Table of Contents

** **

 

** **

**FORM 10-Q**

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 
| **x**                                                                                                                                                                                      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                 | ** ** | ** **                                                                                              |
| **For the Quarterly Period Ended September 30,  2008**                                                                                                                                |
| ** **                                                                                                                                                                                 |
| **OR**                                                                                                                                                                                     |
| ** **                                                                                                                                                                                 | ** ** | ** **                                                                                              |
| **o**                                                                                                                                                                                      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                 | ** ** | ** **                                                                                              |
| **For  the 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.) |

 

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

(Address ofprincipal executive offices, including zip code)

 

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  x   No  o

 

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

 

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

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o   No  x

 

As of November 7,2008, 114,956,667 shares of common stock of Elixir Gaming Technologies, Inc.were outstanding.

 

 

 

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Tableof Contents

 

**TABLE OF CONTENTS**

 
|                                          |                                                                                            | **PAGE** |
|-----------------------------------------------|-------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                            |     |   |
| **PART I  – FINANCIAL INFORMATION** |                                                                                            |     |
|                                          |                                                                                            |     |   |
| **Item 1.**                                   | **FINANCIAL  STATEMENTS**                                                                       |     |   |
|                                          |                                                                                            |     |   |
|                                          | Consolidated Balance Sheets                                                                     |     | 1 |
|                                          |                                                                                            |     |   |
|                                          | Consolidated Statements of  Operations                                                          |     | 2 |
|                                          |                                                                                            |     |   |
|                                          | Consolidated Statements of  Cash Flows                                                          |     | 3 |
|                                          |                                                                                            |     |   |
|                                          | Notes to Consolidated  Financial Statements                                                     |     | 4 |
|                                          |                                                                                            |     |   |
| **Item 2.**                                   | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |     | 20 |
|                                          |                                                                                            |     |   |
|                                          | Overview                                                                                        |     | 21 |
|                                          |                                                                                            |     |   |
|                                          | Results of Operations                                                                           |     | 22 |
|                                          |                                                                                            |     |   |
|                                          | Liquidity and  Capital Resources                                                                |     | 31 |
|                                          |                                                                                            |     |   |
|                                          | Critical Accounting  Policies and Estimates                                                     |     | 33 |
|                                          |                                                                                            |     |   |
| **Item 3.**                                   | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                 |     | 37 |
|                                          |                                                                                            |     |   |
| **Item 4.**                                   | **CONTROLS AND PROCEDURES**                                                                     |     | 37 |
|                                          |                                                                                            |     |   |
| **PART II – OTHER INFORMATION**     |                                                                                            |     |
|                                          |                                                                                            |     |   |
| **Item 4.**                                   | **SUBMISSION OF MATTERS  TO A VOTE OF SECURITY HOLDERS**                                        |     | 38 |
|                                          |                                                                                            |     |   |
| **Item  6.**                                  | **EXHIBITS**                                                                                    |     | 39 |

 

i

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# **Table of Contents**

 

# **PART I – FINANCIALINFORMATION**

# ** **

**Item 1.****                             ****FINANCIAL STATEMENTS**

 

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

### **CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                |       |                             |       |                            |       |
| Current assets:                                                                                                           |       |                             |       |                            |       |
| Cash and cash equivalents                                                                                                 |       | $                                | 17,844,228 |                            | $          | 68,286,820 |   |
| Current portion of accounts receivable, trade, net  of allowance for uncollectibles of $440,339 and $176,666              |       | 3,051,809                        |       | 1,689,909                       |       |
| Other receivables, net of allowance for  uncollectibles of $25,042 and $0                                                 |       | 674,756                          |       | 298,940                         |       |
| Inventories                                                                                                               |       | 1,343,539                        |       | 1,686,670                       |       |
| Prepaid expenses and other current assets                                                                                 |       | 672,069                          |       | 975,549                         |       |
|                                                                                                                      |       | 23,586,401                       |       | 72,937,888                      |       |
|                                                                                                                      |       |                             |       |                            |       |
| Accounts receivable, trade, net of current portion                                                                        |       | —                           |       | 60,421                          |       |
| Gaming machines and systems, net of accumulated  depreciation of $5,964,544 and $569,926                                  |       | 60,882,056                       |       | 39,193,962                      |       |
| Property and equipment, net of accumulated  depreciation of $3,331,318 and $3,039,933                                     |       | 4,392,560                        |       | 3,934,532                       |       |
| Intangible assets, net of accumulated amortization  of $2,189,477 and $1,689,096                                          |       | 4,985,939                        |       | 5,486,321                       |       |
| Goodwill                                                                                                                  |       | 84,210                           |       | 84,210                          |       |
| Prepaid commissions                                                                                                       |       | —                           |       | 1,398,800                       |       |
| Deposits and other assets                                                                                                 |       | 4,203,181                        |       | 617,894                         |       |
|                                                                                                                      |       | $                                | 98,134,347 |                            | $          | 123,714,028 |   |
|                                                                                                                      |       |                             |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                             |       |                             |       |                            |       |
| Current liabilities:                                                                                                      |       |                             |       |                            |       |
| Accounts payable                                                                                                          |       | $                                | 1,439,220  |                            | $          | 1,798,459 |   |
| Amount due to related party                                                                                               |       | 13,524,455                       |       | 29,601,448                      |       |
| Note payable to related party, current portion                                                                            |       | 7,444,409                        |       | —                          |       |
| Accrued expenses                                                                                                          |       | 2,885,824                        |       | 5,248,458                       |       |
| Short-term debt                                                                                                           |       | 16,239                           |       | 31,893                          |       |
| Capital lease obligations, current portion                                                                                |       | 255,277                          |       | 480,663                         |       |
| Customer deposits                                                                                                         |       | 213,043                          |       | 197,019                         |       |
|                                                                                                                      |       | 25,778,467                       |       | 37,357,940                      |       |
|                                                                                                                      |       |                             |       |                            |       |
| Capital lease obligations, net of current portion                                                                         |       | 669,916                          |       | 916,444                         |       |
| Note payable to related party, net of current  portion                                                                    |       | 4,624,727                        |       | —                          |       |
| Other liabilities                                                                                                         |       | 388,294                          |       | 99,966                          |       |
| Deferred tax liability                                                                                                    |       | 966,744                          |       | 1,051,745                       |       |
|                                                                                                                      |       | 32,428,148                       |       | 39,426,095                      |       |
| Stockholders’ equity:                                                                                                |       |                             |       |                            |       |
| Common stock, $0.001 par value, 300,000,000 shares  authorized; 114,956,671 and 114,914,934 shares issued and outstanding |       | 114,957                          |       | 114,916                         |       |
| Additional paid-in-capital                                                                                                |       | 417,236,476                      |       | 411,323,072                     |       |
| Accumulated other comprehensive income                                                                                    |       | (1,919,334                       | )          | 406,358                         |       |
| Accumulated deficit                                                                                                       |       | (349,725,900                     | )          | (327,556,413                    | )          |
|                                                                                                                      |       | 65,706,199                       |       | 84,287,933                      |       |
|                                                                                                                      |       | $                                | 98,134,347 |                            | $          | 123,714,028 |   |

 

See accompanying notes to consolidated financial statements.

 

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

### **Consolidated Statements ofOperations**

**(Unaudited)**

** **
| ** **                                 | ** ** | **Three Months Ended  September  30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                                   | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                  |       |                                                       |       |                                                |       |   |   |   |   |
| Gaming machine participation               |       | $                                                          | 1,109,144  |                                                | $          | 131,356 |   | $ | 2,396,673 |   | $ | 131,356 |   |
| Table game products                        |       | 417,304                                                    |       | 1,014,001                                           |       | 1,667,806 |   | 4,652,980 |   |
| Non-gaming products                        |       | 2,084,950                                                  |       | 1,669,445                                           |       | 6,146,407 |   | 4,830,170 |   |
|                                       |       | 3,611,398                                                  |       | 2,814,802                                           |       | 10,210,886 |   | 9,614,506 |   |
|                                       |       |                                                       |       |                                                |       |   |   |   |   |
| Operating costs and expenses:              |       |                                                       |       |                                                |       |   |   |   |   |
| Cost of gaming machine participation       |       | 2,701,113                                                  |       | 156,645                                             |       | 6,299,055 |   | 156,645 |   |
| Cost of table game products                |       | 507,512                                                    |       | 891,840                                             |       | 1,431,859 |   | 3,835,156 |   |
| Cost of non-gaming products                |       | 1,791,863                                                  |       | 1,782,129                                           |       | 5,262,733 |   | 4,926,980 |   |
| Selling, general and administrative        |       | 5,338,206                                                  |       | 6,381,386                                           |       | 17,218,671 |   | 13,443,365 |   |
| Impairment of assets                       |       | —                                                     |       | 29,609,085                                          |       | 1,368,829 |   | 29,609,085 |   |
| Participation agreement acquisition fees   |       | —                                                     |       | 175,070,000                                         |       | — |   | 175,070,000 |   |
| Research and development                   |       | 178,243                                                    |       | 328,981                                             |       | 777,552 |   | 739,612 |   |
| Depreciation and amortization              |       | 310,886                                                    |       | 71,632                                              |       | 779,922 |   | 726,030 |   |
| Restructuring charges                      |       | —                                                     |       | 1,622,532                                           |       | 168,276 |   | 1,622,532 |   |
|                                       |       | 10,827,823                                                 |       | 215,914,230                                         |       | 33,306,897 |   | 230,129,405 |   |
| Loss from operations                       |       | (7,216,425                                                 | )          | (213,099,428                                        | )          | (23,096,011 | ) | (220,514,899 | ) |
|                                       |       |                                                       |       |                                                |       |   |   |   |   |
| Other income (expense):                    |       |                                                       |       |                                                |       |   |   |   |   |
| Interest expense and finance fees          |       | (290,355                                                   | )          | (512,290                                            | )          | (564,876 | ) | (1,820,034 | ) |
| Interest income                            |       | 107,420                                                    |       | (404                                                | )          | 629,606 |   | 102,755 |   |
| Foreign currency gains/(losses)            |       | (3,100                                                     | )          | (9,340                                              | )          | 638,427 |   | (9,340 | ) |
| Other                                      |       | 85,556                                                     |       | (379,175                                            | )          | 245,851 |   | 15,744 |   |
|                                       |       | (100,479                                                   | )          | (901,209                                            | )          | 949,008 |   | (1,710,875 | ) |
|                                       |       |                                                       |       |                                                |       |   |   |   |   |
| Income tax benefit/(expense)               |       | —                                                     |       | 347,573                                             |       | (22,498 | ) | 347,573 |   |
|                                       |       |                                                       |       |                                                |       |   |   |   |   |
| Net loss                                   |       | $                                                          | (7,316,904 | )                                                   | $          | (213,653,064 | ) | $ | (22,169,501 | ) | $ | (221,878,201 | ) |
|                                       |       |                                                       |       |                                                |       |   |   |   |   |
| Basic and diluted loss per share           |       | $                                                          | (0.06      | )                                                   | $          | (4.67 | ) | $ | (0.19 | ) | $ | (5.88 | ) |
|                                       |       |                                                       |       |                                                |       |   |   |   |   |
| Weighted average common shares outstanding |       | 114,946,671                                                |       | 45,780,514                                          |       | 114,945,602 |   | 37,765,328 |   |

 

See accompanying notes to consolidated financial statements.

 

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

**Consolidated Statementsof Cash Flows**

**(Unaudited)**

** **
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** **  |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2008**                                                | ** **  | **2007** | ** ** |
| **Cash flows from operating activities:**                                    |       |                                                    |        |   |   |
| Net loss                                                                     |       | $                                                       | (22,169,501 | ) | $ | (221,878,201 | ) |
| 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                                        |       | 1,368,829                                               |        | 25,122,348 |   |
| Participation agreement acquisition costs                                    |       | —                                                  |        | 175,070,000 |   |
| Income tax expense                                                           |       | 22,498                                                  |        | (347,573 | ) |
| Foreign currency gains/losses                                                |       | (638,427                                                | )           | 9,340 |   |
| Depreciation of gaming machines and systems and  property and equipment      |       | 6,230,422                                               |        | 565,610 |   |
| Amortization of intangible assets                                            |       | 500,382                                                 |        | 662,867 |   |
| Amortization of deferred interest                                            |       | 20,000                                                  |        | 872,077 |   |
| Amortization of prepaid sales commission                                     |       | 29,971                                                  |        | — |   |
| Stock-based compensation and warrant expense                                 |       | 5,842,642                                               |        | 6,249,507 |   |
| Loss on disposition of assets                                                |       | 22,777                                                  |        | 42,412 |   |
| Write-down of inventory                                                      |       | 28,412                                                  |        | 582,799 |   |
| Changes in operating assets and liabilities:                                 |       |                                                    |        |   |   |
| Accounts receivable and other receivables                                    |       | (1,847,438                                              | )           | (708,241 | ) |
| Inventories                                                                  |       | 304,515                                                 |        | 459,549 |   |
| Prepaid expenses and other current assets                                    |       | 209,352                                                 |        | (681,735 | ) |
| Deposits and other assets                                                    |       | (877,306                                                | )           | 121,221 |   |
| Accounts payable                                                             |       | (1,196,402                                              | )           | 1,630,951 |   |
| Amount due from related parties                                              |       | (1,076,993                                              | )           | — |   |
| Accrued expenses and other current liabilities                               |       | (999,416                                                | )           | 475,829 |   |
| Net cash used in operating activities                                        |       | (14,225,683                                             | )           | (7,264,503 | ) |
| **Cash flows from investing activities:**                                    |       |                                                    |        |   |   |
| Acquisition of property and equipment                                        |       | (1,278,898                                              | )           | (931,413 | ) |
| Purchase of gaming machines, systems and deposits  paid                      |       | (31,698,134                                             | )           | — |   |
| Sale of property and equipment                                               |       | 41,054                                                  |        | — |   |
| Net cash used in investing activities                                        |       | (32,935,978                                             | )           | (931,413 | ) |
| **Cash flows from financing activities:**                                    |       |                                                    |        |   |   |
| Proceeds from sale of stock, warrants and options                            |       | 70,803                                                  |        | 9,184,529 |   |
| Repayment of notes payable and leases                                        |       | (3,351,733                                              | )           | (2,901,816 | ) |
| Proceeds from stock subscriptions receivable                                 |       | —                                                  |        | 2,650,000 |   |
| Net cash (used in) provided by financing activities                          |       | $                                                       | (3,280,930  | ) | $ | 8,932,713 |   |
| Increase (decrease) in cash (used in) and cash  equivalents                  |       | (50,442,592                                             | )           | 736,797 |   |
| Cash and cash equivalents at beginning of period                             |       | 68,286,820                                              |        | 333,888 |   |
| Cash and cash equivalents at end of period                                   |       | $                                                       | 17,844,228  |   | $ | 1,070,685 |   |
| **Non-cash investing and financing activities:**                             |       |                                                    |        |   |   |
| Gaming machines purchased as related party payables                          |       | $                                                       | —      |   | $ | 15,144,794 |   |
| Loans converted into common stock                                            |       | $                                                       | —      |   | $ | 5,782,168 |   |
| Non-cash issuance of warrants                                                |       | $                                                       | —      |   | $ | 176,880,000 |   |
| Increase in prepaid sales incentives                                         |       | $                                                       | —      |   | $ | 20,511,000 |   |
| Conversion of related party payables to trade credit  facility agreement     |       | $                                                       | 15,000,000  |   | $ | — |   |
| **Supplemental disclosure of cash flows  information**                       |       |                                                    |        |   |   |
| Interest paid                                                                |       | $                                                       | 461,181     |   | $ | — |   |
| Income tax paid                                                              |       | —                                                  |        | — |   |

