audit of theCompany’s equipment lessors. As of this filing the State of Nevada has not madea determination if there has been a shortfall in the payment of the sales/usetax. If the State of Nevada determines that the sales of the products to theleasing companies is the level at which sales/use tax should have beencollected, liability of the leasing companies could be passed on to the Companyand may not be recoverable. The outcome could range from a refund of $144,000to a potential liability with interest and penalties of up to $500,000.However, no minimum loss, if any can be estimated. Accordingly, no provisionhas been made for any possible losses in connection with this matter.

 

**14.          IncomeTaxes**

 

At September 30, 2007, the Company had net operating loss carryforwards for US federal income tax purposes of approximately $83,000,000. Theseoperating loss carry forwards expire in the years 2010 through 2026. No taxbenefit has been reported in the financial statements for the current periodbecause the potential tax benefits of the net operating loss carry forwardshave been offset by a 100% valuation allowance. The valuation allowance is abased on the history of the Company’s earnings.

 

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Moreover, transactions under the Participation Agreement do not assurethat the Company will have taxable income in the current or future periods.

 

Lastly, Section 382 of the Internal Revenue Code of 1986, as amended,limits the Company’s potential to fully utilize net operating loss carryforwards after a certain change in ownership. The Company presently estimatesan annual limitation of approximately $5,750,000.

 

The Australian tax rate is 30% and the Company’s Australian subsidiaryhas a deferred tax asset as of December 31, 206 of approximately $80,000 andcarry forward losses as of September 30, 2007 are approximately $900,000. Inaddition, the Company has a deferred tax liability of $1.4 million as ofSeptember 30, 2007.

 

The Company accounts for income taxes under SFAS No.109, *Accounting for Income Taxes*. Accordingly, the Company usesthe asset and liability method of accounting for income taxes. Under thismethod, deferred tax assets and liabilities are recorded for temporarydifferences between the financial reporting basis and income tax basis ofassets and liabilities at the balance sheet date multiplied by the applicabletax rates. Valuation allowances are established when necessary to reducedeferred tax assets to the amount of expected to be realized. Income taxexpense is recorded for the amount of income tax payable or refundable for theperiod increased or decreased by the change in deferred tax assets andliabilities during the period.

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. (“FIN”) 48, *Accounting for Uncertaintyin Income Taxes*, an interpretation of SFAS 109. FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS No. 109 and prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The Company adopted the provisions of FIN 48 on January 1, 2007.FIN 48 contains a two step approach to recognizing and measuring uncertain taxpositions accounted for in accordance with SFAS No. 109. The first step is toevaluate the tax position for recognition by determining if the weight ofavailable evidence indicates that it is more likely than not that the positionwill be sustained on audit, including resolution of related appeals orlitigation process, if any. The second step is to measure the tax benefit asthe largest amount that is more than 50% likely of being realized upon ultimatesettlement. Based on its evaluation, management believes FIN 48 did have amaterial effect on the Company’s financial statements.

 

**15.          RestructuringCharge**

 

In accordance with SFAS 146, *Accounting for CostAssociated with Exit or Disposal Activities*, the Company incurred arestructuring charge of $1.6 million for severance wages and benefits basedupon contractual and other agreements with employees which only includescharges for termination benefits measured at the estimated fair value at thetermination date. It does not include charges for services yet to be rendered. Thetotal reduction in headcount is 21 people. On September 10, 2007, as part ofthe closing of the Participation Agreement with Elixir Group, the Companyannounced a change in executive management. As announced in February 2007, theCompany committed to corporate restructuring. As part of the restructuring, inOctober 2007, the Company gave termination notice to all service technicians,inventory management personnel, some regulatory compliance personnel and someadministrative staff. None of these costs have been paid to date. Restructuringcharges have been presented within operating earnings in the condensedconsolidated statement of earnings.

 

16

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**16.          SubsequentEvents**

 

Private Placement

 

On October 19, 2007, the Company entered into a securities purchaseagreement and a registration rights agreement with certain accredited investorsfor the private placement of 15,000,000 shares of its common stock at a priceof $3.50 per share, for aggregate gross proceeds of $52.5 million. The purchaseand sale of the common shares closed on October 25, 2007. The securitiespurchase agreement includes customary representations, warranties, andcovenants by the investors and the Company, and an indemnity from the Company.Pursuant to the terms of the registration rights agreement, the Company agreedto cause a resale registration statement covering the shares to be filed within30 days after closing. The registration rights agreement also provides that theCompany must pay penalties on a progressive rate of up to 3% of the relevantsubscription amount if it fails to timely complete and maintain theregistration of the resale by the investors. In accordance with FASB StaffPosition EITF 00-19-2: *Accountingfor Registration Payment Arrangements*, management of the Companybelieves it is more probable than not that it will be able to comply with thisprovision and, accordingly, no liability is expected to be recorded at thistime.

 

Exchange Agreement

 

On October 21, 2007, theCompany entered into a securities amendment and exchange agreement (“ExchangeAgreement”) with Elixir Group. The agreement provides that certain outstandingvested and unvested warrants issued to Elixir Group pursuant to the “earn-in”provision of the Participation Agreement will be cancelled in exchange for theCompany’s issuance of its common stock, at an exchange ratio of 1 newly issuedcommon share for every 2.5 outstanding warrants. Under the Exchange Agreement,Elixir Group will exchange 12,000,000 of its outstanding vested warrants for4,800,000 shares of the Company’s common stock, and up to 66,000,000 of ElixirGroup’s outstanding unvested warrants will be exchangeable for up to 26,400,000shares of the Company’s common stock upon the vesting of such warrants. Theexchange of warrants for shares under the Exchange Agreement is subject to theapproval of the Company’s shareholders and the transaction is expected to closesubject to shareholder approval in December 2007. In addition, the agreementalso extended the time the Company has to register certain of Elixir Group’ssecurities for resale pursuant to its obligations to Elixir Group underregistration rights agreements dated January 18 and September 10, 2007,respectively, for one year after the Company’s registration statement to befiled in connection with the private placement described above becomeseffective.

 

Extinguishment of Debt

 

On November 1, 2007, theCompany paid in cash approximately $11.0 million to the Bricoleur Funds in fullpayment of its obligations under its debt agreement which included accruedinterest of $0.4 million. The Company will record a non-cash loss onextinguishment of debt in the amount of $1.5 million in the quarter endedDecember 31, 2007.

 

**Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS**

 

***CAUTIONARY STATEMENT***

 

You should read the following discussion and analysis in conjunctionwith our unaudited condensed consolidated financial statements and the relatednotes thereto contained elsewhere in this report. The information contained inthis quarterly report on Form 10-QSB is not a complete description of ourbusiness or the risks associated with an investment in our common stock. Weurge you to carefully review and consider the various disclosures made by us inthis report and in our other reports filed with the Securities and ExchangeCommission, or SEC, including our Amendment No. 1 to our annual report on

 

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Form 10-KSB/A for the year ended December 31, 2006, filedwith the SEC on November 13, 2007 and subsequent reports on Form 8-K, whichdiscuss our business in greater detail.

 

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 the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934. Statementscontaining the words or phrases “will likely result,” “are expected to,” “willcontinue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,”“intends,” “target,” “goal,” “plans,” “objective,” “should” or similarexpressions identify forward-looking statements, which may appear in documents,reports, filings with the Securities and Exchange Commission, news releases,written or oral presentations made by officers or other representatives made byus to analysts, stockholders, investors, news organizations and others, anddiscussions with management and other of our representatives. For suchstatements, we claim the protection of the safe harbor for forward-lookingstatements contained in 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 begiven that the results reflected in any forward-looking statements will beachieved. Any forward-looking statement speaks only as of the date on whichsuch statement is made. Our forward-looking statements are based uponassumptions that are sometimes based upon estimates, data, communications andother information from suppliers, government agencies and other sources thatmay be subject to revision. Except as required by law, we do not undertake anyobligation to update or keep current either (i) any forward-looking statementto reflect events or circumstances arising after the date of such statement, or(ii) the important factors that could cause our future results to differmaterially from historical results or trends, results anticipated or planned byus, or which are reflected from time to time in any forward-looking statement.

