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 June 30, 2008** |
|                                                  |
| **OR**                                                |
|                                                  |
| **o**                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Forthe transition period from            to            .**

 

**Commissionfile number: 001-32161**

 

**ElixirGaming Technologies, Inc.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**6650Via Austi Parkway, Suite 170**

**LasVegas, NV  89119**

(Address ofprincipal executive offices, including zip code)

 

**(702)733-7195**

(Registrant’stelephone 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   ̈

 

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   ̈   No  x

 

As of August 8,2008, 114,956,667 shares of common stock of Elixir Gaming Technologies, Inc.were outstanding.

 

 

 

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Table of 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 OFFINANCIAL  CONDITION AND RESULTS OF OPERATIONS** | 17 |
|                                          | Overview                                                                                       | 18 |
|                                          | Results of Operations                                                                          | 19 |
|                                          | Liquidity and Capital Resources                                                                | 28 |
|                                          | Critical Accounting Policies and Estimates                                                     | 30 |
| **Item 3.**                                   | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK**                                | 33 |
| **Item 4.**                                   | **CONTROLS AND PROCEDURES**                                                                    | 33 |
| ** **                                    | ** **                                                                                     |   |
| **PART II  – OTHER INFORMATION**    |                                                                                           |
| **Item 6.**                                   | **EXHIBITS**                                                                                   | 35 |

 

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# **PART I– FINANCIAL INFORMATION**

# ** **

**Item 1.      FINANCIALSTATEMENTS**

 

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

### **CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                | ** ** | **June 30, 2008** | ** **  | **December 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                                | ** ** | **(Unaudited)**             | ** **  | ** **                      | ** ** |
| **ASSETS**                                                                                                                |       |                        |        |                            |       |
| Current assets:                                                                                                           |       |                        |        |                            |       |
| Cash and cash equivalents                                                                                                 |       | $                           | 27,320,020  |                            | $          | 68,286,820 |   |
| Current portion of accounts receivable, trade, net  of allowance for uncollectibles of $274,730 and $176,666              |       | 3,116,188                   |        | 1,689,909                       |       |
| Other receivables, net of allowance for  uncollectibles of $41,542 and $0                                                 |       | 425,559                     |        | 298,940                         |       |
| Inventories                                                                                                               |       | 1,565,224                   |        | 1,686,670                       |       |
| Prepaid expenses and other current assets                                                                                 |       | 915,079                     |        | 975,549                         |       |
|                                                                                                                      |       | 33,342,070                  |        | 72,937,888                      |       |
|                                                                                                                      |       |                        |        |                            |       |
| Accounts receivable, trade, net of current portion                                                                        |       | —                      |        | 60,421                          |       |
| Gaming machines and systems, net of accumulated  depreciation of $3,829,267 and $569,926                                  |       | 50,583,639                  |        | 39,193,962                      |       |
| Property and equipment, net of accumulated  depreciation of $3,568,336 and $3,039,933                                     |       | 4,725,598                   |        | 3,934,532                       |       |
| Intangible assets, net of accumulated amortization  of $2,021,492 and $1,689,096                                          |       | 5,153,925                   |        | 5,486,321                       |       |
| Goodwill                                                                                                                  |       | 84,210                      |        | 84,210                          |       |
| Prepaid commissions                                                                                                       |       | —                      |        | 1,398,800                       |       |
| Deposits and other assets                                                                                                 |       | 6,793,792                   |        | 617,894                         |       |
|                                                                                                                      |       | $                           | 100,683,234 |                            | $          | 123,714,028 |   |
|                                                                                                                      |       |                        |        |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                             |       |                        |        |                            |       |
| Current liabilities:                                                                                                      |       |                        |        |                            |       |
| Accounts payable                                                                                                          |       | $                           | 1,711,856   |                            | $          | 1,798,459 |   |
| Amount due to related party                                                                                               |       | 6,798,922                   |        | 29,601,448                      |       |
| Note payable to related party, current portion                                                                            |       | 7,297,485                   |        | —                          |       |
| Accrued expenses                                                                                                          |       | 2,905,889                   |        | 5,248,458                       |       |
| Short-term debt                                                                                                           |       | 13,544                      |        | 31,893                          |       |
| Capital lease obligations, current portion                                                                                |       | 285,131                     |        | 480,663                         |       |
| Customer deposits                                                                                                         |       | 244,148                     |        | 197,019                         |       |
|                                                                                                                      |       | 19,256,975                  |        | 37,357,940                      |       |
|                                                                                                                      |       |                        |        |                            |       |
| Capital lease obligations, net of current portion                                                                         |       | 854,205                     |        | 916,444                         |       |
| Note payable to related party, net of current  portion                                                                    |       | 6,541,841                   |        | —                          |       |
| Other liabilities                                                                                                         |       | 194,402                     |        | 99,966                          |       |
| Deferred tax liability                                                                                                    |       | 1,084,950                   |        | 1,051,745                       |       |
|                                                                                                                      |       | 27,932,373                  |        | 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                                                                                                |       | 415,761,413                 |        | 411,323,072                     |       |
| Accumulated other comprehensive income                                                                                    |       | (716,498                    | )           | 406,358                         |       |
| Accumulated deficit                                                                                                       |       | (342,409,011                | )           | (327,556,413                    | )          |
|                                                                                                                      |       | 72,750,861                  |        | 84,287,933                      |       |
|                                                                                                                      |       | $                           | 100,683,234 |                            | $          | 123,714,028 |   |