 

See accompanying notes to consolidated financial statements.

 

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**NOTE 1.****               ****DESCRIPTION OF BUSINESS ANDSIGNIFICANT ACCOUNTING POLICIES**

 

***Basis of Presentation***

 

The principal businessactivities of Elixir Gaming Technologies, Inc. and its subsidiaries (the“Company”) are the owning and leasing of electronic gaming machines placed inresorts, hotels and other venues throughout Asia and the developing anddistributing of products related to the gaming and automotive industries. Theseproducts include electronic card shuffling devices, RFID casino chips andcomponent parts for the automotive industry.

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and with the instructions to Form 10-Q and Rule 8.03 ofRegulation S-X promulgated by the Securities and Exchange Commission (“SEC”)and reflect all adjustments, consisting of normal recurring adjustments andother adjustments, which management believes are necessary to fairly presentthe financial position, results of operations and cash flows of the Company,for the respective periods presented. The results of operations for an interimperiod are not necessarily indicative of the results that may be expected forany other interim period or the year as a whole. The accompanying unauditedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2007, filed withthe SEC on March 31, 2008.

 

***Use of Estimates***

 

Theseconsolidated financial statements are prepared in conformity with accountingprinciples generally accepted in the United States (U.S.).  Accordingly,the Company is required to make estimates, judgments and assumptions that itbelieves are reasonable based on its historical experience, contract terms,observance of known trends in the Company and the industry as a whole, andinformation available from other outside sources.  These estimates affectthe reported amounts of assets, liabilities, revenues and expenses and relateddisclosures of contingent assets and liabilities.  On a regular basis, theCompany evaluates its estimates, including those related to revenuerecognition, product returns, long-lived assets, inventory obsolescence, stock-basedcompensation, income taxes, bad debts, warranty obligations, long-termcontracts, contingencies and litigation.  Actual results may differ frominitial estimates.

 

***Reclassifications***

 

Certainreclassifications have been made to the September 30, 2007 statement ofoperations for the three-month and nine-month periods ended September 30,2007 to conform to the current period presentation.

 

***Cash and Cash Equivalents***

 

Allhighly liquid debt instruments with an original maturity of three months orless are considered cash equivalents.  The Company places its cash andtemporary investments with financial institutions.  At September 30,2008, the Company had deposits with financial institutions in excess of FDICinsured limits by $17.7 million.

 

TheCompany has restricted cash in the amount of $526,700, in the form of a$100,000 certificate of deposit as security on a lease and $426,700 as treasurydeposits for gaming venues in Cambodia. The

 

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restrictionfor the security deposit will be removed in February 2012 upon terminationof the lease.  Restricted cash has beenrecorded in deposits and other assets in the accompanying consolidated balancesheets.

 

***Inventories***

 

Inventoriesare stated at the lower of cost, determined using the first-in, first-outmethod, or market.  Cost elements included in work-in-process and finishedgoods include raw materials, direct labor, and manufacturing overhead.

 

***Consignment Inventory***

 

Asof September 30, 2008 and December 31, 2007, the Company has $710,454and $65,908, respectively, of units, service supplies and parts on consignmentwith distributors, which is recorded as inventory.  Revenue is notrecognized until ownership of the product and title passes to the distributorwhich occurs upon the distributor’s use of the products evidenced by a purchaseorder or sales to third-party customers.

 

***Gaming Machines and Systems***

 

Gamingmachines and systems are stated at cost.  The Company depreciates gamingmachines and systems over a five-year useful life to a minimal salvage valueonce placed in service. Depreciation of gaming machines and systems of$2,255,043 and $156,645 and $5,643,689 and $156,645 is included in cost ofrevenues in the consolidated statement of operations for the three-month andnine-month periods ended September 30, 2008 and 2007, respectively. TheCompany measures and tests gaming machines for impairment in accordance of SFASNo. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*(“SFAS No. 144”), at least annually on December 31or more often if there are indicators of impairment.

 

***Property and Equipment***

 

Propertyand equipment is stated at cost. Depreciation is computed using thestraight-line method over the useful lives of the assets currently estimated tobe 3-5 years, which, in the case of leasehold improvements, is limited to thelife of the lease and renewal period so long as renewal is reasonably assured.Depreciation of property and equipment of $100,135 and $297,492 and $307,192and $345,802 are included in cost of sales and research and development costsin the consolidated statements of operations for the three-month and nine-monthperiods ended September 30, 2008 and 2007, respectively.

 

***Goodwill and Intangible Assets***

 

Intangibleassets consist of patents, customer relationships, trademarks and goodwill.They are recorded at cost and are amortized, except goodwill, on astraight-line basis over the period of time the asset is expected to contributedirectly or indirectly to future cash flows, which range from 10 to13 years. The straight-line amortization method is utilized because theCompany believes there is not a more reliably determinable method of reflectingthe pattern in which the economic benefits of the intangible assets areconsumed or otherwise used up.

 

TheCompany measures and tests goodwill and intangible assets for impairment inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,*Goodwill and Other Intangible Assets*,(“SFAS No. 142”), and SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (“SFAS No. 144”),at least annually on December 31 or more often if there are indicators ofimpairment.

 

***Accounts Receivable and Allowance for Doubtful Accounts***

 

Accountsreceivable are stated at face value less any allowance for doubtfulaccounts.  Allowances for doubtful accounts are maintained at levelsdetermined by the Company’s management to adequately 

 

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providefor uncollectible amounts.  In determining the estimated uncollectedamounts, the Company evaluates a combination of factors, including, but notlimited to, activity in the related market, financial condition of customers,specific customer collection experience and history of write-offs andcollections.

 

***Prepaids and Other Current Assets***

 

Prepaidsand other current assets consist primarily of prepaid value-added taxes inforeign countries and deposits.

 

***Litigation and Other Contingencies***

 

TheCompany is involved in various legal matters, litigation and claims of varioustypes in the ordinary course of its business operations. The Company hasregular litigation reviews, including updates from corporate and outsidecounsel, to assess the need for accounting recognition or disclosure of thesecontingencies. The status of significant claims is summarized in Note 15.

 

SFASNo. 5, *Accounting for Contingencies,* requiresthat liabilities for contingencies be recorded when it is probable that aliability has been incurred and that the amount can be reasonably estimated.Significant management judgment is required related to contingent liabilitiesand the outcome of litigation because both are difficult to predict. Forcontingencies where unfavorable outcomes are reasonably possible and which aresignificant, the Company discloses the nature of the contingency and, wherefeasible, an estimate of the possible loss.

 

***Revenue Recognition***

 

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

 

·                  persuasiveevidence of an arrangement exists;

·                  theprice to the customer is fixed and determinable;

·                  deliveryhas occurred and any acceptance terms have been fulfilled;

·                  nosignificant contractual obligations remain; and

·                  collectionis reasonably assured.

 

*Gamingand Non-Gaming Products Revenues*

 

TheCompany recognizes revenue from the sale of its products to end users uponshipment against customer contracts or purchase orders. Revenue from shufflerrentals is recorded at the first of each month in accordance with rentalcontract terms.  The Company completed its transition to outsourcing allfuture sales to third-party distributors during the fourth quarter of 2007 andwill thereafter no longer record rental revenue on its table game products.

 

TheCompany recognizes revenue from its sales to independent distributors uponshipment to the distributor against distributor contracts or purchase ordersfor products.  The Company recognizes revenue on consignment inventorywhen ownership of the product and title passes to the distributor which occursupon the distributor’s use of the product in its service organization or saleto an end user.

 

*ParticipationRevenues*

 

TheCompany earns recurring revenue by providing customers with electronic gamingmachines and casino management systems. Revenues are recognized under the contractual terms of the participationagreements between the Company and the venue owners or operators and are basedon the Company’s 

 

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shareof net winnings, defined as all amounts played in, less all winnings paid out.The Company’s share of joint costs, in accordance with applicable contracts, ifany, is recorded in cost of revenues.

 

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

 

Freight-outand warehousing costs are included in cost of product revenues in theaccompanying consolidated statements of operations.

 

***Stock-Based Compensation***

 

TheCompany adopted SFAS No. 123R, *Share-Based Payment*(“SFASNo. 123R”), to account for all its stock-based compensation beginning January 1,2006, and elected the modified prospective method of transition. Under the fairvalue recognition provisions of SFAS No. 123R, the Company estimatesstock-based compensation on the measurement date, generally the award grant date,and recognizes expense over the requisite service period. Option valuationmodels require the input of highly subjective assumptions, and changes in theassumptions used can materially affect the fair value estimate. Judgment isrequired in estimating stock price volatility, forfeiture rates, expecteddividends, and expected terms that options remain outstanding. Stock-basedcompensation expense totaled $1,475,063 and $4,403,048 and $5,842,642 and$6,249,507 for the three-month and nine-month periods ended September 30,2008 and 2007, respectively, and is included in selling, general andadministrative expense in the accompanying consolidated statements ofoperations.  See Note 11 for additional information regarding theseassumptions.

 

***Research and Development Expenses***

 

Researchand development costs are charged to expense as incurred.  Employeerelated costs associated with product development are included in research anddevelopment costs.

 

***Income Taxes***

 

TheCompany is subject to income taxes in the U.S. (including federal and state)and several foreign jurisdictions in which it operates. Deferred income taxbalances reflect the effects of temporary differences between the carryingamounts of assets and liabilities and their tax basis and are stated at enactedtax rates expected to be in effect when taxes are actually paid or recovered.SFAS No. 109, *Accounting for IncomeTaxes*(“SFAS No. 109”), requires that deferred tax assets beevaluated for future realization and reduced by a valuation allowance to theextent the Company believes a portion will not be realized. The Companyconsiders many factors when assessing the likelihood of future realization ofits deferred tax assets, including its recent cumulative earnings experienceand expectations of future taxable income by taxing jurisdiction, thecarry-forward periods available to the Company for tax reporting purposes, andother relevant factors.

 

Significantjudgment is required in evaluating the Company’s tax positions and determiningits provision for income taxes. During the ordinary course of business, thereare many transactions and calculations for which the ultimate tax determinationis uncertain. Effective January 1, 2007, the Company adopted theprovisions of FIN No. 48, *Accounting**for Uncertainty in Income Taxes and Interpretation of FASB Statement No. 109*,which contains a two-step approach to recognizing and measuring uncertain taxpositions accounted for in accordance with SFAS No. 109. The first step isto evaluate the tax position for recognition by determining if the weight ofavailable evidence indicates it is more likely than not that the position willbe sustained on audit, including resolution of related appeals or litigationprocesses, if any. The second step is to measure the tax benefit as the largestamount which is more than 50% likely of being realized upon ultimatesettlement. The Company considers many factors when evaluating and 

 

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estimatingits tax positions and tax benefits, which may require periodic****adjustments and which may not accurately anticipate actualoutcomes.

 

Weare subject to income tax examination by federal and state tax authorities from2003 through the present period in the jurisdictions in which we operate. Thereare currently no income tax returns under examination by the Internal RevenueService or any other major tax authorities.

 

***Loss Per Share***

 

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

 

***Foreign Currency Translations and Transactions***

 

Thefunctional currency of the Company’s international subsidiaries is the localcurrency, except for Cambodia where the functional currency is the U.S. dollar. For these subsidiaries, the Company translates the assets and liabilities atexchange rates in effect at the balance sheet date and income and expenseaccounts at average exchange rates during the period.  Resulting currencytranslation adjustments are recorded directly to accumulated othercomprehensive income within stockholders’ equity.  Gains and lossesresulting from transactions in non-functional currencies are recorded inoperations.