 

In addition to other mattersidentified or described by us from time to time in filings with the SEC, thereare several important factors that could cause our future results to differmaterially from historical results or trends, results anticipated or planned byus, or results that are reflected from time to time in any forward-lookingstatement. Some of these important factors, but not necessarily all importantfactors, include those matters included in the section “Risk Factors” furtherbelow. Please also refer to the section “Risk Factors” in the Amendment No. 1to our annual report on Form 10-KSB for the year ended December 31,2006 filed with the SEC on November 13, 2007.

 

The Company owns or hasrights to certain trademarks that it uses in connection with the sale of itsproducts, including, but not limited to, the following: *DeckChecker*TM,*Random Ejection*TM, *Random Plus*TM, *PokerOne*TM, *Chip Wa$her*TM, *ShufflePro*TM, *DeckSetter*® and*Dolphin*TM. This report also makesreference to trademarks and trade names of other companies.

 

### **Overview**

### ** **

As more fully described immediately below, in June 2007, we enteredinto the Participation Agreement with Elixir Group pursuant to which we proposeto redirect our business focus to the placement of electronic gaming machineson a revenue sharing basis in the general Asia region. Although we willcontinue to pursue the development and distribution of products that increasethe security, productivity and profitability of casino operations, our focuswill be on the placement of electronic gaming machines on a revenue sharingbasis throughout Asia. In June 2007, we transitioned to an all distributormodel for the United States and the rest of the world.

 

In July 2006, we acquired all of the capital shares of Dolphin. Dolphinis engaged in the business of producing high-precision plastic injection moldedcomponents and associated tooling, including casino chips and plaques, for thegaming, and automotive industries. As a result of the Dolphin acquisition, we

 

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have two segments for financial reporting purposes, our gamingoperations and our non-gaming operation, which consists of the Dolphinoperations in the automotive sector. In September 2007, based upon performancenumbers significantly below our expectations we impaired goodwill and otherintangibles in the amount of $4.5 million (see Note 5).

 

**Off-Balance Sheet Arrangements**

 

We are not party to any off-balance sheet arrangements.

 

**Elixir Group Transaction**

 

On June 12, 2007, we entered into the Participation Agreement withElixir Group. Pursuant to the Participation Agreement, we agreed to issue toElixir Group our common shares and warrants, subject to Elixir Group’s sourcingand identification of gaming operators located in the general Asia region onour behalf. We will place electronic gaming machines with gaming operatorspursuant to lease agreements between us and the operators on a revenue sharingbasis. Elixir Group also agreed to sell to us the electronic gaming machines tobe placed under the lease agreements.

 

On September 10, 2007, we conducted an initial closing of thetransactions under the Participation Agreement between us and Elixir Group. 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, we issued an additional 15,000,000 shares ofour common stock to Elixir Group pursuant to the Participation Agreement basedon Elixir Group’s placement of additional electronic gaming machines. Based onthe aforementioned issuances, as of November 9, 2007, we had 93,389,211 sharesof common stock issued and outstanding, of which 41,000,000 (or 43.9%) are heldby Elixir Group.

 

The 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.

 

According to the terms of the Participation Agreement, Elixir Group hasthe right to “earn-in” an equity interest in our company based on theachievement of various performance milestones in terms of (a) thecumulative number of the electronic gaming machines that are contracted to beplaced and leased pursuant to lease agreements entered into between us and thegaming operators sourced and identified by Elixir Group (the “gaming machinesunder contract”) and (b) the cumulative number of electronic gamingmachines physically placed by us and in operation in the gaming premises ofgaming operators pursuant to the lease agreements (the “gaming machines inoperation”). The initial close of the transactions under the ParticipationAgreement was subject to the placement of at least 1,000 gaming machines, whichpursuant to the terms of the Participation Agreement includes gaming machinesunder lease agreements and in a public gaming area subject to temporary closurefor compliance or safety reasons. As of the closing, 320 gaming machines wereproducing revenue and in excess of 680 gaming machines were shipped to orplaced in a venue subject to temporary closure. Those 680 gaming machines areexpected to commence revenue producing operations by the end of fiscal 2007.

 

At the initial close, we issued to Elixir Group 25,000,000 commonshares and warrants, with an exercise price of $2.65 per share, to purchase upto 88,000,000 additional shares of our common stock. The warrants vest andfirst become exercisable based on the achievement of certain milestones withrespect to the number of gaming machines under contract and in operation.Elixir Group is entitled to earn a total of 55,000,000 shares of our commonstock (inclusive of the 25,000,000 shares issued at the initial closing and the15,000,000 shares issued on September 13, 2007) and the warrants will vestand become exercisable subject to achieving the following milestones withrespect to the cumulative number of gaming machines under contract and inoperation as follows:

 

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| **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 |   |

 

In addition to the above, we agreed that upon the initial placement of1,000 gaming machines in operation with gaming operators identified by ElixirGroup, we would reduce by $1.00 the exercise price of all warrants (other than6,000,000 common share warrants priced at $2.65) sold to Elixir Group pursuantto a securities 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 reaches 1,000units, we agreed to further reduce by $1.00 the exercise prices of the 2006Warrants. When the cumulative number of machines under contract reaches 3,000units and the cumulative number of machines in operation reaches 2,000 units,we will further reduce by $1.00 the exercise prices of the 2006 Warrants. As ofthe date of this report, we have reduced the exercise price of the 2006Warrants by $2.00 based on the achievement of the related performancemilestones (see Note 8 to our unaudited consolidated financial statements).

 

In connection with the closing of the transactions under theParticipation Agreement, we entered into a registration rights agreement withElixir Group. The registration rights agreement requires us to file a sellingshareholder registration statement with the SEC, within 30 days followingthe initial closing of the transactions under the Participation Agreement, forpurposes of registering the resale of the shares of the Company’s common stockissued to Elixir Group pursuant to the transaction, including all shares thatare issued, or may be issued, upon exercise of the warrants. Pursuant to theregistration rights agreement, the holders of the securities are also entitledto certain demand and piggyback registration rights. In connection with asecurities amendment and exchange agreement entered into by us with ElixirGroup on October 21, 2007, Elixir Group agreed to defer its registration rightsfor one year.

 

The transactions under the Participation Agreement are being accountedfor pursuant to EITF 96-18, *Accounting for EquityInstruments that are Issued to Other than Employees for Acquiring, or inConjunction with Selling, Goods or Services* and SFAS 91, *Accounting for Nonrefundable Feesand Costs Associated with Originating or Acquiring Loans and Initial DirectCosts of Leases.*Inaccordance with EITF 96-18, we valued the initial 25,000,000 common shares and88,000,000 warrants at fair value on the measurement date which occurred whenthe first performance milestone was achieved. The common shares were initiallycapitalized in accordance with SFAS 91 and the warrants were deferred in equityas deferred contract acquisition fees until vested subject to certainperformance criteria. The fair value of the common shares totaled $77.8 millionand the fair value of the warrants totaled $176.9 million. The initial directcosts associated with the issuance of the common stock are subject torecoverability and impairment testing (see Note 5 to our unaudited consolidatedfinancial statements).

 

Once the first milestone was achieved, ourcompany and Elixir Group become related parties. On September 13, 2007, thesecond milestone was achieved and 15,000,000 shares of our common stock with afair value of $53.1 million were issued and 22,000,000 of the above referencedwarrants vested. As this transaction was between related parties, in accordancewith SFAS 13 and SFAS 91, the fair value of the common shares and the vestedportion of the warrants were recorded as expense when incurred. Accordingly, weexpensed $97.3 million to contract acquisition fees during the third quarter offiscal 2007.

 

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In addition, we recorded $15.2 million inrelated party accounts payable for our purchase of electronic gaming machinesfrom Elixir Group (see note 10).

 

**Private Placement**

 

On October 19, 2007, we entered into a securities purchase agreementand a registration rights agreement with certain accredited investors for theprivate placement of 15,000,000 shares of its common stock at a price of $3.50per share, for aggregate gross proceeds of $52.5 million. The purchase and saleof the common shares closed on October 25, 2007. The securities purchaseagreement includes customary representations, warranties, and covenants by theinvestors and us, and an indemnity from us. Pursuant to the terms of theregistration rights agreement, we agreed to cause a resale registrationstatement covering the shares to be filed within 30 days after closing. Theregistration rights agreement also provides that we must pay penalties in theamount on a progressive rate of up to 3% of the relevant subscription amount ifwe fail to timely complete and maintain the registration of the resale by theinvestors. In accordance with EITF 00-19-2: *Accounting for Registration Payment Arrangements*, we believeit is probable we will be able to comply with the provision and accordingly noliability will be recorded at this time.