 

See accompanying notes to consolidated financial statements.

 

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

### **ConsolidatedStatements of Operations**

**(Unaudited)**

** **
| ** **                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                  |       |                                                |       |                                              |       |   |   |   |   |
| Gaming machine participation               |       | $                                                   | 768,911    |                                              | $          | — |   | $ | 1,287,528 |   | $ | — |   |
| Table game products                        |       | 570,472                                             |       | 1,682,956                                         |       | 1,250,502 |   | 3,638,979 |   |
| Non-gaming products                        |       | 2,328,581                                           |       | 1,729,848                                         |       | 4,061,458 |   | 3,160,725 |   |
|                                       |       | 3,667,964                                           |       | 3,412,804                                         |       | 6,599,488 |   | 6,799,704 |   |
|                                       |       |                                                |       |                                              |       |   |   |   |   |
| Operating costs and expenses:              |       |                                                |       |                                              |       |   |   |   |   |
| Cost of gaming machine participation       |       | 2,209,741                                           |       | —                                            |       | 3,597,942 |   | — |   |
| Cost of table game products                |       | 273,142                                             |       | 1,456,253                                         |       | 924,347 |   | 2,943,316 |   |
| Cost of non-gaming products                |       | 1,938,385                                           |       | 1,550,654                                         |       | 3,470,870 |   | 3,144,851 |   |
| Selling, general and administrative        |       | 6,738,877                                           |       | 4,124,604                                         |       | 11,880,465 |   | 7,061,979 |   |
| Impairment of assets                       |       | 1,368,829                                           |       | —                                            |       | 1,368,829 |   | — |   |
| Research and development                   |       | 275,589                                             |       | 147,876                                           |       | 599,310 |   | 410,634 |   |
| Depreciation and amortization              |       | 237,915                                             |       | 322,722                                           |       | 469,036 |   | 654,398 |   |
| Restructuring charges                      |       | 2,706                                               |       | —                                            |       | 168,276 |   | — |   |
|                                       |       | 13,045,184                                          |       | 7,602,109                                         |       | 22,479,075 |   | 14,215,178 |   |
| Loss from operations                       |       | (9,377,220                                          | )          | (4,189,305                                        | )          | (15,879,587 | ) | (7,415,474 | ) |
|                                       |       |                                                |       |                                              |       |   |   |   |   |
| Other income (expense):                    |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense and finance fees          |       | (220,234                                            | )          | (636,632                                          | )          | (274,520 | ) | (1,307,744 | ) |
| Interest income                            |       | 155,436                                             |       | 89,286                                            |       | 522,187 |   | 103,159 |   |
| Foreign currency gain/(loss)               |       | (198,439                                            | )          | —                                            |       | 641,527 |   | — |   |
| Other                                      |       | 79,768                                              |       | (92,528                                           | )          | 160,294 |   | 394,919 |   |
|                                       |       | (183,469                                            | )          | (639,874                                          | )          | 1,049,488 |   | (809,666 | ) |
|                                       |       |                                                |       |                                              |       |   |   |   |   |
| Income tax benefit/(expense)               |       | 9,643                                               |       | —                                            |       | (22,498 | ) | — |   |
|                                       |       |                                                |       |                                              |       |   |   |   |   |
| Net loss                                   |       | $                                                   | (9,551,046 | )                                                 | $          | (4,829,179 | ) | $ | (14,852,597 | ) | $ | (8,225,140 | ) |
|                                       |       |                                                |       |                                              |       |   |   |   |   |
| Basic and diluted loss per share           |       | $                                                   | (0.08      | )                                                 | $          | (0.14 | ) | $ | (0.13 | ) | $ | (0.24 | ) |
|                                       |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average common shares outstanding |       | 114,956,451                                         |       | 35,008,041                                        |       | 114,940,007 |   | 33,691,311 |   |