 

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**NOTE 2.****               ****SEGMENTS**

 

TheCompany currently operates in three operating segments: (i) gaming machineparticipation operations (ii) table game product operations and (iii) non-gamingproducts operations, consisting primarily of the Dolphin Advanced TechnologiesPty Ltd (“Dolphin”) automotive sector. The accounting policies of thesesegments are consistent with the Company’s policies for the accompanyingconsolidated financial statements.

 

Thetable below presents information as to the Company’s revenues and operatingloss by segment:

 
| ** **                                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Gaming machine participation operations                                                |       | $                                                    | 1,109,144  |                                                | $          | 131,356 |   | $ | 2,396,673 |   | $ | 131,356 |   |
| Table game product operations                                                          |       | 417,304                                              |       | 1,014,001                                           |       | 1,667,806 |   | 4,652,980 |   |
| Non-gaming product operations                                                          |       | 2,084,950                                            |       | 1,669,445                                           |       | 6,146,407 |   | 4,830,170 |   |
| Total revenues                                                                         |       | $                                                    | 3,611,398  |                                                | $          | 2,814,802 |   | $ | 10,210,886 |   | $ | 9,614,506 |   |
|                                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Operating loss:                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Gaming machine participation operations  gross margin                                  |       | $                                                    | (1,591,968 | )                                                   | $          | (25,289 | ) | $ | (3,902,382 | ) | $ | (25,289 | ) |
| Table game product operations gross margin                                             |       | (90,209                                              | )          | 122,161                                             |       | 235,947 |   | 817,824 |   |
| Non-gaming product operations gross margin                                             |       | 293,087                                              |       | (112,684                                            | )          | 883,675 |   | (96,810 | ) |
| Corporate and other operating costs and  expenses                                      |       | (5,827,335                                           | )          | (213,083,616                                        | )          | (20,313,251 | ) | (221,210,624 | ) |
| Total operating loss                                                                   |       | $                                                    | (7,216,425 | )                                                   | $          | (213,099,428 | ) | $ | (23,096,011 | ) | $ | (220,514,899 | ) |
|                                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Total depreciation and amortization by  segment: (including non-cost of sales related) |       |                                                 |       |                                                |       |   |   |   |   |
| Gaming machine participation                                                           |       | $                                                    | 2,255,045  |                                                | $          | 156,645 |   | $ | 5,643,689 |   | $ | 156,645 |   |
| Table game product                                                                     |       | 204,067                                              |       | 252,268                                             |       | 632,815 |   | 753,745 |   |
| Non-gaming product                                                                     |       | 74,637                                               |       | 54,176                                              |       | 206,013 |   | 181,350 |   |
| Corporate and others                                                                   |       | 132,317                                              |       | 62,680                                              |       | 248,287 |   | 136,737 |   |
| Total depreciation and amortization(1)                                                 |       | $                                                    | 2,666,064  |                                                | $          | 525,769 |   | $ | 6,730,804 |   | $ | 1,228,477 |   |

 

----

(1)   Includes $2,355,178 and $454,137and $5,950,882 and $502,447 for the three-month and nine-month periods ended September 30,2008 and 2007, respectively, that was reported in cost of sales and researchand development costs on the consolidated statements of operations (see Note1).

 

Geographicsegment revenues for the three-month and nine-month periods ended September 30,2008 and 2007 are as follows:

 
| ** **    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **    | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Asia          |       | $                                                    | 1,341,838  |                                                | $          | 230,166 |   | $ | 3,065,071 |   | $ | 2,865,804 |   |
| United States |       | 120,945                                              |       | 827,094                                             |       | 761,285 |   | 1,591,002 |   |
| Australia     |       | 2,084,950                                            |       | 1,757,542                                           |       | 6,096,634 |   | 4,981,477 |   |
| Europe        |       | 63,665                                               |       | —                                              |       | 273,825 |   | 143,012 |   |
| Other         |       | —                                               |       | —                                              |       | 14,071 |   | 33,211 |   |
|          |       | $                                                    | 3,611,398  |                                                | $          | 2,814,802 |   | $ | 10,210,886 |   | $ | 9,614,506 |   |

 

Forthe three-month and nine-month periods ended September 30, 2008, in thetable game products segment, one customer represented 46% and 48%,respectively, of total table game product sales. For the 

 

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three-monthand nine-month periods ended September 30, 2008, within the non-gamingproducts segment, one customer represented 39% and 40%, respectively, of totalnon-gaming product sales.

 

**NOTE 3.****               ****INVENTORIES**

 

Inventoriesconsist of the following:

 
| ** **       | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **       | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Raw materials    |       | $                                | 773,547    |                            | $          | 577,980 |   |
| Work-in-progress |       | 132,894                          |       | 230,449                         |       |
| Finished goods   |       | 437,098                          |       | 878,241                         |       |
|             |       | $                                | 1,343,539  |                            | $          | 1,686,670 |   |

 

Includedin the inventory balance is inventory on consignment totaling $710,454 and$65,908 as of September 30, 2008 and December 31, 2007, respectively.

 

**NOTE 4.****               ****PREPAID EXPENSES AND OTHERCURRENT ASSETS**

 

Prepaidexpenses and other current assets consist of the following:

 
| ** **                               | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Prepaid taxes                            |       | $                                | 460,129    |                            | $          | 701,527 |   |
| Prepaid service and licensing agreements |       | 90,282                           |       | 71,879                          |       |
| Prepayment of suppliers                  |       | 47,345                           |       | 26,860                          |       |
| Other                                    |       | 74,313                           |       | 175,283                         |       |
|                                     |       | $                                | 672,069    |                            | $          | 975,549 |   |

 

**NOTE 5.****               ****RECEIVABLES**

 

Accountsand other receivable consist of the following:

 
| ** **                            | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Trade accounts                        |       | $                                | 3,492,148  |                            | $          | 1,926,996 |   |
| Other                                 |       | 699,798                          |       | 298,940                         |       |
|                                  |       | 4,191,946                        |       | 2,225,936                       |       |
| Less: allowance for doubtful accounts |       | (465,381                         | )          | (176,666                        | )          |
| Net                                   |       | $                                | 3,726,565  |                            | $          | 2,049,270 |   |
| Non-current portion                   |       | $                                | —     |                            | $          | 60,421 |   |

 

Within the other receivables isa related party receivable for expenses of $376,816 paid on behalf of ElixirGroup Philippines.

 

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**NOTE 6.****       ****PROPERTY AND EQUIPMENT**

** **

Property and equipment consists of the following:

 
| ** **                                     | ** ** | **Useful Life  (years)** | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | ** **                    | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Equipment rented by customers                  |       | 3 – 5                    |       | $                                | 14,606     |                            | $          | 85,011 |   |
| Equipment and vehicles, furniture and fixtures |       | 3 – 5                    |       | 6,854,391                        |       | 6,329,146                       |       |
| Leasehold improvements                         |       | 5                             |       | 854,881                          |       | 560,308                         |       |
|                                           |       |                          |       | 7,723,878                        |       | 6,974,465                       |       |
| Less accumulated depreciation                  |       |                          |       | (3,331,318                       | )          | (3,039,933                      | )          |
|                                           |       |                          |       | $                                | 4,392,560  |                            | $          | 3,934,532 |   |

 

Of the Company’s property and equipment, $1,392,000 represents assetsthat are held under capital leases (see Note 10).

 

**NOTE 7.****       ****GOODWILL AND INTANGIBLE ASSETS**

** **

In accordance with SFAS No. 142 and SFAS No. 144, the Companyreviews goodwill and intangibles for impairment on an annual basis (December 31)or more frequently if events or circumstances indicate that the carrying valuemay not be recoverable.  No circumstancesindicate any further impairment provisions are necessary during the nine-monthperiod ended September 30, 2008.

 

All of the Company’s definite-life intangible assets are subject toamortization. Definite-life intangible assets consist of the following:

 
| ** **                           | ** ** | **Useful Life  (years)** | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **                    | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Patents                              |       | 10                            |       | 4,986,314                        |       | 4,986,314                       |       |
| Less:  accumulated amortization |       |                          |       | (1,536,876                       | )          | (1,147,900                      | )          |
|                                 |       |                          |       |                             |       |                            |       |
| Customer relationships               |       | 10-13                         |       | 1,684,103                        |       | 1,684,103                       |       |
| Less:  accumulated amortization |       |                          |       | (560,897                         | )          | (478,712                        | )          |
|                                 |       |                          |       |                             |       |                            |       |
| Trademarks                           |       | 10-13                         |       | 505,000                          |       | 505,000                         |       |
| Less:  accumulated amortization |       |                          |       | (91,705                          | )          | (62,484                         | )          |
|                                 |       |                          |       | $                                | 4,985,939  |                            | $          | 5,486,321 |   |
|                                      |            |                               |            |                                  |            |                                 |            |  |  |

 

**NOTE 8.****       ****PREPAID COMMISSIONS, DEPOSITS ANDOTHER ASSETS**

** **

*Prepaid Commissions*

 

On January 25, 2007, the Company issued warrants to purchase up to16,000,000 shares of its common stock (the “2006 Warrants”) to Elixir Group,which at the time was its Asian distributor of table game products, as anincentive to meet certain sales targets.  These warrants were accountedfor in accordance with the Emerging Issues Task Force (“EITF”) No. 96-18, *Accounting for Equity Instruments That are Issued to Other thanEmployees for Acquiring, or in Conjunction with Selling Goods or Services*. The 2006 Warrants were classified in the Company’s balance sheet as prepaidcommissions subject to amortization to commission expense at a rate of 8% ofthe gross revenue generated by the distributor.

 

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For the first half of 2008, table game revenues have not met theCompany’s expectations.  In addition,future order placements indicate the remaining value of the prepaid commissionson June 30, 2008 of $1,368,829 is not recoverable.

 

The Company estimated fair value using present value techniques basedon estimates of cash flows.  In accordance with SFAS No. 144, animpairment loss shall be recognized if the carrying amount of an intangibleasset is not recoverable and its carrying amount exceeds its fair value. Afteran impairment loss is recognized, the adjusted carrying amount of theintangible asset shall be its new accounting basis.  During the secondquarter of 2008, the Company recorded an impairment to the asset of $1.4million and included the amount in loss from operations in the consolidatedstatement of operations.  In September2007, the Company also recorded an impairment of $25.1 million under the sameprinciple.

 

*Deposits and Other Assets*

** **
| ** **                                                  | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Deposits with a related party on gaming machines  (Note 12) |       | $                                | 2,774,636  |                            | $          | — |   |
| Office equipment rental deposits                            |       | 105,861                          |       | 67,505                          |       |
| Sales tax in dispute                                        |       | 433,513                          |       | 418,449                         |       |
| Restricted cash                                             |       | 534,263                          |       | 104,363                         |       |
| Prepaid non-current taxes                                   |       | 315,183                          |       | —                          |       |
| Other                                                       |       | 39,725                           |       | 27,577                          |       |
| Total                                                       |       | $                                | 4,203,181  |                            | $          | 617,894 |   |

** **

**NOTE 9.****       ****ACCRUED EXPENSES**

** **

Accrued expenses consist of the following:

 
| ** **                        | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Payroll and related costs         |       | $                                | 693,032    |                            | $          | 1,832,175 |   |
| Legal, accounting and tax         |       | 218,367                          |       | 419,516                         |       |
| Litigation                        |       | 1,293,056                        |       | 1,318,994                       |       |
| Sales tax                         |       | 88,548                           |       | —                          |       |
| Deferred rent                     |       | 46,576                           |       | —                          |       |
| Overpayment from customer         |       | 163,206                          |       | 148,812                         |       |
| Restructuring and severance costs |       | —                           |       | 1,290,837                       |       |
| Other                             |       | 383,039                          |       | 238,124                         |       |
| Total                             |       | $                                | 2,885,824  |                            | $          | 5,248,458 |   |

 

Included in accrued liabilities at September 30, 2008 is $1.3million for potential charges in relation to a lawsuit with the former owner ofDolphin (see Note 15).

 

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** **

**NOTE 10.****     ****DEBT AND CAPITAL LEASEOBLIGATIONS**

** **

Debt and capital lease obligations consist of the following:

 
| ** **                                                                                                       | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                       | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| Note payable to a related party at interest of 8%  (Notes 12 and 17)                                             |       | $                                | 12,069,136 |                            | $          | — |   |
| Short-term line of credit at an Australian bank at  interest between 13.83% and 13.98%                           |       | 16,239                           |       | 31,893                          |       |
| Capital lease obligation to an Australian bank at  interest between 7.22% and 13.54% collateralized by equipment |       | 833,733                          |       | 1,051,713                       |       |
| Capital lease obligations for furniture and  equipment at 10.0% interest                                         |       | 91,460                           |       | 345,394                         |       |
|                                                                                                             |       | 13,010,568                       |       | 1,429,000                       |       |
| Less current portion                                                                                             |       | (7,715,925                       | )          | (512,556                        | )          |
| Long-term portion                                                                                                |       | $                                | 5,294,643  |                            | $          | 916,444 |   |

 

**NOTE 11.****     ****STOCK-BASED COMPENSATION**

** **

**Options**

** **

At the annual shareholders meeting on September 8, 2008, a newstock option plan, “2008 Stock Incentive Plan” (the “Plan”) was voted on andwill be effective January 1, 2009. The two current plans, the Amended and Restated 1999 Stock Option Planand the Amended and Restated 1999 Directors’ Stock Option Plan (the “StockOption Plans”), expire on December 31, 2008 and December 31, 2009,respectively, through which 3.9 million shares and 25,000 shares are availableto be granted, respectively. In May 2007, stock options for the purchaseof 5,000,000 common stock were granted by the board of directors outside of theStock Option Plans pursuant to the initial closing of the transactions underthe Purchase and Product Participation Agreement (“Product ParticipationAgreement”) with Elixir Group Limited (“Elixir Group”), to certain employeesand non-employees of Elixir Group and their parent Melco InternationalDevelopment Limited.  Each option had an exercise price of $2.90 per shareand will vest over a three-year period and have a five-year term.  Duringthe nine-month period ended September 30, 2008, stock options for the purchaseof 7,183,539 shares of common stock were granted with a weighted averageexercise price of $4.47 and will vest over a three-year period.