 

**Exchange Agreement**

 

On October 21, 2007, weentered into a securities amendment and exchange agreement (“Exchange Agreement”)with Elixir Group. The agreement provides that certain outstanding vested andunvested warrants issued to Elixir Group pursuant to the “earn-in” provision ofthe Participation Agreement will be cancelled in exchange for our issuance ofour common stock, at an exchange ratio of 1 newly issued common share for every2.5 outstanding warrants. Under the Exchange Agreement, Elixir Group willexchange 12,000,000 of its outstanding vested warrants for 4,800,000 shares ofour common stock, and up to 66,000,000 of Elixir Group’s outstanding unvestedwarrants will be exchangeable for up to 26,400,000 shares of our common stockupon the vesting of such warrants. The exchange of warrants for shares underthe Exchange Agreement is subject to the approval of our shareholders and thetransaction is expected to close, subject to shareholder approval, in December2007. In addition, the agreement also extended the time we have to registercertain of Elixir Group’s securities for resale pursuant to our obligations toElixir Group under registration rights agreements dated January 18 andSeptember 10, 2007, respectively, for one year after our registration statementto be filed in connection with the private placement described above becomeseffective. We will record the transaction in accordance with SFAS 123R, *Share-Based Payments*.

 

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**Results ofOperations**

 

##### ***C***omparison ofThree Months Ended September 30, 2007 and 2006

 

For the three months ended September 30, 2007, we increased revenue by$461,000, or 20%, to $2.8 million compared to $2.3 million for the prior yearperiod. This increase was primarily driven by an increase in shuffler andparticipation revenue. The increase in revenue was partially offset by adecrease in non-gaming automotive sales. Increased sales of shuffler productduring the period was attributable to (a) initial sales to our new USdistributor and (b) international sales to Asia-based distributor, Elixir Groupto stock their inventory. As a result of the closing of the Elixir Grouptransaction, participation revenue increased 100% to $0.1 million. Gross marginimproved to 7% for the three months ended September 20, 2007, compared to 1% inthe corresponding period of the prior year. This improvement is primarily dueto increased production efficiencies and cost controls in our non-gamingproduct line and an increase in gross margin on shuffler sales due to prioryear quarter product returns and upgrades which did not occur in the currentyear period. Specific product line results for the three months ended September30, 2007 and 2006 are provided below.

 
| ** **              | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **Percentage  change** | ** ** | **2007** | ** ** | **2006** | ** ** | **Percentage  change** | ** ** |
| **Shuffler Sales**      |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Revenue                 |       | 606,681                                                  |       | 35,731                                                  |       | 1,598 | % | 858,534 |   | (7,275 | ) | (11,901 | )% |
| Gross margin %          |       | 60                                                       | %          | (152                                                    | )%         | 722 | % | 60 | % | 6,166 | % | (215 | )% |
|                    |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Shuffler Rentals**    |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Revenue                 |       | 27,784                                                   |       | 51,416                                                  |       | (46 | )% | 103,087 |   | 178,462 |   | (42 | )% |
| Gross margin %          |       | 84                                                       | %          | 85                                                      | %          | (46 | )% | 86 | % | 84 | % | (41 | )% |
|                    |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| **DeckChecker Sales**   |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Revenue                 |       | 27,701                                                   |       | 176,808                                                 |       | (84 | )% | 1,039,485 |   | 1,103,410 |   | (6 | )% |
| Gross margin %          |       | 37                                                       | %          | 66                                                      | %          | (91 | )% | 69 | % | 71 | % | (8 | )% |
|                    |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| **DeckChecker Rentals** |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Revenue                 |       | 21,560                                                   |       | 24,186                                                  |       | (11 | )% | 63,400 |   | 88,388 |   | (28 | )% |
| Gross margin %          |       | 95                                                       | %          | 83                                                      | %          | 2 | % | 95 | % | 84 | % | (19 | )% |
|                    |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Chip Washer Revenue** |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Revenue                 |       | 23,125                                                   |       | —                                                  |       | 100 | % | 65,125 |   | — |   | 100 | % |
| Gross margin %          |       | 24                                                       | %          | —                                                  |       | 100 | % | 53 | % | — |   | 100 | % |
|                    |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Casino Chips**        |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Revenue                 |       | 117,061                                                  |       | 55,348                                                  |       | 112 | % | 1,989,118 |   | 1,252,618 |   | 59 | % |
| Gross margin %          |       | (2                                                       | )%         | 11                                                      | %          | (140 | )% | 17 | % | 44 | % | (38 | )% |
|                    |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Participation Games** |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Revenue                 |       | 131,356                                                  |       | —                                                  |       | 100 | % | 131,356 |   | — |   | 100 | % |
| Gross margin %          |       | (19                                                      | )%         | —                                                  |       | 100 | % | (19 | )% | — |   | 100 | % |
|                    |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Non-gaming products** |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Revenue                 |       | 1,669,445                                                |       | 1,850,043                                               |       | (10 | )% | 4,830,170 |   | 1,850,043 |   | 161 | % |
| Gross margin %          |       | 1                                                        | %          | (1                                                      | )%         | 170 | % | (2 | )% | (1 | )% | (480 | )% |
|                    |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Other**               |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Revenue                 |       | 189,685                                                  |       | 159,817                                                 |       | 19 | % | 636,986 |   | 287,018 | ) | 122 | % |
| Gross margin            |       | (109                                                     | )%         | (60                                                     | )%         | 116 | % | (132 | )% | (212 | )% | 38 | % |

 

22

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**Shuffler sales.**Revenue fromshuffler sales increased by $571,000 in the third quarter of 2007 over the prioryear period as a result of an increase in unit sales. The increase in unitsales was a result of the sales channel transition to distributors as discussedabove. Gross margin improved to 60% in the third quarter of 2007 as a result ofa decrease in costs associated with the one-time product upgrades and productreturns during the prior year period. We expect margins to decrease for a shortperiod due to the transition to a full distributor model but expect them tolevel off during the next twelve months.

 

**Shuffler rentals.**Shuffler rentalrevenue decreased $23,600 in the third quarter of 2007 from the prior yearperiod as a result of the transition to the new global distribution model whichdoes not include rental revenue. In the new model, we will only be sellingequipment to distributors and as a result our rental revenue for these productswill continue to decline.

 

**DeckChecker sales.**DeckChecker sales decreased by $150,000 or 84%. This is due to thedecrease in unit sales from 13 in the three month period ended September 30,2006 to 2 in the current year period as a result of a lower level of new casinoopenings. In the prior year, we generated increased sales for two new casinoopenings in Macau. Gross margin decreased in the current year period as a resultof lower average sales prices given to our distributors.

 

**DeckChecker rentals.**DeckChecker rentals remained flat. As we have moved to a new globaldistribution model which does not include rental and or lease of equipment, weexpect this revenue stream to decrease to zero.

 

**Casino chip sales.**Casino chip sales increased to $117,000or 112%. This increase is due to existing customers replenishing theirinventory of chips at their casino. Gross margin was negatively impacted byproduction costs associated with building product for demonstration andexhibition purposes

 

**Participation revenue**. DuringSeptember 2007, the Company entered into a new revenue stream of participationrevenue. During the quarter, revenue of $131,000 was recognized withcorresponding depreciation of $156,000. We expect margins to improve as thevenues in which the games have been placed mature and the installed base ofgames increases.

 

**Non-gaming products sales.**Revenue fromnon-gaming product sales decreased by $181,000 to $1.7 million or 10%. Grossmargin improved from (1)% to 1% as a result of improved productionefficiencies.

 

**Other income.**The increase inother revenues was attributable to an increase in service revenue compared tothe corresponding period of the prior year while gross margin was negativelyimpacted by an inventory write off of approximately $136,000 resulting from thewrite-down of legacy products.

 

**General and AdministrativeExpense**

 

For the three months ended September 30, 2007, our general andadministrative expenses decreased $325,000 or 12% to $2.5 million compared to$2.7 million in the corresponding period of the prior year. This decrease isprimarily related to the following:

 

•                  Wagesand salaries decreased approximately $237,000 over the prior year period as aresult of the decrease in headcount.

 

•                  Weexperienced a decrease in travel and related expenses of approximately $80,000in the current year quarters compared to the corresponding period of the prioryear as a result of less headcount and reduced travel abroad. We expect thesecosts to increase in the future.

 

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**Stock-Based Compensation**

 

During the third quarter of 2007, our expenses for share basedcompensation totaled $4.4 million as compared to $224,000 in the correspondingperiod in the prior year. This increase is primarily due to $3.2 million ofexpenses incurred upon the acceleration of vesting on certain stock options dueto the change in control represented by the closing of the transaction underthe Participation Agreement. Additionally, approximately $1.2 millionrepresented the share-based compensation of stock options granted to ElixirGroup employees and affiliates in September 2007.

 

**Restructuring Charge**

 

In accordance with SFAS 146, *Accounting for CostAssociated with Exit or Disposal Activities*, we incurred arestructuring charge of $1.6 million for severance wages and benefits basedupon contractual and other agreements with employees which only includescharges for termination benefits measured at the estimated fair value at thetermination date. It does not include charges for services yet to be rendered. Thetotal reduction in headcount is 21 people. On September 10, 2007, as part ofthe closing of the Participation Agreement with Elixir Group, we announced achange in executive management. As announced in February 2007, we committed tocorporate restructuring. As part of the restructuring, in October 2007, we gavetermination notice to all service technicians, inventory management personnel,some regulatory compliance personnel and some administrative staff. None ofthese costs have been paid to date. Restructuring charges have been presentedwithin operating earnings in the condensed consolidated statement of earnings.

 

**Impairment Charges**

 

In accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*, wereview goodwill for impairment on an annual basis or more frequently if eventsor circumstances indicate that the carrying value may not be recoverable.Dolphin which was acquired in July 2006, has not met expectations to date dueto a number of factors one of which includes the loss of a general manager andsale staff in early 2007 and to date the Company has not found a suitablereplacement. As such, we believe that original forecast needed to be adjusteddownward and a test for impairment was warranted.

 

In accordance with SFAS 142, we performed atwo-step impairment test which compares 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 our review, we recorded animpairment writedown to goodwill of $1.5 million for the non-gaming productssegment and $2.6 million for the gaming products segment, for a trial writedownof $4.1 million.

 

We amortized other identifiable intangibleassets, such as customer relationships and trade names, on the straight-linemethod over their estimated useful lives. We assessed the potential impairmentof intangible assets subject to amortization based upon the events identifiedabove. We determined that the carrying value of the Dolphin customerrelationships and trade names for the non-gaming products segment would be recoverablebut not recoverable for the gaming segment, based upon the our calculation ofthe asset’s fair value based on the projected net cash flows expected to resultfrom that asset, including eventual disposition. Based upon the above, werecorded impairment writedowns to other identifiable intangible assets of thegaming product segment of $423,000 as of September 30, 2007.

 

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The following table summarizes the goodwilland intangible impairment writedowns:

 
| Goodwill               |   | $       | 4,063,737 |   |
|------------------------|--------|---------|-----------|--------|
| Customer relationships |   | 378,000 |      |
| Trademarks             |   | 45,000  |      |
|                   |   | $       | 4,486,737 |   |

 

On January 25, 2007, we issued warrants to purchase up to 16,000,000shares of the Company to Elixir Group, which at the time was our Asiandistributor, as an incentive to meet certain sales targets. These warrants wereaccounted for in accordance with FASB Emerging Issues Task Force Issue (“EITF”)No. 96-18, *Accounting for Equity Instruments That Are Issuedto Other Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices.* The warrants had a fair market value of $6,147,000 as ofJanuary 25, 2007 and were classified in the balance sheet as prepaidcommissions subject to amortization to commission expense at a rate of 8% ofthe gross revenue generated by the distributor.

 

In September 2007, we conducted the initial closing of the transactionsunder the Participation Agreement between the Company and Elixir Group (seeNote 8). As part of the Participation Agreement, we agreed that upon theinitial placement of 1,000 gaming machines with gaming operators identified byElixir Group, we would reduce by $1.00 the exercise price of 10 million of theabove referenced warrants, which originally had exercise prices ranging from$3.00 per share to $5.50 per share. When the cumulative number of gamingmachines under contract reaches 2,000 units and the cumulative number of gamingmachines reaches 1,000 units, we agreed to further reduce by $1.00 the exerciseprices of the 10 million warrants. When the cumulative number of machinesreaches 3,000 units under contract and the cumulative number of machinesreaches 2,000 units, we will further reduce by $1.00 the exercise prices of the10 million warrants. As of the date of this report, we have reduced theexercise price of the 10 million warrants by $2.00 based on the achievement ofthe related performance milestones.

 

In accordance with SFAS 123R, *Share-based Payments,*thereduction in exercise price constituted a modification in terms and thewarrants and required a recalculation of fair value. The modification increasedthe fair value of the warrants by $21 million bring the unamortized balance ofthe prepaid sales incentive account to $25.9 million. Per FASB Statement No.144, *Accounting for the Impairment or Disposal ofLong-Lived Assets,* a long-lived asset (asset group) shall be testedfor recoverability whenever events or changes in circumstances indicate thatits carrying amount may not be recoverable including an accumulation of costssignificantly in excess of the amount originally expected for the acquisition.

 

We estimated fair value using present value techniques based onestimates of cash flows. In accordance with Statement 144, an impairment lossshall be recognized if the carrying amount of an intangible asset is notrecoverable and its carrying amount exceeds its fair value. After an impairmentloss is recognized, the adjusted carrying amount of the intangible asset shallbe its new accounting basis. Based upon the above, we will record impairment tothe asset of $25.1 million and presented in loss from operations in ourconsolidated statement of operations and deficit.

 

On September 10, 2007, we issued Elixir Group25,000,000 shares of its common stock and 88,000,000 warrants, subject to certainperformance criteria, to purchase our common stock pursuant to theParticipation Agreement. Based on market quotes, the shares had a fair value of$77.8 million (see Note 7) which was capitalized in accordance with SFAS 91 andthe warrants had a fair value of $176.9 million which were deferred in equityas deferred contract acquisition fees until vested in accordance with EITF96-18.. In accordance with SFAS 144, we tested this asset for recoverabilityusing present value techniques based on estimated future cash flows. Based uponthis assessment, we will record an impairment loss of $77.8 million recorded asparticipation agreement acquisition fees in the condensed consolidatedstatement of earnings for the 25,000,000 shares.

 

25

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Impairment charges havebeen presented within operating earnings in the condensed consolidatedstatement of earnings.

 

**Research and Development Expense**

 

For the three months endedSeptember 30, 2007, research and development expenses were $329,000 or 27% lessthan the three month period ended September 30, 2006. The decrease in researchand development expenses was due to reduced expenses related to the developmentof our ShufflePro and Chip Washer products.

 

**Other Income (Expense)**

 

Interest Expense and Finance Fees

 

For the three months endedSeptember 30, 2007, we incurred interest expenses and finance fees of $708,000,a decrease of 42% from the corresponding period of the prior year. The decreasein interest expense was due to the lower amount of principal and the rate ofinterest payable on the principal amount for the third quarter of 2007 ascompared to interest expenses for the corresponding period in the previousyear. In April 2007, we repaid principal in the amount of $2.15 million ofoutstanding notes payable with the proceeds from the stock sale described inNote 11. In November 2007, we paid $11.0 million of principal and interest ofour 8% long-term debt with the proceeds from stock sale described in Note 16 toour unaudited condensed financial statements.

 

***Comparison of Nine MonthsEnded September 30, 2007 and 2006***

 

For the nine months ended September 30, 2007, we increased revenue by$4.9 million, or 104%, to $9.7 million compared to $4.8 million for the prioryear period. This increase was primarily driven by the increase in non-gamingautomotive product revenue as a result of an increased demand from ourcustomers at Dolphin and an increase in shuffler and casino chip sales.Increased sales of shuffler products during the period were attributable to (a)initial sales to our new US distributor and (b) international sales to ourAsia-based distributor, Elixir Group. Gross margin decreased to 10% for thenine months ended September 30, 2007 compared to the prior year period of 10%as a result of the increase of the lower margin non-gaming product line forfiscal 2007. Specific product line results for the nine months ended September30, 2007 and 2006 are provided in the table above (page 22).