 

As of September 30, 2008, there were options for the purchase of13,878,981 shares of common stock issued and outstanding under the two plansand stock options for purchase of common stock granted under the ProductParticipation Agreement.

 

The Plan allows for awards to eligible recipients, incentive awards,consisting of:

 

·      Options to purchase shares of common stock,that qualify as incentive stock options within the meaning of the InternalRevenue Code;

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

·      Restricted stock awards; and

·      Performance stock awards, which are subjectto future achievement of performance criteria or be free of any performance orvesting.

 

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

 

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| ** **                                | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding as of December 31, 2007  |       | 8,218,369                  |       | $                                          | 2.56       |                                                                     |       |                            | $          | 14,311,016 |   |
| Granted                                   |       | 7,183,539                  |       | $                                          | 4.47       |                                                                     |       |                            |       |   |
| Exercised                                 |       | (41,737                    | )          | $                                          | 1.70       |                                                                     |       |                            |       |   |
| Forfeited or expired                      |       | (1,481,190                 | )          | $                                          | 5.10       |                                                                     |       |                            |       |   |
| Outstanding as of September 30, 2008 |       | 13,878,981                 |       | $                                          | 3.28       |                                                                     | 4.78       |                            | —     |   |
| Exercisable as of September 30, 2008 |       | 5,225,194                  |       | $                                          | 2.50       |                                                                     | 3.21       |                            | —     |   |
|                                           |            |                            |            |                                            |            |                                                                          |            |                                 |            |  |  |

 

Outstanding and exercisable stock options have no aggregate intrinsicvalue as of September 30, 2008 due to the fair market value of the Company’sstock as of that date.

 

**Warrants**

 

A summary of the status of the Company’s warrants outstanding at September 30,2008 and changes during the nine-month period then ended is presented in thetable below:

 
| ** **                                | ** ** | **Warrants** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------|------------|--------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------|------------|
| Warrants, as of December 31, 2007    |       | 79,761,375   |       | $                                      | 2.51       |                                                                     | 4.76       |                            | $          | 142,505,069 |   |
| Cancelled                                 |       | (586,375     | )          |                                   |       |                                                                     |       |                            |       |
| Warrants, as of September 30, 2008   |       | 79,175,000   |       | $                                      | 2.52       |                                                                     | 4.77       |                            | —     |   |
| Exercisable as of September 30, 2008 |       | 13,175,000   |       | $                                      | 1.86       |                                                                     | 3.60       |                            | —     |   |
|                                           |            |              |            |                                        |            |                                                                          |            |                                 |            |  |  |

 

Outstanding and exercisable warrants have no aggregate intrinsic valueas of September 30, 2008 due to the fair market value of the Company’sstock as of that date.

 

**Recognition and Measurement**

** **

The fair market value of each stock-based award to employees andnon-employee directors is estimated on the measurement date, which generally isthe grant date, using the Black-Scholes-Merton option-pricing model. Optionvaluation models require the input of highly subjective assumptions, andchanges in assumptions used can materially affect the fair market valueestimates. The Company estimates the expected life of the award by taking intoconsideration the vesting period, contractual term, historical exercise data,expected volatility, blackout periods and other relevant factors. Volatility isestimated by evaluating the Company’s historical volatility data. The risk-freeinterest rate at the date of grant is based on U.S. Treasury constant maturityrates for a period approximating the expected life of the award. The Companyhistorically has not paid dividends, nor does it expect to pay dividends in theforeseeable future and, therefore, the expected dividend rate is zero.

 

The following table summarizes the range of assumptions utilized in theBlack-Scholes-Merton option-pricing model for the valuation of stock optionsand warrants granted during the nine-month period ended September 30, 2008and 2007:

 

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| ** **               | ** ** | **September 30,** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **2008**               | ** ** | **2007** | ** ** |
| ** **               | ** ** | **Low**                | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** |
| Range of values:         |       |                   |       |   |   |   |   |   |   |
| Expected volatility      |       | 60.00                  | %          | 63.59 | % | 60.00 | % | 60.00 | % |
| Expected dividends       |       | —                 |       | — |   | — |   | — |   |
| Expected term (in years) |       | 2.54                   |       | 10.00 |   | 3.01 |   | 5.00 |   |
| Risk free rate           |       | 2.72                   | %          | 4.01 | % | 3.86 | % | 4.24 | % |

 

The Company recognizes stock-based compensation expense for allservice-based awards with graded vesting schedules on a straight-line basisover the requisite service period for the entire award. Initial accruals ofcompensation expense are based on the estimated number of shares for whichrequisite service is expected to be rendered. Estimates are revised ifsubsequent information indicates that forfeitures will differ from previousestimates, and the cumulative effect on compensation cost of a change in theestimated forfeitures is recognized in the period of the change.

 

For awards with service conditions and graded vesting that were grantedprior to the adoption of SFAS No. 123R, the Company estimates therequisite service period and the number of shares expected to vest, andrecognizes compensation expense for each tranche on a straight-line basis overthe estimated requisite service period.

 

**NOTE 12.****     ****RELATED PARTY TRANSACTIONS**

** **

During the nine-month period ended September 30, 2008, the Companypurchased $28.1 million of electronic gaming machines, casino managementsystems and other peripherals from Elixir International Limited (“ElixirInternational”), a wholly-owned subsidiary of the Company’s largestshareholder, Elixir Group, at cost plus fifteen percent (15%).  At September 30,2008 and December 31, 2007, the Company had accounts payable of $13.5million and $29.6 million, respectively, due to Elixir International forpurchases of electronic gaming machines, casino management systems and otherperipherals and a note payable of $12.1 million and $0, respectively.  Theaccounts payable have cash payment terms of fifty percent (50%) due upon orderand the balance 45 days thereafter with no required interest payments.  Inaddition, at September 30, 2008, the Company had deposits on orders withElixir International totaling $2.8 million for gaming machines.  All purchases orders were placed prior to June 30,2008.  No additional purchases of gamingmachines were made in the third quarter and none are planned for the remainderof 2008.

 

On April 21, 2008, the Company entered into a Trade Credit FacilityAgreement (the “Facility Agreement”) with Elixir International.  Pursuant to the Facility Agreement, ElixirInternational provided trade credits to the Company for its purchase ofelectronic gaming machines from Elixir International in exchange for theCompany’s issuance of unsecured notes to Elixir International bearing interestat a fixed rate of eight percent (8.0%) per annum.  Title of any gaming machines offered inexchange for the notes passes to the Company upon issuance of the notes.

 

Upon entering into the Facility Agreement, the Company immediatelyissued the first note pursuant to the terms of the Facility Agreement in theprincipal amount of $15,000,000 (the “Initial Advance”).  The Initial Advance extinguished an existingcurrent trade payable of an equivalent amount to Elixir International inrespect to gaming machines previously acquired.

 

The Company is obligated to repay the principal, plus any accruedinterest thereon, of the Initial Advance in 24 equal monthly installments afterthe date of issue.  The Initial Advanceis subject to demand by Elixir International for immediate payment only ifthere is either an event of default or a change of control as defined in theFacility Agreement.  For the three-monthand nine-month periods ended September 30, 2008 and 2007, the Companyrecorded sales of table game products of $253,674 and $0 and $627,051 

 

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and $0, respectively, to Elixir International.  As of November 6, 2008, the FacilityAgreement has been amended to include new payment terms.  (See Note 17). Within the other receivables(Note 5) is a related party receivable for expenses of $376,816 paid on behalfof Elixir Group Philippines.

 

**NOTE 13.****     ****INCOME TAXES**

** **

The Company’s effective tax rate for the nine-month periods ended September 30,2008 and 2007 approximates 0.1% and 0.0%, respectively.  The Company will continue to review the taxissues and income generated in the future by the foreign subsidiaries toevaluate whether they should be reflected as a benefit or provision in theCompany’s consolidated financial statements.

 

**NOTE 14.****     ****RESTRUCTURING CHARGES**

** **

During the first quarter of 2008, the Company moved its corporateoffices and ceased use of a warehouse.  In accordance with SFAS No. 146, *Accountingfor Cost Associated with Exit or Disposal Activities*, the Companyincurred restructuring charges for facilities operating leases the Company vacatedduring the first quarter of 2008.  Theliability was calculated based upon the remaining lease rentals, reduced by acombination of actual sublease rentals and estimated sublease rentals andrecorded at fair value.  The liability isreduced as lease payments are made.  Theliability of $157,514 and $0 as of September 30, 2008 and December 31,2007, respectively, is recorded in accrued expenses for the short-term portionand other liabilities for the long-term portion in the accompanyingconsolidated balance sheets.  For thethree-month and nine-month periods ended September 30, 2008, total costsof $0 and $168,276, respectively, have been incurred and recorded asrestructuring costs in the accompanying consolidated statements of operations.

 

**NOTE 15.****     ****COMMITMENTS AND CONTINGENCIES**

** **

**Legal Matters**

** **

The Company is a party to certain claims, legal actions, andcomplaints, including a patent infringement action between the Company and oneof its main competitors and the sales tax dispute discussed below. The Companycannot estimate the probable loss, if any, or predict the likely outcome of anysuch matters, and accordingly, no accrual has been made for them.

 

*Shuffle Master Litigation*

* *

On October 5, 2004, Shuffle Master filed a patent infringementaction in the United States District Court, District of Nevada (Case No. CV-S-04-1373-JCM-LRL)claiming that the use, importation and offering for sale of our PokerOneshuffler infringed Shuffle Master’s United States Patent, No. 6,655,684.The Company responded by denying Shuffle Master’s claim of patent infringement.On April 27, 2007, the Company filed a motion for summary judgment and on February 1,2008, the District Court granted the Company’s motion for summary judgment onall patent infringement claims.  On February 15, 2008, the Companydelivered a demand to Shuffle Master for $3.0 million in damages for thewrongful injunction it obtained in 2004. The Company also filed a motion in District Court to recover itsattorneys’ fees in the litigation.  The Company intends to vigorouslypursue collection of the $3.0 million bond and its attorneys’ fees from ShuffleMaster, however, there can be no assurances the Company will be successful indoing so.  On February 29, 2008,Shuffle Master filed a notice of appeal in the case.  The appeal is currently pending before theU.S. Court of Appeals for the Federal Circuit. The Company believes that the ruling in its favor from the DistrictCourt will be upheld and it will then pursue its claim for damages andattorneys’ fees.

 

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*Purton Litigation*

 

On October 5, 2007, William Purton filed an action against theCompany in the Supreme Court of Victoria at Melbourne, Australia claiming he isowed monies under the July 2006 Share Sale Agreement by which the Companyacquired Dolphin.  In addition, Mr. Purton is claiming he is owedmoney for an independent contractor agreement that he claims he wasoffered.  The Company has filed a counterclaim.  A mediation held in September inMelbourne in an attempt to settle the matter was unsuccessful.  The matter is now proceeding towardtrial.  While the Company is optimisticregarding the matter, it is not possible to predict the likely outcome of thecase.

 

*Sales Tax Audit*

 

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

 

*Lombino Litigation*

 

On October 9, 2008, Charles Lombino, an attorney who wascontracted by the Company to do legal work in 2005 and 2006 filed suit againstthe Company claiming he had performed services during that time period forwhich he was not paid and demanding $180,000 in payment for such services.  The Company intends to contest the claim.

 

**NOTE 16.      LOSS PER SHARE**

 

Basic loss per share is computed by dividing the reported net loss forthe period by the weighted average number of common shares outstanding duringthe period.  Loss per share is unchanged on a diluted basis since theassumed exercise of common stock equivalents would have an anti-dilutiveeffect.

 

**NOTE 17.      SUBSEQUENT EVENTS**

 

*Supporting arrangements from Elixir Group Limited*

 

On November 6, 2008, the Company entered into a Machines DisposalAgreement (the “Disposal Agreement”) with Elixir International, a wholly-ownedsubsidiary of Elixir Group. Pursuant to the Disposal Agreement, the Companyagreed to sell and return 715 electronic gaming machines to ElixirInternational, which as consideration for such sale and return, agreed toextinguish an existing current trade payable of approximately $14.0 million ofthe Company to Elixir International.

 

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On the same day the Disposal Agreement was executed, the Companyentered into a letter of agreement terminating the Securities Purchase andProduct Participation Agreement and the amendments thereto (“the “ProductParticipation Agreement”) with Elixir Group (the “Termination Agreement”) andan Amendment of the Trade Credit Facility Agreement and Related Note withElixir International (the “Facility Amendment Agreement”).

 

Pursuant to the Termination Agreement, Elixir Group and the Companyagreed to terminate, with immediate effect the Product Participation Agreementsave and except for certain provisions therein regarding board representation,which includes but not limited to, the continued presence untilSeptember 10, 2009 of at least two independent directors who served on theboard since prior to the September 2007 close of the Product ParticipationAgreement. With such termination, Elixir Group ceases to have rights toidentify suitable gaming venues for the Company and exclusive rights to supplyelectronic gaming machines and related equipment and systems for the Company’sparticipation business and, as a result, Elixir Group will no longer beentitled to earn an aggregate of 41.4 million additional shares of the Company.In addition, Elixir Group agreed to cancel warrants to purchase 66 millionshares of the Company’s common stock, representing all of the outstandingwarrants issued to Elixir  Group pursuantto the Participation Agreement, which were subject to the Exchange Agreementbetween the parties dated October 21, 2007.