 

**Shuffler sales.**Revenue fromshuffler sales increased by $865,000, in the first nine months of 2007 over theprior year period as a result of an increase in unit sales and a decrease inproduct upgrades and returns. The increase in unit sales was a result of thesales channel transition to distributors as discussed above. Gross marginimproved to 60% in the first nine months of 2007 as a result of a decrease incosts associated with the one-time product upgrades during the prior yearperiod. We expect margins to decline slightly due to the distributor model andthen to level off in the next twelve months.

 

**Shuffler rentals.**Shuffler rentalrevenue decreased $75,000 in the first nine months of 2007 from the prior yearperiod as a result of the transition to the new global distribution model whichdoes not include the rental of shufflers. As a result our rental revenue forthese products will eventually decline to zero.

 

**DeckChecker sales.**The decrease inDeckChecker sales was due to the decrease in unit sales during the first ninemonths of 2007 as compared to the prior year period. Gross margin decreased asa result of lower average sales prices given to our distributors.

 

**DeckChecker rentals**. DeckCheckerrental revenue declined as a result of the transition to the new distributionmodel in the US and Asia. Rental revenues are expected to decline to zero overthe next twelve months.

 

26

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**Casino chip sales.**The 59%increase in revenue from casino chip sales in the first nine months of 2007 wasa result of a $1.5 million sale of RFID casino chip order to a Macau casino inthe first quarter 2007. Our gross margin decreased 27% due to more salesthrough distributors in the current year period compared to the correspondingperiod of the previous year.

 

**Participation revenue.**DuringSeptember 2007, we entered into a new revenue stream of participation revenue. Duringthe quarter, revenue of $131,000 was recognized with corresponding depreciationof $156,000. We expect margins to improve as the venues in which the games areplaced mature and the installed base of games increases.

 

**Non-gaming product sales.**Revenueincreased approximately $3.0 million 161% as a result of the timing andtransition of orders in backlog. Sales are expected to remain stable over thenext twelve months. Our gross margin decreased by 1% and is expected to improveas we move to cut expenses and improve our production efficiencies.

 

**Other income.**The increase inother revenues was attributable to an increase in service revenue compared thecorresponding period of the prior.

 

###### **Generaland Administrative Expense**

###### ** **

For the nine months ended September 30, 2007, our general andadministrative expenses increased $2.0 million or 33% over the correspondingperiod of the prior year. This increase is primarily related to the following:

 

•                  Consultingand accounting expenses increased $667,000 to $1.4 million compared to $728,000in the corresponding period in the prior year. This increase is primarily dueto an increase in accounting and audit fees related to restatements of ourpreviously issued financial statements, an increase in consulting fees of$325,000 related to financial services and an increase in consulting fees foraccounting and marketing.

 

•                  Duringthe first nine months of 2007, we incurred an increase in wages and salaries,including commissions, of $483,000 to $2.7 million in the current year periodcompared to $2.3 million in the corresponding period of the prior year as aresult of the increase in wage increases to senior management in the firstquarter of 2007 and an increase in commission expense of $178,000 partiallyoffset by a decrease in headcount.

 

•                  Legaland regulatory costs increased approximately $608,000 to $1.6 million duringthe nine months ended September 30, 2007, compared to $1.0 million in thecorresponding period of the prior year as a result of fees related to theElixir Group transaction, and the filing of various motions in connection withthe patent litigation.

 

**Stock Option Compensation**

 

During the first nine months of 2007, our expenses for share basedcompensation totaled $6.2 million, an increase of $5.3 million or 637% comparedto $837,000 in the corresponding period of the prior year. The increase is dueto the change of control which occurred on September 10, 2007, which triggeredthe vesting of outstanding options under our plan, resulting in a charge of$3.8 million. In addition, we incurred a charge of approximately $1.2 millionfor options granted on September 10, 2007.

 

27

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**Restructuring Charge**

 

In accordance with SFAS 146, *Accounting for CostAssociated with Exit or Disposal Activities*, we incurred arestructuring charge of $1.6 million for severance wages and benefits basedupon contractual and other agreements with employees which only includescharges for termination benefits measured at the estimated fair value at thetermination date. It does not include charges for services yet to be rendered. Thetotal reduction in headcount is 21 people. On September 10, 2007, as part ofthe closing of the Participation Agreement with Elixir Group, we announced achange in executive management. As announced in February 2007, we committed tocorporate restructuring. As part of the restructuring, in October 2007, we gavetermination notice to all service technicians, inventory management personnel,some regulatory compliance personnel and some administrative staff. None ofthese costs have been paid to date. Restructuring charges have been presentedwithin operating earnings in the condensed consolidated statement of earnings.

 

**Research and Development Expense**

 

Research and developmentexpenses decreased by $521,000 or 41% to $740,000 for the nine months endedSeptember 30, 2007 compared to $1.3 million in the corresponding period of theprior year. The decrease in research and development expenses was due toreduced expenses related to the development of our ShufflePro and ChipWasherproducts.

 

###### **OtherIncome (Expense)**

###### ** **

###### **Interest Expense and Finance Fees**

###### ** **

For the nine months endedSeptember 30, 2007, we incurred interest expenses and finance fees ofapproximately $1.8 million, a decrease of 14% from the corresponding period ofthe prior year. The decrease in interest is due to the lower amount ofprincipal and rate of interest payable on the principal amount for the ninemonths ended September 30, 2007 as compared to the corresponding period of theprior year which consisted of the 9% senior secured notes, the 10% seniorsecured convertible notes and the $5 million 9% line of credit. In April 2007,we repaid principal in the amount of $2.15 million of outstanding debt and inNovember 2007, we repaid principal in the amount of $10.6 million with theproceeds from the stock sale described in Note 11 to our unaudited condensedconsolidated financial statements, which will reduce our interest expense goingforward.

 

Other income increased$500,000 or 100% for the nine months ended September 30, 2007, as a result ofthe sale of intellectual property related to the discontinued SecureDrop®product line.

 

### **Liquidity and Capital Resources**

### ** **

As of September 30, 2007, we had a working capital deficiency of $18.2million, an increase of approximately $16.7 million compared to our workingcapital deficit as of December 31, 2006. The increase is primarily due tocontinued losses from operations and an increase in trade payables, includingpayables of $15.2 million as of September 30, 2007 resulting from our purchaseof electronic gaming machines for placement on a revenue sharing basis withgaming operators located in the general Asia region. We have historicallyincurred losses from operations. During the nine month period ended September30, 2007 and the fiscal year ended December 31, 2006, we incurred negative cashflow from operations of $7.3 million and $7.7 million, respectively.

 

On October 25, 2007, we sold 15,000,000 shares of our common stock at aprice of $3.50 per share, for aggregate gross proceeds of $52.5 millionpursuant to a securities purchase agreement and a registration rights agreementwith certain accredited investors. After commissions and offering costs, thenet proceeds to us were approximately $49.8 million. As of November 2007, weapplied approximately $4.6

 

28

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million of the net proceeds towards the payment of trade payables owedto Elixir Group for that party’s sale of electronic gaming machines to us. Wealso applied $11.0 million of net proceeds towards the payment of notespayable. The balance of the net proceeds will be used for the purchase ofadditional electronic gaming machines and working capital.

 

After giving effect to our receipt of the $49.8 million in net proceedsand the payment of $15.6 million in trade payable and notes payable, our proforma working capital as of September 30, 2007 was approximately $16.0 million.

 

**In June 2007, we entered into theParticipation Agreement described above with Elixir Group for the placement ofelectronic gaming machines in certain Asian markets. If all the performancecriteria are met, management believes that we will need at least $75.0 millionof capital over the next 12 months, in addition to the $52.5 million of capitalwe received in the October 2007 private placement, in order to fund our presentcommitments and projected agreements for the placement of electronic gamingmachines pursuant to the Participation Agreement. We will consider raisingadditional funds through various financing sources, including the sale of ourequity and debt securities, the procurement of commercial debt financing with abias towards debt financing over equity raisings. However, there can be noguarantees that such funds will be available on commercially reasonable terms,if at all. Alternative sources to enhance the Company’s working capitalposition include the negotiation of longer gaming machine payment terms or theexercise of warrants currently outstanding. If such financing is not availableon satisfactory terms, we may be unable to expand or continue our business asdesired and operating results may be adversely affected. Any debt financingwill increase expenses and must be repaid regardless of operating results andmay involve restrictions limiting our operating flexibility. If we issue equitysecurities to raise additional funds, the following results may occur:**

 

**•****                 ****the percentage ownership of our existingstockholders will be reduced;**

 

**•****                 ****our stockholders may experience additional dilutionin net book value per share; or**

 

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

 

**Critical Accounting Policies and Estimates**

 

Following is a summary of what our management believes are the criticalaccounting policies related to our operations. The application of these policies,in some cases, requires management to make subjective judgments and estimatesregarding the effect of matters that are inherently uncertain. See Note 1,“Description of Business and Significant Accounting Policies,” to the Company’sAmendment No. 1 to Annual Report on Form 10-KSB/A for the year ended December31, 2006, filed with the SEC on November 13, 2007, for a more detaileddiscussion of our accounting policies. Except as described below, we do notemploy any critical accounting policies selected from among availablealternatives or that require the exercise of significant management judgment toapply, and we believe none of our estimates are so highly uncertain orsusceptible to change as to present a significant risk of a material impact on ourfinancial condition or operating performance.

 

*Allowance for DoubtfulAccounts*

 

In connection with the preparation of our financial statements,management reviews and evaluates the collectability of our trade receivablesand adjusts our allowance for estimated uncollectible accounts as deemednecessary in the circumstances. These estimates have the potential forcritically affecting results of operations for any given period. Factorsconsidered by management in making such estimates and adjustments include anyconcentrations among customers, changes in our relationships therewith, paymenthistory and the apparent financial condition of our customers.

 

29

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*Revenue Recognition*

 

We recognize revenue fromthe sale of our gaming products upon shipment against customer contracts orpurchase orders. Sales are recognized immediately when shufflers that arerented are converted to purchases depending on the creditworthiness and paymenthistory of the casino company since payment terms are from 20 to 48 months. Asof September 2007, we will no longer rent any gaming products.

 

Our participation revenueearns revenue from the operation of gaming machines and the related systemsplaced in casinos on a daily fee basis. Revenue of these sources is recognizedbased on the contractual terms of the participation agreement is generallybased on a share of the net winnings.

 

Revenue from shufflerrentals is recorded at the first of each month in accordance with rentalcontract terms. All rental contracts are cancelable upon 30-day written noticeby the customer. Maintenance expense for rental units is recorded in the periodit is incurred. The revenue from this source will decline to zero by year end.

 

The extended warranty and maintenancecomponents that are part of long term sales contracts are unbundled andrecognized as deferred revenue 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, *Revenue Arrangements withMultiple Deliverables*.

 

We provide currently forestimated warranty repair costs associated with sales contracts. Although thereare no extended warranties offered for our products, and our recorded warrantyliability is, therefore, not material, we do provide for maintenance contractsthat are billed and recognized on a monthly basis.

 

Although sales are notgenerally made with a right to return, upon occasion, usually associated withthe performance warranty, sales returns and allowances are recorded afterreturned goods are received and inspected.

 

*Intangible Assets*

 

We currently amortize ourintangible assets (patent and technology rights) on a straight-line basis overcurrently estimated useful lives of 10 to 13 years. Management believes thatthe useful life of patents and technology rights equals the full term of thepatent.

 

*Legal Defense Costs*

 

We do not accrue for future litigation defense costs, if any, to beincurred by us in connection with outstanding litigation and other disputedmatters but, instead, record such costs as the related legal and other servicesare rendered.

 

*Income Taxes*

 

At September 30, 2007, we had net operating loss carry forwards for USfederal income tax purposes of approximately $83,000,000. These operating losscarry forwards expire in the years 2010 through 2026. No tax benefit has beenreported in the financial statements for the current period because thepotential tax benefits of the net operating loss carry forwards have beenoffset by a 100% valuation allowance. The valuation allowance is based on thehistory of our earnings.

 

Moreover, transactions under the Participation Agreement do not assurethat we will have taxable income in the current or future periods.

 

30

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Lastly, Section 382 of the Internal Revenue Code of 1986, as amended,limits our potential to fully utilize net operating loss carry forwards after acertain change in ownership. We presently estimate an annual limitation ofapproximately $5,750,000.

 

The Australian tax rate is 30% and our Australian subsidiary has adeferred tax asset as of December 31, 206 of approximately $80,000 and carryforward losses as of September 30, 2007 are approximately $900,000. Inaddition, we have a deferred tax liability of $1.4 million as of September 30,2007.

 

We account for income taxes under SFAS No.109, *Accountingfor Income Taxes*. Accordingly, we use the asset and liability methodof accounting for income taxes. Under this method, deferred tax assets andliabilities are recorded for temporary differences between the financialreporting basis and income tax basis of assets and liabilities at the balancesheet date multiplied by the applicable tax rates. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount ofexpected to be realized. Income tax expense is recorded for the amount ofincome tax payable or refundable for the period increased or decreased by thechange in deferred tax assets and liabilities during the period.

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. (“FIN”) 48, *Accounting for Uncertaintyin Income Taxes*, an interpretation of SFAS 109. FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS No. 109 and prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. We adopted the provisions of FIN 48 on January 1, 2007. FIN 48contains a two step approach to recognizing and measuring uncertain taxpositions accounted for in accordance with SFAS No. 109. The first step is toevaluate the tax position for recognition by determining if the weight ofavailable evidence indicates that it is more likely than not that the positionwill be sustained on audit, including resolution of related appeals orlitigation process, if any. The second step is to measure the tax benefit asthe largest amount that is more than 50% likely of being realized upon ultimatesettlement. Based on its evaluation, management believes FIN 48 did have amaterial effect on our financial statements.

 

*Recent Accounting Pronouncements*

 

In September2006,FASB issued SFAS No. 157, *Fair Value Measurements*, which definesfair value, establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. SFAS No. 157 will becomeeffective for financial statements issued for fiscal years beginning afterNovember 15, 2007. In February 2007, the FASB issuedSFAS No. 159, *The**Fair Value Option for Financial Assets and FinancialLiabilities — Including an**amendmentof FASB Statement No. 115*, which will permit the option ofchoosing to measure certain eligible items at fair value at specified electiondates and report unrealized gains and losses in operations.SFAS No. 159 will become effective for us for financial statementsissued for periods beginning in 2008. We are currently evaluating the effectthat SFAS Nos. 157 and 159, if any, will have on our future financialposition, results of operations and operating cash flows.

 

### **Risk Factors**

### ** **

***We will require additional fundingin the future to continue to operate our business.***As of September 30, 2007, we had a workingcapital deficiency of $18.2 million. On October 25, 2007, we sold 15,000,000shares of our common stock at a price of $3.50 per share, for aggregate grossproceeds of $52.5 million pursuant to a securities purchase agreement and aregistration rights agreement with certain accredited investors. Aftercommissions and offering costs, the net proceeds to us were approximately $49.8million. We applied approximately $4.6 million of the net proceeds towards thepayment of trade payables owed to Elixir Group for that party’s sale ofelectronic gaming machines to us. We also applied $11.0 million of net proceedstowards the payment of notes payable. The balance of the net proceeds will beused for the purchase of additional electronic gaming machines and workingcapital.

 

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After giving effect to our receipt of the $49.8 million in net proceedsand the payment of $15.6 million in trade payable and notes payable, our proforma working capital as of September 30, 2007 was approximately $16.0 million.