 

According to the terms of the original Trade Credit Facility Agreemententered into between the Company and Elixir International dated April 21,2008 (the “Facility Agreement”), Elixir International provided trade credits tothe Company for its purchase of electronic gaming machines from ElixirInternational in exchange for the Company’s issuance of unsecured notes toElixir International bearing interest at a fixed rate of eight percent (8.0%)per annum.  Upon entering into theFacility Agreement, the Company immediately issued a promissory note pursuantto the terms of the Facility Agreement for the then principal amount of$15,000,000 (the “Initial Advance”).  TheInitial Advance extinguished a then existing current trade payable of anequivalent amount to Elixir International in respect to gaming machinespreviously acquired and the Company was obligated to repay the principal, plus anyaccrued interest thereon, under the Initial Advance in 24 equal monthlyinstallments after the date of issue.

 

As at September 30, 2008, the unpaid principal balance under theInitial Advance was approximately $12,100,000 (the “Outstanding Principal”).Pursuant to the amendment to the Facility Agreement, Elixir International hassurrendered the Initial Advance to the Company in exchange for the issuance ofa new promissory note for the Outstanding Principal amount (the “New Note”)with the following new repayment terms: (a)  the Outstanding Principalamount and the interest accrued thereon shall be repaid in 24 equal monthlyinstallments reset from January 1, 2009; (b) interest shall beaccrued on the Outstanding Principal at the rate of five percent (5.0%)(instead of 8.0%) per annum starting from January 1, 2009; and no monthlyrepayment under the Initial Advance is required for the months of October, November andDecember 2008.

 

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*Change of Chief Executive Officer*

 

Mr. Gordon Yuen resigned as president and chief executive officerof the Company as well as a director on October 1, 2008. On the same date,Mr. Clarence Chung, who is the Company’s Chairman, was appointed by theBoard as Chief Executive Officer serving for an interim period.

 

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| **ITEM  2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|-------------------------------------------------------------------------------------------------|

 

***CAUTIONARY STATEMENT***

 

You should read the following discussion and analysis in conjunctionwith our unaudited consolidated financial statements and the related notesthereto contained elsewhere in this report. The information contained in thisquarterly report on Form 10-Q 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 annual report on Form 10-K for the yearended December 31, 2007, filed with the SEC on March 31, 2008 andsubsequent reports on Form 8-K, which discuss our business in greaterdetail.

 

In this report we make, and from time to time we otherwise make,written and oral statements regarding our business and prospects, such asprojections of future performance, statements of management’s plans andobjectives, forecasts of market trends, and other matters that areforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934. Statements containing the words or phrases “will likely result,” “areexpected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,”“expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should”or similar expressions identify forward-looking statements, which may appear indocuments, reports, filings with the Securities and Exchange Commission, newsreleases, written or oral presentations made by officers or otherrepresentatives made by us to analysts, stockholders, investors, newsorganizations and others, and discussions with management and other of ourrepresentatives. For such statements, we claim the protection of the safeharbor for forward-looking statements contained in the Private SecuritiesLitigation 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-lookingstatement to reflect events or circumstances arising after the date of suchstatement, or (ii) the important factors that could cause our futureresults to differ materially from historical results or trends, resultsanticipated or planned by us, or which are reflected from time to time in anyforward-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” in ourannual report on Form 10-K for the year ended December 31, 2007 filedwith the SEC on March 31, 2008.

 

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, *RandomEjection*TM, *Random Plus*TM, *PokerOne*TM, *ChipWa**$**her*TM, *ShufflePro*TM, *DeckSetter*® and *Dolphin*TM. This report also makesreference to trademarks and trade names of other companies.

 

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**Overview**

 

Our operations currentlyconsist of three segments:

 

·                  Gaming machine participation, which focuseson our ownership of electronic gaming machines and gaming management systemsplaced in hotels and other venues throughout Asia on a revenue sharing basis;

 

·                  Table game products, which focuses on thedesign, manufacture and distribution of table game products, includingtraditional and RFID casino chips, automated shuffling devices, card scannersand chip washers; and

 

·                  Non-gaming products, which focuses on thedesign, manufacture and sale of component parts primarily for the automotiveindustry.

 

In September 2007, wecommenced our gaming machine participation operations pursuant to a SecuritiesPurchase and Product Participation Agreement (the “Product ParticipationAgreement”) dated June 12, 2007 between us and Elixir Group Limited (“ElixirGroup”).  Since then our primary businessfocus has been on the ownership and leasing of electronic gaming machines andgaming management systems placed with venue owners on a revenue share basisacross several countries in Asia where we or our affiliates have established astrategic presence.  Revenue from our electronic gaming machine participationoperations comprised 31% and 24% of our total revenues for the three-month andnine-month periods ended September 30, 2008.

 

As a result of the termination of the Securities Purchase and ProductParticipation Agreement effective on November 6, 2008 (details of thetermination of which are set out in Note 17 to the consolidated financialstatements), we now identify and secure by ourselves venues for the placementof electronic gaming machines and casino management systems, which track gameperformance and provide statistics on each installed electronic gaming machineowned and leased by us.  We contract with the venue owners or operatorsfor the placement of the electronic gaming machines on a revenue sharing basis.In addition, we acquire and install by ourselves, the gaming machines, casinomanagement systems and other gaming peripherals at the relevant gaming venues.

 

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**Resultsof Operations for the Three-Month Periods Ended September 30, 2008 and2007:**

 

The following is a scheduleshowing summarized operating results on a consolidated basis and separately byeach of our three segments for the three-month periods ended September 30,2008 and 2007, namely gaming machine participation, table game products andnon-gaming products.

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Increase/(Decrease)** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **September 30,**           | ** ** | **Dollar**              | ** ** | **%** | ** ** |
| ** **                          | ** ** | **2008**                         | ** ** | **2007**                | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Total:                              |       |                             |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                | 3,611,398  |                    | $          | 2,814,802 |   | $ | 796,596 |   | 28 | % |
| Gross loss                          |       | $                                | (1,389,090 | )                       | $          | (15,812 | ) | $ | (1,373,278 | ) | 8,685 | % |
| Gross margin percentage             |       | (38                              | )%         | (1                      | )%         | (37 | )% | 3,700 | % |
| Operating loss                      |       | $                                | (7,216,425 | )                       | $          | (213,099,428 | ) | $ | 205,883,002 |   | (97 | )% |
| Net loss                            |       | $                                | (7,316,904 | )                       | $          | (213,653,064 | ) | $ | 206,336,160 |   | (97 | )% |
|                                |       |                             |       |                    |       |   |   |   |   |
| Basic and diluted loss per share    |       | $                                | (0.06      | )                       | $          | (4.67 | ) | $ | 4.61 |   | (99 | )% |
| Weighted average shares outstanding |       | 114,946,671                      |       | 45,780,514              |       |   |   |   |   |
|                                |       |                             |       |                    |       |   |   |   |   |
| Gaming machine participation:       |       |                             |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                | 1,109,144  |                    | $          | 131,356 |   | $ | 977,788 |   | 744 | % |
| Gross loss                          |       | $                                | (1,591,969 | )                       | $          | (25,289 | ) | $ | (1,566,680 | ) | 6,195 | % |
| Gross margin percentage             |       | (144                             | )%         | (19                     | )%         | (125 | )% | 658 | % |
|                                |       |                             |       |                    |       |   |   |   |   |
| Table game products:                |       |                             |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                | 417,304    |                    | $          | 1,014,001 |   | $ | (596,697 | ) | (59 | )% |
| Gross (loss)/profit                 |       | $                                | (90,209    | )                       | $          | 122,161 |   | $ | (212,369 | ) | (174 | )% |
| Gross margin percentage             |       | (22                              | )%         | 12                      | %          | (34 | )% | (283 | )% |
|                                |       |                             |       |                    |       |   |   |   |   |
| Units sold:                         |       |                             |       |                    |       |   |   |   |   |
| Shufflers                           |       | 24                               |       | 50                      |       | (26 | ) | (52 | )% |
| DeckCheckers                        |       | 1                                |       | 7                       |       | (6 | ) | (86 | )% |
| RFID chips                          |       | 123,500                          |       | 58,000                  |       | 65,500 |   | 113 | % |
|                                |       |                             |       |                    |       |   |   |   |   |
| Non-gaming products:                |       |                             |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                | 2,084,950  |                    | $          | 1,669,445 |   | $ | 415,505 |   | 25 | % |
| Gross (loss)/profit                 |       | $                                | 293,087    |                    | $          | (112,683 | ) | $ | 405,770 |   | (360 | )% |
| Gross margin percentage             |       | 14                               | %          | (7                      | )%         | 21 | % | (300 | )% |

 

Total revenues for thethree-month period ended September 30, 2008 increased from thecorresponding period in the prior year due to an increase in non-gaming productsales and an increase in participation revenues. Revenue from non-gamingproducts improved as a result of increased orders from our major customer.  In the prior year our major customer did notmeet its internal targets, which had an adverse effect on our production andsales of non-gaming products. This increase was partly offset by decreases intable game products sales as a result of a decrease in DeckChecker and Shufflersales.

 

Gross margin has decreasedprimarily as a result of the depreciation cost of our gaming machineparticipation operations.  Participating revenuesare not yet at a level to cover the cost of machine depreciation which is recordedin costs of revenues.

 

Operating loss and loss pershare for the three-month period ended September 30, 2008 was impacted byour negative gross margin.

 

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**Gaming Machine Participation**

 

In September 2007, we began our electronic gaming machineparticipation operations in Asia as part of our primary focus on placing gamingmachines on a revenue share basis.

 

As of September 30, 2008 we had approximately 2,700 gamingmachines, of which 1,283 machines were in operation and generating revenue infive venues in the Philippines and seven venues in Cambodia. The term “gamingmachine” refers to gaming machine “seats” as multi-player gaming machines havemore than one seat.

 

We have withdrawn all machines from three venues in Cambodia in thethird quarter of 2008, and resulting in the removal of 261 machines from theactive machine list.

 

In recent months, we actively renegotiated contracts with gaming venuelicense holders to strengthen our ability to monitor gaming machine performanceand procedures at numerous venues in Cambodia, participate in cash handlingenable us to collect receivables more timely and increased our average revenueshare.

 

During this reporting period an additional 106 gaming machines havebeen installed in two venues in Vietnam and the contracts are currently beingrenegotiated and the machines are expected to be generating revenue by the endof November 2008.

 

We anticipate additionalmachine placements through the addition of machines in existing high-performingvenues and through the rollout of new contracts in the Philippines and theIndo-China region.  However, in the eventgaming machine performance at a contracted venues does not meet ourexpectations, we may choose to withdraw all or a portion of our gaming machinesfrom that venue for future redeployment in existing better performing venues ornew venues which may cause gaming machines in service and generating revenue tofluctuate.

 

**Table Game Products**

 

Table game products revenuedecreased primarily as a result of decreases in Shuffler, ChipWasher andservice revenue offset by increases in RFID chip revenue.  Shuffler revenue decreased $464,200 to$142,500 for the three-month period ended September 30, 2008 compared to$606,700 in the corresponding period of the prior year due to decreased ordersfrom our distributors. Service revenue decreased $83,800 to $2,200 for thethree-month period ended September 30, 2008 compared to $86,000 in thecorresponding period of the prior year due to the transfer of all servicefunctions to our distributor.  Thisrevenue line is expected to continue to decrease as existing service contractsterminate.  RFID chip revenue increased$115,600 to $232,700 for the three-month period ended September 30, 2008compared to $117,100 in the corresponding period of the prior year due to anincrease of chip orders for new casino openings.

 

Our gross margin on tablegame products decreased in the three-month period ended September 30, 2008over the corresponding period of the prior year due to decreased volumesresulting in production inefficiencies and decreased margins to our distributor.

 

**Non-Gaming Products**

 

Non-gaming products revenue,which consists of automotive tooling and parts, increased in the three-monthperiod ended September 30, 2008 by $415,500 to $2,085,000 compared to$1,669,500 in the corresponding period of the prior year.  The increase isrelated to increased sales to our largest customer as they have increased theirproduction for the year.

 

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Gross margins improved by$405,800 due to a change in certain material used in production resulting inreduced costs for one of our product lines. Additionally, with increased volume, we have achieved further improvementsin our production efficiencies.

 

**Operating Expenses**

 

The following is a scheduleshowing expenses on a consolidated basis:

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Increase/(Decrease)** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** | **Dollar**              | ** ** | **%** | ** ** |
| ** **                               | ** ** | **2008**                         | ** ** | **2007**                | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Cost of products                         |       | $                                | 5,000,487  |                    | $          | 2,830,614 |   | $ | 2,169,873 |   | 77 | % |
| Selling, general and administrative      |       | 3,863,144                        |       | 1,978,466               |       | 1,884,678 |   | 95 | % |
| Stock-based compensation expense         |       | 1,475,063                        |       | 4,402,920               |       | (2,927,857 | ) | (66 | )% |
| Research and development                 |       | 178,243                          |       | 328,981                 |       | (150,738 | ) | (46 | )% |
| Depreciation and amortization            |       | 310,886                          |       | 71,632                  |       | 239,254 |   | 334 | % |
| Restructuring charges                    |       | —                           |       | 1,622,532               |       | (1,622,532 | ) | (100 | )% |
| Impairment of assets                     |       | —                           |       | 29,609,085              |       | (29,609,085 | ) | (100 | )% |
| Participation agreement acquisition fees |       | —                           |       | 175,070,000             |       | (175,070,000 | ) | (100 | )% |
|                                     |       | $                                | 10,827,823 |                    | $          | 215,914,230 |   | $ | (205,086,407 | ) | (95 | )% |

 

**Selling, General andAdministrative Expense**

 

During the three-monthperiod ended September 30, 2008, selling, general and administrativeexpenses increased $1,884,700 over the prior year period primarily due toincreased salaries and wages expense of $845,300 as a result of an expandedsenior management team and expanded accounting and business developmentpersonnel. Additionally, travel, trade show and meeting expenses increased by$300,600 due to the expansion of international office locations, consultingfees increased by $156,800 due to SOX implementation, insurance costs increasedby $50,600 as a result of increases in coverage of property and equipment andincreased cost of directors and officers insurance, and bad debt expenseincreased by $71,200 due to the inability to collect on past due table gameproduct sales due to surrendering our gaming licenses in U.S. jurisdictions andthe renegotiation of gaming participation agreements.  Rent expenses increased by $159,600 due toback-billing for office rental charge previously not accrued.  Utilities and telephone expense increased by$29,600 due to additional office locations. Advertising expense increased by $41,600 due to rebranding of our newcompany image.  Office supplies increasedby $44,600 due to additional office locations opened since 2007.  Printing costs have increased $24,900 due toincreased SEC filings.  Property, otherand sales taxes increased by $63,900 due to taxes on Cambodia revenues.

 

**Stock-Based Compensation Expense**

 

Stock-based compensationexpensed decreased by $2,927,900 to $1,475,000 for the three-month period endedSeptember 30, 2008, compared to $4,403,000 in the corresponding period ofthe prior year due to senior executives who have departed and forfeited stockoptions.

 

**Impairment of assets**

 

On January 25, 2007, we issued warrants to purchase up to16,000,000 shares of our common stock (the “2006 Warrants”) to Elixir Group,which at the time was our Asian distributor of table game products, as anincentive to meet certain sales targets.  These warrants were accountedfor in accordance with the 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 2006Warrants were classified in our balance sheet 

 

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as prepaid commissions subject to amortization to commission expense ata rate of 8% of the gross revenue generated by the distributor.

 

Since inception of the arrangement, table game revenue had not met ourexpectations.  In addition, future orderplacements indicate the remaining value on June 30, 2008 of $1,368,829 maynot be recoverable.

 

We estimated the fair value using present value techniques based onestimates of cash flows.  In accordance with SFAS No. 144, animpairment loss shall be recognized if the carrying amount of an intangibleasset is not recoverable and its carrying amount exceeds its fair value. Afteran impairment loss is recognized, the adjusted carrying amount of theintangible asset shall be its new accounting basis.  During the second quarterof 2008, we recorded an impairment loss to the asset of $1,368,829 and includedthe amount in loss from operations in our consolidated statement of operations.

 

**Research and Development Expenses**

 

Research and developmentexpenses decreased as a result of the decreased headcount at our research anddevelopment facility in Zhuhai, China.

 

**Depreciation and AmortizationExpenses**

 

Depreciation andamortization expense decreased as a result of the impairment to intangibles at December 31,2007, resulting in a lower depreciation base.

 

**Restructuring Charge**

 

On September 10, 2007, as part of the initial closing of thetransactions under the Product Participation Agreement with Elixir Group, weannounced a change in executive management.  As part of the restructuring,in October 2007 we gave termination notice to all service technicians,inventory management personnel, some regulatory compliance personnel and someadministrative staff.  As of January 2008, all these costs had beenpaid.  Restructuring charges have been presented within operating costsand expenses in the consolidated statement of operations in accordance withSFAS No. 146, *Accounting for CostAssociated with Exit or Disposal Activities.*

 

**Other Income/(Expenses):**

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Increase/(Decrease)** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **September 30,**           | ** ** | **Dollar**              | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **2008**                         | ** ** | **2007**                | ** ** | **Amount** | ** ** | **% Amount** | ** ** |
| Interest expense and finance fees |       | $                                | (290,355   | )                       | $          | (512,290 | ) | $ | 221,935 |   | (43 | )% |
| Interest income                   |       | 107,420                          |       | (404                    | )          | 107,824 |   | (26,689 | )% |
| Foreign currency gains/losses     |       | (3,100                           | )          | (9,340                  | )          | 6,240 |   | (67 | )% |
| Other                             |       | 85,556                           |       | (379,175                | )          | 464,731 |   | (123 | )% |
| Total                             |       | $                                | (100,479   | )                       | $          | (901,209 | ) | $ | 800,730 |   | (89 | )% |
| Income tax provisions             |       | —                           |       | 347,573                 |       |   |   |   |   |

 

**Interest Expense and Finance Fees**

 

The decrease in interestexpense and finance fees was due to the lower interest rate on notes payable inthe three-month period ended September 30, 2008 versus the correspondingperiod in the prior year as a result of the pay-off of $11.0 million inlong-term debt in November 2007 accruing interest at 13% offset by a $15.0million increase in long-term debt in April 2008 accruing interest at 8%.

 

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**Interest Income**

 

Interest income increased asa result of the increase in our cash and cash equivalents held in overnightmoney market accounts.  Cash in bankincreased by $16.8 million to $17.8 million from September 30, 2007 to September 30,2008.

 

**Foreign Currency Transactions**

 

Foreign currency transactiongains are a result of the declining value of the U.S. dollar denominatedpayables at our Philippines subsidiary, whose functional currency is thePhilippine peso.

 

**Other**

 

In the three-month periodended September 30, 2008, we recorded $77,500 income related to a grantfrom the Australian Federal Government.

 

In the three-month periodended September 30, 2007, we recorded legal fees due to the acquisition ofDolphin that were billed in the third quarter of 2007.

 

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** **

**Results of Operations for theNine-Month Periods Ended September 30, 2008 and 2007:**

 

The following is a scheduleshowing summarized operating results on a consolidated basis and separately byeach of our three segments for the nine-month periods ended September 30,2008 and 2007, namely gaming machine participation, table game products andnon-gaming machine products.

 
| ** **                          | ** ** | **Nine Months Ended** | ** **  | **Increase (Decrease)** | ** ** |
|-------------------------------------|------------|---------------------------------|-------------|------------------------------|------------|
| ** **                          | ** ** | **September 30,**          | ** **  | **Dollar**                   | ** ** | **%** | ** ** |
| ** **                          | ** ** | **2008**                        | ** **  | **2007**                     | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Total:                              |       |                            |        |                         |       |   |   |   |   |
| Revenues                            |       | $                               | 10,210,886  |                         | $          | 9,614,506 |   | $ | 596,380 |   | 6 | % |
| Gross (loss)/profit                 |       | $                               | (2,782,761  | )                            | $          | 695,726 |   | $ | (3,478,487 | ) | (500 | )% |
| Gross margin percentage             |       | (27                             | )%          | 7                            | %          | (34 | )% | (486 | )% |
| Operating loss                      |       | $                               | (23,096,011 | )                            | $          | (220,514,899 | ) | $ | 197,418,888 |   | (90 | )% |
| Net loss                            |       | $                               | (22,169,501 | )                            | $          | (221,878,201 | ) | $ | 199,708,700 |   | (90 | )% |
|                                |       |                            |        |                         |       |   |   |   |   |
| Basic and diluted loss per share    |       | $                               | (0.19       | )                            | $          | (5.88 | ) | $ | 5.69 |   | (97 | )% |
| Weighted average shares outstanding |       | 114,945,602                     |        | 37,765,328                   |       |   |   |   |   |
|                                |       |                            |        |                         |       |   |   |   |   |
| Gaming machine participation:       |       |                            |        |                         |       |   |   |   |   |
| Revenues                            |       | $                               | 2,396,672   |                         | $          | 131,356 |   | $ | 2,265,316 |   | 1,725 | % |
| Gross loss                          |       | $                               | (3,902,383  | )                            | $          | (25,289 | ) | $ | (3,877,094 | ) | 15,331 | % |
| Gross margin percentage             |       | (163                            | )%          | (19                          | )%         | (144 | )% | 758 | % |
|                                |       |                            |        |                         |       |   |   |   |   |
| Table game products:                |       |                            |        |                         |       |   |   |   |   |
| Revenues                            |       | $                               | 1,667,806   |                         | $          | 4,652,980 |   | $ | (2,985,174 | ) | (64 | )% |
| Gross profit                        |       | $                               | 235,947     |                         | $          | 817,824 |   | $ | (581,877 | ) | (71 | )% |
| Gross margin percentage             |       | 14                              | %           | 18                           | %          | (4 | )% | (22 | )% |
|                                |       |                            |        |                         |       |   |   |   |   |
| Units sold:                         |       |                            |        |                         |       |   |   |   |   |
| Shufflers                           |       | 169                             |        | 62                           |       | 107 |   | 173 | % |
| DeckCheckers                        |       | 1                               |        | 20                           |       | (19 | ) | (95 | )% |
| ChipWashers                         |       | 2                               |        | 1                            |       | 1 |   | 100 | % |
| RFID chips                          |       | 247,900                         |        | 992,000                      |       | (744,100 | ) | (75 | )% |
|                                |       |                            |        |                         |       |   |   |   |   |
| Non-gaming products:                |       |                            |        |                         |       |   |   |   |   |
| Revenues                            |       | $                               | 6,146,407   |                         | $          | 4,830,170 |   | $ | 1,316,237 |   | 27 | % |
| Gross profit                        |       | $                               | 883,674     |                         | $          | (96,810 | ) | $ | 980,484 |   | (1,013 | )% |
| Gross margin percentage             |       | 14                              | %           | (2                           | )%         | 16 | % | (800 | )% |

 

Total revenues for thenine-month period ended September 30, 2008 increased from thecorresponding period in the prior year due to an increase in participationrevenue and sales of non-gaming products. Gaming machine participation revenue was introduced in the third quarterof 2007 and has increased due to a full quarter of operation and improvedperformance on existing venues. Additionally, revenue from non-gaming productsimproved as a result of an increased order from our major customer during thenine-month period ended September 30, 2008.  In the prior year our major customer did notmeet its internal targets which had adverse effect on our production and salesof non-gaming products.

 

Gross margin has decreasedprimarily as a result of the depreciation cost of our gaming machineparticipation operations.  Revenues haveyet to cover the cost of machine depreciation, which is recorded in costs ofrevenues.

 

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Operating loss and loss pershare for the nine-month period ended September 30, 2008 were impacted byour negative gross margin and increased selling, general and administrativeexpenses, which rose due to increased management compensation and increasedshare-based compensation.

 

**Gaming Machine Participation**

 

In September 2007, we began our electronic gaming machineparticipation operations in Asia as part of our primary focus on placing gamingmachines on a revenue share basis.

 

As of September 30, 2008 we had approximately 2,700 gamingmachines, of which 1,283 machines were in operation and generating revenue infive venues in the Philippines and seven venues in Cambodia. The term “gamingmachine” refers to gaming machine “seats” as multi-player gaming machines havemore than one seat.

 

We have withdrawn machines from three venues in Cambodia in the thirdquarter of 2008, resulting in the removal of 261 machines from our activemachine list.  

 

In recent months, we actively renegotiated contracts with gaming venuelicense holders to strengthen our ability to monitor gaming machine performanceand procedures at numerous venues in Cambodia, participate in cash handlingenabling us to collect receivables more timely and increased our averagerevenue share.

 

During this reporting period an additional 106 gaming machines have beeninstalled in two venues in Vietnam with the contracts currently beingrenegotiated and the machines are expected to generate revenue by the end of November 2008.

 

We anticipate additionalmachine placements through the addition of machines in existing high-performingvenues and through the rollout of new contracts in the Philippines and theIndo-China region.  However, in the eventgaming machine performance at a contracted venues does not meet ourexpectations, we may choose to withdraw all or a portion of our gaming machinesfrom that venue for future redeployment in existing better performing venues ornew venues which may cause gaming machines in service and generating revenue tofluctuate.

 

**Table Game Products**

 

Table game products revenuedecreased primarily as a result of decreases in DeckChecker, RFID chip andservice revenue.  DeckChecker revenuedecreased $991,800 to $111,000 for the nine-month period ended September 30,2008 compared to $1,102,900 in the corresponding period of the prior year due toa decrease in orders from our distributors. RFID chip revenue decreased $1,440,500 to $548,600 for the nine-monthperiod ended September 30, 2008 compared to $1,989,100 in thecorresponding period of the prior year due to a decrease in large chip ordersfor new casino openings.  Service revenuedecreased $243,400 to $15,300 for the nine-month period ended September 30,2008 compared to $258,700 in the corresponding period of the prior year due tothe transfer of all service functions to our distributor.  This revenue line is expected to continue todecrease as service contracts terminate.

 

**Non-Gaming Products**

 

Non-gaming products revenue,which consists of automotive tooling and parts, increased in the nine-monthperiod ended September 30, 2008 by $1,316,200 to $6,146,400 compared to$4,830,200 in the corresponding period of the prior year.  The increase isrelated to increased sales to our largest customer as they have increased theirproduction for the year.

 

Gross margins improved by$980,500 due to a change in certain material used in production resulting inreduced costs for one of our product lines. Additionally, with increased volume, we have achieved furtherimprovements in our production efficiencies.