 

**Management believes that we willneed at least $75.0 million of capital over the next 12 months, in addition tothe $52.5 million of capital we received in the October 2007 private placement,in order to fund our present commitments and projected agreements for theplacement of electronic gaming machines pursuant to the Participation Agreementif all performance criteria are met. We will consider raising additional fundsthrough various financing sources, including the sale of our equity and debtsecurities, the procurement of commercial debt financing with a bias towarddebt financing over equity raisings. However, there can be no guarantees thatsuch funds will be available on commercially reasonable terms, if at all. Alternativesources to enhance the Company’s working capital include the negotiation oflonger gaming machine payment terms or the exercise of warrants currentlyoutstanding. If such financing is not available on satisfactory terms, we maybe unable to expand or continue our business as desired and operating resultsmay be adversely affected. Any debt financing will increase expenses and mustbe repaid 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 our existingstockholders will be reduced;**

 

**•****                 ****our stockholders may experience additional dilutionin net book value per share; or**

 

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

 

***We have a history ofsignificant operating losses and anticipate continued operating losses for atleast the near term.***For the nine months ended September 30, 2007and the years ended December 31, 2006 and 2005, we have incurred netlosses of $213,653,064, $14,605,762 and $23,401,529, respectively, and ouroperations have used $7,264,503, $7,709,812 and $10,085,798 of cash,respectively. As of September 30, 2007, December 31, 2006 and December 31,2005, we had accumulated deficits of $314,754,842, $92,957,833 and $78,352,071,respectively. We expect to continue to experience negative cash flow fromoperations until such time as we are able to substantially increase revenuesand control expenses at levels that will allow us to operate on a cash flowpositive basis. While management will endeavor generate positive cash flow fromour placement of electronic gaming machines in the general Asia region pursuantto the Participation Agreement, there can be no assurance that we will besuccessful in generating cash flow from operations. The transactions under theParticipation Agreement represent a material change in our business model, andthat business model has not been proven by us. There can be no assurance wewill be able to become profitable. Revenues may not grow in the future, and wemay not generate sufficient revenues for profitability. If we becomeprofitable, we may not be able to sustain profitable operations.

 

***Our shareholders will undergo significant equitydilution pursuant to the transactions completed by the Participation Agreement.***According to theterms of the Participation Agreement, Elixir Group had 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 withgaming operators sourced and identified by Elixir Group. At the initial close,we issued to Elixir Group 25,000,000 common shares and warrants, with anexercise price of $2.65 per share, to purchase up to 88,000,000 additionalshares of our common stock. The warrants vest and first become exercisable basedon the achievement of certain milestones with respect to the number of gamingmachines under contract and in operation. Elixir Group is entitled to earn atotal of 55,000,000 shares of our common stock (inclusive of the 25,000,000shares issued at the initial closing and the 15,000,000 shares issued onSeptember 13, 2007) and the warrants will vest and become exercisable 

 

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subject to achieving the following milestones with respect to thecumulative number of gaming machines under contract and in operation. Ourissuance of equity to Elixir Group pursuant to the Participation Agreement willresult in significant equity dilution to our shareholders.

 

***The accounting treatment of the transactions underthe Participation Agreement will negatively impact our reportable net profit(loss) over the life of the gaming machine lease agreements that relate to theequity earned by Elixir Group.***Our issuance of common shares and warrants to Elixir Group under theParticipation Agreement will be accounted for under *EITF No.96-18, Accounting for Equity Instruments that are Issued to Other thanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services*,which addresses the accounting for, among other things, the issuance of equityin exchange for services rendered. As electronic gaming machines are placedwith gaming operators in satisfaction of the milestones set forth in theParticipation Agreement, and Elixir Group earns equity thereby, we will debitdeferred costs and credit accrued unit placement cost liability, in the dollaramount of shares earned using the value of the shares earned based on marketprice as of the date of placement. As revenue is earned, the deferred costswill be amortized over the life of the lease agreement relating to theapplicable electronic gaming machines. Assuming a share price of $3.00 for ourcommon stock throughout the period Elixir Group earns all 55,000,000 common sharesunder the Participation Agreement, we would realize a cumulative total ofapproximately $165,000,000 in non-cash charges to its income statement over thelife of the gaming machine lease agreements that relate to the common sharesearned by Elixir Group. Although this amount is a non-cash charge and would notnegatively impact cash flow from operations or EBITDA, the charges are likelyto materially negatively impact our reportable net profit (loss) fromoperations.

 

***The transactions under the Participation Agreementrepresent a material change in our business model, and that business model hasnot been proven by us.***Our decision to pursue the transactions under the ParticipationAgreement, and specifically our decision to issue the significant equity toElixir Group based upon the resulting placement of electronic gaming machines,was based in large part on certain pro forma financial projections andunderlying forecasts and assumptions concerning future events andcircumstances, including, but not limited to, Elixir Group’s ability to sourceand identify gaming operators in the 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.

 

****We are increasing our operations in Asia and could besubject to risks of doing business in the region.******We intend to increase our business operations inAsia, and particularly in China and Southeast Asia. As a result, our exposureto the business risks presented by the economies and regulatory environments ofAsia will increase. For example, the validity, enforceability and scope ofprotection of intellectual property is uncertain and evolving in China, and ourintellectual property rights may not be protected under the laws of China tothe same extent as under laws of the United States. If our intellectualproperty is misappropriated, we may experience unfair competition and decliningsales or be forced to incur increased costs of enforcing our intellectualproperty rights, both of which would adversely affect our net sales, grossmargins and results of operations.**

 

****Elixir Group holds a controlling interest in ourcommon stock, giving Elixir Group the power to control our management and allstockholder actions.******As aresult of the transactions consummated under the Participation Agreement, ourcompany has undergone a change in control in which Elixir Group now holds acontrolling interest in our company. As of the date of this report, ElixirGroup owns 41 million shares of our common stock, representing 43.9% of ourissued and outstanding common shares, and has the right to earn another 15million common shares under the Participation Agreement. Accordingly,**

** **

**33**

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** **

**Elixir Group effectively controlsour management and all matters requiring approval by our stockholders,including the ability to elect our entire board of directors and the approvalof mergers and other significant corporate transactions. This concentration ofownership will make it difficult for other stockholders to effect substantialchanges in our company, and also will have the effect of delaying, preventingor expediting, as the case may be, a further change in control of our company.**

 

****The interests of Elixir Group may conflict with theinterests of our other stockholders.******Elixir Group, as our controlling stockholder,effectively controls all matters submitted for stockholder approval and hascontrol over our management and affairs. We cannot assure you that theinterests of Elixir Group will coincide with the interests of our otherstockholders. Although our board of directors has created a conflictscommittee, made up exclusively of directors independent of Elixir Group, withveto rights over certain transactions between us and Elixir Group, incircumstances involving a conflict of interest between Elixir Group, on the onehand, and our company or the other stockholders, on the other, we can give noassurance that Elixir Group would not exercise its power to control us in amanner that would benefit Elixir Group to the detriment of our otherstockholders.**

 

****Our growth into markets outside the United Statesexposes us to risks inherent in international business operations.******We market and sell our electronic gaming machinesboth domestically and outside the United States. We intend to focus our salesefforts in Asia, but our international expansion efforts may not be successful.Our international operations expose us to risks and challenges that we wouldotherwise not face if we conducted our business only in the United States, suchas:**

 

**•****                 ****heightened price sensitivity from customers inemerging markets;**

 

**•****                 ****our ability to establish local manufacturing,support and service functions, and to form channel relationships with resellersin non-US markets;**

 

**•****                 ****localization of our electronic gaming machines andcomponents, including translation into foreign languages and the associatedexpenses;**

 

**•****                 ****compliance with multiple, conflicting and changinggovernmental laws and regulations;**

 

**•****                 ****foreign currency fluctuations;**

 

**•****                 ****laws favoring local competitors;**

 

**•****                 ****weaker legal protections of intellectual propertyrights and mechanisms for enforcing those rights;**

 

**•****                 ****market disruptions created by public health crisesin regions outside the US, 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 adequately protect our intellectual property right******.***Our success depends upon maintaining theconfidentiality and proprietary nature of our intellectual property rights. Our ability tocompete may be damaged, and our revenues may be reduced if we are unable toprotect our intellectual property rights adequately. To protect theserights, we rely principally on a combination of:

 

•                  contractualarrangements providing for non-disclosure and prohibitions on use;

 

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•                  patents andpending patent applications;

 

•                  trade secret,copyright and trademark laws; and

 

•                  certainbuilt-in technical product features.

 

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

 

***It is possible that our future products will be the subject of futurepatent litigation if the products are sold and installed in the United Statesand, if commenced, could subject us to continuing litigation costs and risks.***To the extent that we introduce new productsthat incorporate the same or similar technology, it is likely that a competitorwill bring 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.