 

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**Operating Expenses**

 
| ** **                               | ** ** | **Nine Months Ended** | ** ** | **Increase (Decrease)** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                               | ** ** | **September 30,**          | ** ** | **Dollar**                   | ** ** | **%** | ** ** |
| ** **                               | ** ** | **2008**                        | ** ** | **2007**                     | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Cost of products                         |       | $                               | 12,993,647 |                         | $          | 8,918,781 |   | $ | 4,074,866 |   | 46 | % |
| Selling, general and administrative      |       | 11,376,030                      |       | 7,274,858                    |       | 4,101,172 |   | 56 | % |
| Stock-based compensation expense         |       | 5,842,641                       |       | 6,168,507                    |       | (325,866 | ) | (5 | )% |
| Impairment of assets                     |       | 1,368,829                       |       | 29,609,085                   |       | (28,240,256 | ) | (95 | )% |
| Research and development                 |       | 777,552                         |       | 739,612                      |       | 37,940 |   | 5 | % |
| Depreciation and amortization            |       | 779,922                         |       | 726,030                      |       | 53,892 |   | 7 | % |
| Restructuring charges                    |       | 168,276                         |       | 1,622,532                    |       | (1,454,256 | ) | (90 | )% |
| Participation agreement acquisition fees |       | —                          |       | 175,070,000                  |       | (175,070,000 | ) | (100 | )% |
|                                     |       | $                               | 33,306,897 |                         | $          | 230,129,405 |   | $ | (196,822,508 | ) | (86 | )% |

 

**Selling, General andAdministrative Expense**

 

During the nine-month periodended September 30, 2008, selling, general and administrative expensesincreased $4,101,200 over the prior year period, primarily due to increasedsalaries and wages expense of $2,179,000 as a result of an expanded seniormanagement team and expanded accounting and business developmentpersonnel.  Additionally, travel, tradeshow and meeting expense increased by $717,400 due to the expansion ofinternational office locations and increased international customers andbusiness lines, insurance costs increased by $131,100 as a result of increasesin coverage of property and equipment and increased cost of directors andofficers insurance, and bad debt expense increased by $361,500 due to theinability to collect on past due table game product sales resulting from thesurrender of our gaming licenses in the U.S. and the renegotiation of gamingparticipation agreements.  Rent expensesincreased by $255,600 due to back-billing for office rental charges previouslynot accrued.  Board of director feesincreased by $225,000 due to additional board members added, property and salestaxes increased by $180,300 due to additional purchases of office and operatingequipment for new office locations and consulting and accounting fees increasedby $217,800 as a result of SOX implementation.

 

**Stock-Based Compensation Expense**

 

Stock-based compensationexpense decreased by $325,900 to $5,842,600 for the nine-month period ended September 30,2008, compared to $6,168,500 in the corresponding period of the prior year dueto forfeited stock option grants issued to executive management and otheremployees.

 

**Impairment of Assets**

 

On January 25, 2007, we issued warrants to purchase up to16,000,000 shares of our common stock (the “2006 Warrants”) to Elixir Group,which at the time was our Asian distributor of table game products, as anincentive to meet certain sales targets.  These warrants were accountedfor in accordance with the EITF No. 96-18.  The 2006 Warrants wereclassified in our balance sheet as prepaid commissions subject to amortizationto commission expense at a rate of 8% of the gross revenue generated by thedistributor.

 

Since the inception of the arrangement, table game revenue had not metsales targets.  In addition, future orderplacements indicate the remaining value on June 30, 2008 of $1,368,829 wasnot recoverable.

 

We estimated the fair value using present value techniques based onestimates of cash flows.  In accordance with SFAS No. 144, animpairment loss shall be recognized if the carrying amount of an intangibleasset is not recoverable and its carrying amount exceeds its fair value. Afteran impairment loss 

 

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is recognized, the adjusted carrying amount of the intangible assetshall be its new accounting basis.  During the second quarter of 2008, werecorded an impairment to the asset of $1,368,829 and included the amount inloss from operations in our consolidated statement of operations.

 

**Research and Development Expenses**

 

Research and developmentexpenses decreased as a result of the decreased headcount at our research anddevelopment facility in Zhuhai, China.

 

**Depreciation and AmortizationExpenses**

 

Depreciation andamortization expense decreased as a result of the impairment to intangibles at December 31,2007, resulting in a lower depreciation base.

 

**Restructuring Charge**

 

During the first quarterended March 31, 2008, we moved our corporate offices and ceased use of awarehouse.  In accordance with SFAS No. 146,the Company incurred restructuring charges of $168,300 during the nine-monthperiod ended September 30, 2008 for operating leases the Company ceaseduse of during the three-month period ended March 31, 2008.  The liability was calculated based upon theremaining lease rentals, reduced by a combination of actual sublease rentalsand estimated sublease rentals and recorded at fair value.

 

On September 10, 2007, as part of the initial closing of thetransactions under the Product Participation Agreement with Elixir Group, weannounced a change in executive management.  As part of the restructuring,in October 2007, we gave termination notice to all service technicians,inventory management personnel, some regulatory compliance personnel and someadministrative staff.  As of January 2008, all these costs had beenpaid.  Restructuring charges have been presented within operating costsand expenses in the consolidated statement of operations in accordance withSFAS No. 146.

 

**Other Income/(Expenses):**

 
| ** **                        | ** ** | **Nine Months Ended** | ** ** | **Increase/(Decrease)** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **September 30,**          | ** ** | **Dollar**              | ** ** | **%** | ** ** |
| ** **                        | ** ** | **2008**                        | ** ** | **2007**                | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Interest expense and finance fees |       | $                               | (564,876   | )                       | $          | (1,820,034 | ) | $ | 1,255,158 |   | (69 | )% |
| Interest income                   |       | 629,606                         |       | 102,755                 |       | 526,851 |   | 513 | % |
| Foreign currency gains/losses     |       | 638,427                         |       | (9,340                  | )          | 647,767 |   | (6,936 | )% |
| Patent sale and other             |       | 245,851                         |       | 15,744                  |       | 230,106 |   | 1,462 | % |
| Total                             |       | $                               | 949,008    |                    | $          | (1,710,875 | ) | $ | 2,659,884 |   | (155 | )% |
| Income tax provisions             |       | (22,498                         | )          | 347,573                 |       | (370,071 | ) | (106 | )% |

 

**Interest Expense and Finance Fees**

 

The decrease in interestexpense and finance fees was due to the lower interest rate on notes payable inthe nine-month period ended September 30, 2008 versus the correspondingperiod in the prior year as a result of the pay-off of $11.0 million inlong-term debt in November 2007 accruing interest at 13% offset by a $15.0million increase in long-term debt in April 2008 accruing interest at 8%.

 

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**Interest Income**

 

Interest income increased asa result of the increase in our cash and cash equivalents held in overnightmoney market accounts.  Cash in bankincreased by $16.8 million to $17.8 million from September 30, 2007 to September 30,2008.

 

**Foreign Currency Transactions**

 

Foreign currency transactiongains are a result of the declining value of the U.S. dollar denominatedpayables at our Philippines subsidiary, whose functional currency is thePhilippine peso.

 

**Patent Sale and Other**

 

In the nine-month periodended September 30, 2008, we recorded $300,000 income related to a grantfrom the Australian Federal Government.

 

In the nine-month periodended September 30, 2007, we recorded a $500,000 gain on the sale of ourintellectual property related to our previously discontinued Secure Dropproduct line, offset by acquisition costs of $451,000 due to the purchase ofDolphin.

 

**Income Tax Provisions**

 

Our effective tax rate for the nine-month periods ended September 30,2008 and September 30, 2007 are approximately 0.1% and 0.0%, respectively.  We will continue to review the tax losses andincome generated in the future by our foreign subsidiaries to evaluate whetherthey should be reflected as a benefit or provision in our consolidatedfinancial statements.

 

**FINANCIAL CONDITION**

 

**Liquidityand Capital Resources**

 

On April 21, 2008, we entered into a Trade Credit FacilityAgreement (the “Facility Agreement”) with Elixir International.  Title of any gaming machines offered inexchange for the notes passes to the Company upon issuance of the notes.

 

Upon entering into the Agreement, we immediately issued the first notepursuant to the terms of the Facility Agreement in the principal amount of$15,000,000 (the “Initial Advance”).  TheInitial Advance extinguished an existing current trade payable of an equivalentamount to Elixir International in respect to gaming machines previouslyacquired.

 

Under the terms as amended as of the date of this report, we areobligated to repay the current principal of $12.1 million, plus any accruedinterest thereon, in 24 equal monthly installments commencing January 1,2009.  The advances under the Facility Agreementare subject to demand by Elixir International for immediate payment only ifthere is either an event of default or a change of control defined in theFacility Agreement.

 

The balance of the Facility Agreement is $12.1 million and $0 as of September 30,2008 and December 31, 2007, respectively.

 

We currently do not expect to obtain any further amount of credit withElixir International under the Facility Agreement.

 

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As of September 30,2008, we had total cash and cash equivalents of $17.8 million and a working capitaldeficit of $(2.3) million.  Our workingcapital deficit has continued to increase since September 30, 2008 due tofurther losses from operations.  Theworking capital deficit included $13.5 million of related party trade payablesand $7.4 million of the current portion of the total amount of $12.1 milliondue to Elixir International drawn on a $15.0 million trade credit facilityagreement.

 

During the nine-month periodended September 30, 2008, we incurred negative cash flow from operationsof approximately $12.1 million.  On November 6,2008, our board of directors approved the termination of Elixir Group’s rights to identifygaming venues for the Company and its exclusive distribution rights under theSecurities Purchase and Product Participation Agreement dated June 12,2007 with Elixir Group Limited (“Product Participation Agreement”).  In addition, the Company will return 715gaming machines to Elixir International at their net book value as of September 30,2008, resulting in a reduction of approximately $14.0 million in tradepayables. As a result, the Company’s remaining payables owed to ElixirInternational are approximately $12.1 million in notes payable.  Also on November 6, 2008 the board ofdirectors approved an Amendment to the Facility Agreement to reduce the fixedinterest rate on the Initial Advance on the Facility Agreement to five percent(5.0%) from eight percent (8.0%) per annum and to extend the payment terms tomonthly installments paid over 24 months beginning January 1, 2009.  This equates to the Company making equalmonthly payments of principal and accrued interest to Elixir International inthe amount of $529,490 with the first payment in January 2009.

 

Primarily as a result of thereturn of 715 machines from both operations and in inventory to ElixirInternational and restructuring our contracted venues in Cambodia, our currentgaming machine inventory level is in excess of 600 gaming machines, which wewill seek to redeploy into new projects and existing sites. We do not expect toconduct significant purchases of gaming machines during the remainder of 2008;however, we may choose to purchase a limited number of multi-player machines,which are proven as strong performers in the Cambodia market.  If we pursue the purchase of additionalmachines, we may be able to purchase second-hand machines at significantlydiscounted prices.  We will also purchasecasino management systems during the remainder of 2008 for placement inpreviously purchased gaming machines depending upon our business plan’sexecution.

 

Based on our massive costscutting measures, which involve, amongst other things, the closing down of theChina factory and Macau office, the scaling down of the U.S. office andsignificantly reducing traveling and entertainment expenses, and assuming weare successful in our endeavors to ramp up revenue base by focusing ourplacement of gaming machines in better performing venues and plans to providevalue-added services, such as promotion and marketing advisory, to certain venueswith a view to improving net win per machine, we believe our available workingcapital, along with cash expected to be generated from operations, would allowus to meet our working capital needs for 2009.

 

However, if we were toundertake any major new projects in addition to those in our current growthplans, or if we fail to realize our working capital assumption, we may requireadditional funding in 2009, in which case we will look into the option ofraising additional funds through various financing sources, including the saleof debt or equity securities and the procurement of commercial debt financingand vendor financing. However, there can be no guarantees that such funds willbe available on commercially reasonable terms, if at all. If such financing isnot available on satisfactory terms, we may be unable to expand or continue ourbusiness as desired and operating results may be adversely affected. Any debtfinancing will increase expenses and must be repaid regardless of operatingresults and may involve restrictions limiting our operating flexibility and anyequity financing will be dilutive to our present stockholders.

 

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**Cash Flows Summary**

 
| ** **                  | ** ** | **Nine Months Ended  September 30,** | ** **  | ** ** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|-------------|------------|------------|
| ** **                  | ** ** | **2008**                                            | ** **  | **2007**   | ** ** | **Increase (Decrease)** | ** ** |
| Cash provided by (used in): |       |                                                |        |       |       |   |   |
| Operations                  |       | $                                                   | (14,225,683 | )          | $          | (7,264,503 | ) | $ | (6,961,180 | ) |
| Investing                   |       | (32,935,978                                         | )           | (931,413   | )          | (32,004,565 | ) |
| Financing                   |       | (3,280,930                                          | )           | 8,932,713  |       | (12,213,643 | ) |
|                        |       | $                                                   | (50,442,592 | )          | $          | 736,797 |   | $ | (51,179,389 | ) |

 

**Operations**

 

Cash used in operationsincreased as a result of the increase in working capital as well as operatingexpenses such as salary, travel, rent and professional fees.

 

**Investing**

 

Cash used in investingactivities increased as a result of payments made on the purchase of gamingmachines and systems from Elixir International.  In fiscal 2007, we hadnon-cash purchases of gaming machines and systems in the amount of $39.2million and non-cash purchases of $28.1 million in the nine-month period ended September 30,2008. Cash payments of $31.7 million were made in the nine-month period ended September 30,2008 in respect of previous non-cash purchases.

 

**Financing**

 

Cash provided by financingactivities decreased as a result of decreased sales of stock and exercises ofstock options and warrants.

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

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

 

We consider the following accountingestimates to be the most critical to fully understanding and evaluating ourreported financial results. They require us to make subjective or complexjudgments about matters that are inherently uncertain or variable. Seniormanagement discussed the development, selection and disclosure of the followingaccounting estimates, considered most sensitive to changes from externalfactors, with the audit committee of our board of directors.

 

**Goodwill and Intangible Assets**

 

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

 

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We adopted SFAS No. 142,*Goodwill and Other Intangible Assets*(“SFASNo. 142”) and SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets* (“SFAS No. 144”),effective January 1, 2002.  Under SFAS No. 142, goodwill is nolonger amortized but is subject to periodic impairment tests. Other intangibleassets with finite lives, such as patents, customer relationships andtrademarks will continue to be amortized over their useful lives.