 

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

 

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

 

•                  consumingsubstantial time and financial resources required to defend against them;

 

•                  diverting theattention of management from growing our business and managing operations;

 

•                  resulting incostly litigation; and

 

•                  disruptingproduct sales and shipments.

 

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

 

***We rely on distributors ininternational markets, and our limited sales experience in foreign countriescould cause us to lose sales.***Substantially all sales of our productsdomestically and outside the US are achieved through distributor relationships. We believe the distributors that wehave engaged are experienced and reputable; however, if we are unable to managethese relationships, our ability to generate revenue and profits in the non-USmarket may be adversely affected. To the extent that we engage in direct salesoutside the US, we have limited sales experience and history in foreignmarkets.

 

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***Our board of directors mayissue blank check preferred stock, which may affect the voting rights of ourholders and 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 3.    CONTROLSAND PROCEDURES**

## ** **

*(a)*  *Evaluationof Disclosure Controls.*As required byRule 13a-15(b) promulgated under the Securities Exchange Act of 1934,as amended (the “Exchange Act”), our management, with the participation of ourchief executive officer and chief financial officer, evaluated the effectivenessof the design and operation of our disclosure controls and procedures, asdefined in Exchange Act Rule 13a-15(e), as of the end of the period covered bythis report. Disclosure controls and procedures are controls and otherprocedures that are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, as appropriate to allowtimely decisions regarding required disclosure. Based on this evaluation, ourmanagement, including our chief executive officer and chief financial officer,concluded that as of September 30, 2007 our disclosure controls and procedureswere effective.

 

In connection with their audit of our 2006 consolidated financialstatements, our auditors reported to us two material weaknesses and asignificant deficiency in our internal control over financial reporting. Thesignificant deficiency concerns lack of evidence of authorization of payment ofvendor invoices. The material weaknesses include: (1) our inability to properlycontrol financial records and analyses relative to business combinations, whichwas evident in connection with our acquisition of Dolphin, to assure the properallocation of purchase price to the net assets acquired and proper disclosuresrelative to the acquisition, and (2) the collective experience of our personnelresponsible for financial reporting.

 

Subsequently, management initiated preliminary remediation steps toaddress the material weaknesses and the significant deficiency identified.These remediation steps include planning for and documenting the implementationof formal disclosure checklist processes and procedures to ensure that there isproper authorization of payment on vendor invoices. We also initiated a searchfor an addition to our accounting team with strong public accounting financialreporting experience. During the third quarter of fiscal 2007, we strengthenedour financial organization by hiring an additional member to our managementteam, with extensive experience in SEC reporting and GAAP, who will beresponsible for providing added training and financial discipline to thefinancial reporting process. We also added to the accounting staff, a certifiedpublic accountant with “Big Four” audit and accounting experience. We arecontinuing to assess and strengthen our financial organization by seekingadditional qualified staff. Additionally, we are training other appropriatepersonnel in the required approach and documentation standard for each keyaccount analysis.

 

*Changes in Internal Control*. During the quarter ended September 30 2007, we implemented thechanges to our internal controls described above. No other change in ourinternal control over financial reporting occurred during the quarter endedSeptember 30 2007, that has materially affected, or is reasonably likely toaffect, our internal control over financial reporting.

 

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# **PART II – OTHER INFORMATION**

# ** **

**Item 4.       SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

We held a special meeting of shares holderson September 10, 2007, for purposes of :

 

•                  Approving the Participation Agreement betweenus and Elixir Group, and to authorize and approve the issuance of shares of ourcommon stock and warrants to Elixir Group pursuant thereto;

 

•                  Approving the grant of options to purchase upto 5,000,000 shares of our common stock to certain officers, directors andemployees of Elixir Group and its affiliates;

 

•                  Approving an amendment to our Amended andRestated 1999 Stock Option Plan to increase the number of shares of commonstock reserved under the plan;

 

•                  Approving an amendment to our articles ofincorporation to increase our authorized common stock;

 

•                  Re-electing five directors and elect threenew directors, each to serve until our 2008 annual meeting of stockholders;

 

All of the persons nominated to serve on ourboard of directors, namely Mark R. Newburg, James E. Crabbe, Major General Paul A. Harvey,**Vincent L. DiVito, Robert L.Miodunski, Gordon Yuen, Joe Pisano and Lorna Patajo-Kapunan, wereelected to our board of directors. In addition, our shareholders approved eachof the other proposals set forth at the meeting as follows:

 

Our shareholders approved the Participation Agreement between us andElixir Group, and authorized and approved the issuance of shares of our commonstock and warrants to Elixir Group pursuant thereto, with shares voted asfollows:

 
| Shares voted for |   | 24,156,936 |   |
|----------------------------|--------|------------|--------|
| Shares against             |   | 70,962     |   |
| Shares abstaining          |   | 2,500      |   |

 

Our shareholders approved the grant ofoptions to purchase up to 5,000,000 shares of our common stock to certainofficers, directors and employees of Elixir Group and its affiliates, withshares voted as follows:

 
| Shares voted for  |   | 22,483,068 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 1,744,614  |   |
| Shares abstaining |   | 2,716      |   |

 

Our shareholders approved an amendment to our Amended and Restated 1999Stock Option Plan to increase the number of shares of common stock that may beissued thereunder, with shares voted as follows: 

 
| Shares voted for  |   | 22,388,663 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 1,832,889  |   |
| Shares abstaining |   | 8,846      |   |

 

Our shareholders approved an amendment to ourcertificate of incorporation to increase the number of authorized shares ofcommon stock, with shares voted as follows:

 
| Shares voted for  |   | 24,193,715 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 33,393     |   |
| Shares abstaining |   | 3,290      |   |

 

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

 

## **Item 6.       EXHIBITS**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                    | ** ** | **Method of Filing** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|
| 3.1              |       | Amendment to articles of incorporation filed with the Nevada Secretary  of State on September 10, 2007                                                             |       | Filed  electronically herewith |
|             |       |                                                                                                                                                               |       |                           |
| 10.1             |       | Waiver and  Amendment to Warrants dated September 7, 2007 between Elixir Gaming  Technologies, Inc. four investment funds managed by Bricoleur Capital  Management |       | Filed  electronically herewith |
|             |       |                                                                                                                                                               |       |                           |
| 10.2             |       | Securities  Purchase Agreement dated October 19, 2007 between Elixir Gaming Technologies,  Inc. and the investors named therein                                    |       | (1)                            |
|             |       |                                                                                                                                                               |       |                           |
| 10.3             |       | Registration  Rights Agreement dated October 19, 2007 between Elixir Gaming Technologies,  Inc. and the investors named therein.                                   |       | (1)                            |
|             |       |                                                                                                                                                               |       |                           |
| 10.4             |       | Securities  Amendment and Exchange Agreement dated October 21, 2007 between Elixir  Gaming Technologies, Inc. and Elixir Group Limited.                       |       | (1)                            |
|             |       |                                                                                                                                                               |       |                           |
| 31.1             |       | Certifications  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                         |       | Filed  electronically herewith |
|             |       |                                                                                                                                                               |       |                           |
| 31.2             |       | Certifications  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                         |       | Filed  electronically herewith |
|             |       |                                                                                                                                                               |       |                           |
| 32.1             |       | Certification of  Principal Executive Officer and Principal Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |       | Filed electronically  herewith |

 

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(1)  Incorporated by referencefrom Registrant’s Current Report on Form 8-K dated October 22, 2007.

 

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**SIGNATURES**

** **

** **

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** ** | ** **              | **ELIXIR GAMING TECHNOLOGIES, INC.** | ** **                                      |
|------------|-------------------------|--------------------------------------|-------------------------------------------------|
|       |                    | (Registrant)                         |                                            |
|       |                    |                                 |                                            |   |
| Date:      |  November 14, 2007 | By:                                  |   /s/ Gordon  Yuen                    |   |
|       |                    |                                 |   Gordon Yuen                         |   |
|       |                    | Its:                                 |   President,  Chief Executive Officer |   |
|       |                    |                                 |                                            |   |
|       |                    |                                 |                                            |   |
| Date:      |  November 14, 2007 | By:                                  |   /s/ David R.  Reberger              |   |
|       |                    |                                 |   David R.  Reberger                  |   |
|       |                    | Its:                                 |   Chief  Financial Officer            |   |

 

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