 

**Inventory**

 

The determination ofobsolete or excess inventory requires us to estimate the future demand for ourproducts within specific time horizons, generally one year or less. If weexperience a significant unexpected decrease in demand for our products or ahigher occurrence of inventory obsolescence because of changes in technology orcustomer requirements, we could be required to increase our inventory provisions.

 

**Consignment Inventory**

 

As of September 30,2008 and December 31, 2007, we have $710,454 and $65,908, respectively, ofunits, service supplies and parts on consignment with distributors, which isrecorded as inventory at September 30, 2008.  Revenue is notrecognized, and the inventory remains ours, until ownership of the product andtitle passes to the distributor which occurs upon the distributor’s use of theproducts or sales to third-party customers.

 

**Gaming Machines and Systems**

 

Gaming machines and systemsare stated at cost.  We depreciate gaming machines and systems over afive-year useful life to a minimal salvage value once placed in service.  Trends in market demand and technologicalobsolescence may require us to review and evaluate the recoverability of ourinvestment, as well as the estimated useful lives used to depreciate theseassets. The Company measures and tests gaming machines for impairment inaccordance with SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets* (“SFAS No. 144”), atleast annually on December 31 or more often if there are indicators ofimpairment.

 

**Property and Equipment**

 

We are required to estimatesalvage values and useful lives for our property and equipment.  Trends inmarket demand and technological obsolescence may require us to recordimpairment charges in accordance with the provisions of SFAS No. 144.

 

**Revenue Recognition**

 

We recognize revenue when all of the following have been satisfied:

 

·                  persuasive evidence of an arrangement exists;

·                  the price to the customer is fixed anddeterminable;

·                  delivery has occurred and any acceptanceterms have been fulfilled;

·                  no significant contractual obligationsremain; and

·                  collection is reasonably assured.

 

*Gaming and Non-Gaming Products Revenues*

 

We recognize revenue from the sale of our products to end users uponshipment against customer contracts or purchase orders. Revenue from shufflerrentals is recorded at the first of each month in accordance with rentalcontract terms.  We completed our transition to outsourcing all futuresales to third-party distributors during the fourth quarter 2007 and will nolonger record rental revenue on our table game products.

 

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We recognize revenue from our sales to independent distributors uponshipment to the distributor against distributor contracts or purchase orders ofour product.  We recognize revenue on consignment inventory when ownershipof the product and title passes to the distributor which occurs upon thedistributor’s use of the product in its service organization or to an end user.

 

*Participation Revenues*

 

We earn recurring revenue by providing customers with electronic gamingmachines and casino management systems, which are owned by us and leased tovenue owners. Revenues are recognized on the contractual terms of theparticipation agreements between us and the venue owners and are based on ourshare of net winnings defined as all amount played in, less all winnings paidout. Our share of joint costs in accordance with applicable contracts, if any,is recorded in cost of revenues.

 

**Stock-Based Compensation**

 

We adopted SFAS No. 123R,*Share-Based Payments* (“SFAS No. 123R”)to account for all our stock-based compensation beginning January 1, 2006,and elected the modified prospective method of transition.  Under the fair value recognition provisionsof SFAS No. 123R, we estimate stock-based compensation on the determinedmeasurement date, generally the award grant date, and recognize expense overthe requisite service period. Option valuation models used to determine thefair value of share-based payments require the input of highly subjectiveassumptions, and changes in the assumptions used can materially affect the fairvalue estimate. Judgment is required in estimating stock price volatility,forfeiture rates, expected dividends, and expected terms that options remainoutstanding.

 

**Income Taxes**

 

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

 

Significant judgment isrequired in evaluating our tax positions and determining our provision forincome taxes. During the ordinary course of business, there are manytransactions and calculations for which the ultimate tax determination isuncertain. Effective January 1, 2007, we adopted the provisions of FIN No. 48,*Accounting for Uncertainty in Income Taxes*and Interpretation of FASB Statement No. 109, which contains a two-stepapproach to recognizing and measuring uncertain tax positions accounted for inaccordance with SFAS No. 109. The first step is to evaluate the tax positionfor recognition by determining if the weight of available evidence indicates itis more likely than not that the position will be sustained on audit, includingresolution of related appeals or litigation processes, if any. The second stepis to measure the tax benefit as the largest amount which is more than 50%likely of being realized upon ultimate settlement. We consider manyfactors when evaluating and estimating our tax positions and tax benefits,which may require periodic adjustments and which may not accurately anticipateactual outcomes.

 

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We are subject to income taxexamination by federal and state tax authorities from 2003 through the presentperiod in jurisdictions in which we operate. There are currently no income taxreturns under examination by the Internal Revenue Service or any other majortax authorities.

 

*Recently Issued AccountingStandards*

 

In December 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), *Business Combinations* (“SFAS No. 141(R)”). SFAS No. 141(R) replacesSFAS No. 141, *Business Combinations*(“SFASNo. 141”), but retains the requirement that the purchase method ofaccounting for acquisitions be used for all business combinations. SFAS No. 141(R) expandson the disclosures previously required by SFAS No. 141 (“SFAS 141”),better defines the acquirer and the acquisition date in a business combination,and establishes principles for recognizing and measuring the assets acquired(including goodwill), the liabilities assumed and any non-controlling interestsin the acquired business. SFAS No. 141(R) also requires an acquirerto record an adjustment to income tax expense for changes in valuationallowances or uncertain tax positions related to acquired businesses. SFAS No. 141(R) iseffective for all business combinations with an acquisition date in the firstannual period following December 15, 2008; early adoption is notpermitted. We will adopt this statement as of January 1, 2009. Managementis currently evaluating the impact SFAS No. 141(R) will have on ourconsolidated financial statements.

 

In December 2007, theFASB issued SFAS No. 160, *Non-Controlling Interestin Consolidated Financial Statements,*an Amendment of ARB No. 51(“SFAS No. 160”). This statement establishes accounting and reportingstandards for ownership interest in subsidiaries held by parties other than theparent and for the deconsolidation of a subsidiary. It also clarifies that anon-controlling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements. SFAS No. 160 changes the way the consolidated incomestatement is presented by requiring consolidated net income to be reported atamounts that include the amount attributable to both the parent and thenon-controlling interests. The statement also establishes reportingrequirements that provide sufficient disclosure that clearly identify anddistinguish between the interest of the parent and those of the non-controllingowners. We adopted this statement as of January 1, 2008.  The adoption had no material impact on ourfinancial position, results of operations or cash flows.

 

In March 2008, the FASBissued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*, an amendment of FASBStatement No. 133 (“SFAS No. 161”). This statement is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008.  We will adopt this statement as of January 1,2009.  Management is currently evaluatingthe impact SFAS No. 161 will have on our consolidated financialstatements.

 

In May 2008, the FASBissued SFAS No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles*. This statement identifies the sources of accounting principles and theframework for selecting the principles to be used in the preparation offinancial statements of non-governmental entities that are presented in theconformity with generally accepted accounting principles (GAAP) in the UnitedStates.  It clarifies the order whichsources of accounting principles have priority. We have adopted this statement as of June 1, 2008.  The adoption has no material impact on ourfinancial position, results of operations or cash flows.

 

In May 2008, FASBissued SFAS No. 163, *Accounting for FinancialGuarantee Insurance Contracts-an Interpretation of FASB Statement No. 60*.  The scope of the statement is limited tofinancial guarantee insurance (and reinsurance) contracts.  The pronouncement is effective for fiscalyears beginning after December 31, 2008. The Company does not believe this pronouncement will impact itsfinancial statements.

 

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**ITEM 3.          QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**.

 

Not applicable.

 

## **ITEM 4.          CONTROLSAND PROCEDURES**

 

(a)  *Evaluation of Disclosure Controls andProcedures*.

 

Our management, with the participation of our chief executive officerand vice president of finance, who serves as our principal financial officer,evaluated the effectiveness of our disclosure controls and procedures pursuantto Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). The term “disclosure controls and procedures” refers to the controls andprocedures of our company that are designed to ensure that information requiredto be disclosed by us in the reports that we file under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedby the Securities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourchief executive officer and principal financial officer, as appropriate, toallow timely decisions regarding required disclosures.  In designing andevaluating the disclosure controls and procedures, management recognizes thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives.In addition, the design of disclosure controls and procedures must reflect thefact that there are resource constraints and that management is required toapply its judgment in evaluating the benefits of possible controls andprocedures relative to their costs.

 

An evaluation was performed under the supervision and with theparticipation of our management, including our chief executive officer and vicepresident of finance, of the effectiveness of the design and operation of ourdisclosure controls and procedures as of September 30, 2008.  Based on that evaluation, our management,including our chief executive officer and vice president of finance, hasconcluded that our disclosure controls and procedures were effective as of September 30,2008.

 

(b)  *Changes in internal control over financialreporting.*

 

During the quarter ended September 30, 2008, the Company hascontinued to implement new controls and procedures in order to strengthen theinternal controls over financial reporting at various locations. In addition,the audit committee of our board of directors approved the transition of our BusinessControl Department into the Audit Department which will report functionality tothe Audit Committee effective as of November 6, 2008.  Except as described in the foregoing, we madeno changes in internal control over financial reporting that occurred duringthe period covered by this report that have materially affected or arereasonably likely to materially affect, our internal control over financialreporting.

 

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# **PART II – OTHERINFORMATION**

# ** **

## **ITEM4.          SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

## ** **

On September 8, 2008, we held our annual meeting of shareholdersin Hong Kong.  Out of 114,956,667 common shares issued and outstanding asof the record date and entitled to vote at such annual meeting, there werepresent at such meeting, in person and by proxy, shareholders holding92,202,861 of our voting shares.  We held the annual meeting ofshareholders, for the purposes of:

 

·                  Electing eleven directors, each to serveuntil our 2009 annual meeting of shareholders;

 

·                  Adopting the Elixir Gaming Technologies, Inc.2008 Stock Incentive Plan; and

 

·                  Ratifying the appointment of Ernst &Young, LLP as our independent registered public accounting firm for the fiscalyear ending December 31, 2008.

 

All of the persons nominated to serve on our board of directors, namelyClarence Chung, Gordon Yuen, Joe Pisano, Lorna Patajo-Kapunan, Major GeneralPaul A. Harvey, Vincent L. DiVito, John W. Crawford, Samuel Tsang, Ted Chan,Anthony Tyen and Daniel Sham, were elected to our board of directors to forterms of one year each.

 
| ** **           | ** ** | **For**    | ** ** | **Withheld** | ** ** | **Abstained** | ** ** |
|----------------------|------------|------------|------------|--------------|------------|---------------|------------|
| Clarence Chung       |       | 85,821,918 |       | 6,380,943    |       | —        |       |
| Gordon Yuen          |       | 77,165,444 |       | 15,037,417   |       | —        |       |
| Joe Pisano           |       | 77,112,944 |       | 15,089,917   |       | —        |       |
| Vincent DiVito       |       | 87,328,526 |       | 4,874,335    |       | —        |       |
| Paul Harvey          |       | 87,330,626 |       | 4,872,235    |       | —        |       |
| Lorna Patajo-Kapunan |       | 87,208,612 |       | 4,994,249    |       | —        |       |
| John Crawford        |       | 87,345,640 |       | 4,857,221    |       | —        |       |
| Samuel Tsang         |       | 85,817,215 |       | 6,385,646    |       | —        |       |
| Ted Chan             |       | 85,702,501 |       | 6,500,360    |       | —        |       |
| Anthony Tyen         |       | 87,343,340 |       | 4,859,521    |       | —        |       |
| Daniel Sham          |       | 87,338,840 |       | 4,864,021    |       | —        |       |

 

Our shareholders approved to adopt the 2008 Stock Incentive Plan.

 
| Shares voted for  |   | 52,119,182 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 19,060,052 |   |
| Shares abstaining |   | 273,530    |   |

 

Our shareholders approved the ratification of Ernst & YoungLLP as our independent registered public accounting firm.

 
| Shares voted for  |   | 91,692,310 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 199,042    |   |
| Shares abstaining |   | 311,509    |   |

 

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

 

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## **ITEM6.  EXHIBITS**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                               | ** ** | **Method of Filing** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|
| 10.1             |       | Letter Agreement dated  November 6, 2008 between Registrant and Elixir Group Limited.                                                                                    |       | Filed electronically  herewith |
|             |       |                                                                                                                                                                          |       |                           |
| 10.2             |       | Machine Disposal  Agreement dated November 6, 2008 between Registrant and Elixir  International Limited.                                                                 |       | Filed electronically  herewith |
|             |       |                                                                                                                                                                          |       |                           |
| 10.3             |       | Amendment to Trade  Credit Facility Agreement and Related Note dated November 6, 2008  between Registrant and Elixir International Limited.                              |       | Filed electronically  herewith |
|             |       |                                                                                                                                                                          |       |                           |
| 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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**SIGNATURES**

** **

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| ** ** | ** **             | **ELIXIR GAMING TECHNOLOGIES, INC.** |
|------------|------------------------|--------------------------------------|
|       |                   | (Registrant)                         |
|       |                   |                                 |
| Date:      | November 13 2008  | By:                                  |   /s/ Clarence  Chung |
|       |                   |                                 |   Clarence Chung |   |
|       |                   | Its:                                 |   President, Chief Executive Officer |   |
|       |                   |                                 |   |   |
|       |                   |                                 |   |   |
| Date:      | November 13, 2008 | By:                                  |   /s/ Andy Tsui |
|       |                   |                                 |   Andy Tsui |   |
|       |                   | Its:                                 |   Vice President Finance |   |
|       |                   |                                 |   (Principal Financial Officer) |   |

 

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