 

See accompanying notes to consolidated financial statements.

 

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

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Six Months Ended June 30,** | ** **  |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                                                   | ** ** | **2008**                                          | ** **  | **2007** | ** ** |
| **Cash flows from operating activities:**                                                    |       |                                              |        |   |   |
| Net loss                                                                                     |       | $                                                 | (14,852,597 | ) | $ | (8,225,140 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                 |       |                                              |        |   |   |
| Income tax expense                                                                           |       | 22,498                                            |        | — |   |
| Foreign currency gains                                                                       |       | (641,527                                          | )           | — |   |
| Impairment of assets                                                                         |       | 1,368,829                                         |        | — |   |
| Depreciation of gaming machines and systems and  property and equipment                      |       | 3,732,343                                         |        | 263,942 |   |
| Amortization of intangible assets                                                            |       | 332,396                                           |        | 438,766 |   |
| Amortization of deferred interest                                                            |       | 20,000                                            |        | 409,395 |   |
| Amortization of prepaid sales commission                                                     |       | 29,970                                            |        | — |   |
| Stock-based compensation expense                                                             |       | 4,367,579                                         |        | 1,765,587 |   |
| Loss on disposition of assets                                                                |       | 30,378                                            |        | 33,075 |   |
| Write down of inventory                                                                      |       | 16,708                                            |        | 394,991 |   |
| Changes in operating assets and liabilities:                                                 |       |                                              |        |   |   |
| Accounts receivable and other receivables                                                    |       | (1,405,216                                        | )           | (964,378 | ) |
| Inventories                                                                                  |       | 104,739                                           |        | 272,560 |   |
| Prepaid expenses and other current assets                                                    |       | (5,146                                            | )           | (33,135 | ) |
| Deposits and other assets                                                                    |       | (455,950                                          | )           | 114,069 |   |
| Accounts payable                                                                             |       | 182,999                                           |        | 750,905 |   |
| Accrued expenses and other current liabilities                                               |       | (2,208,159                                        | )           | (1,449,313 | ) |
| Net cash used in operating activities                                                        |       | (9,360,156                                        | )           | (6,228,676 | ) |
|                                                                                         |       |                                              |        |   |   |
| **Cash flows from investing activities:**                                                    |       |                                              |        |   |   |
| Acquisition of property and equipment                                                        |       | (367,105                                          | )           | (358,434 | ) |
| Payments of related party payables for deposits and  purchase of gaming machines and systems |       | (29,904,010                                       | )           | — |   |
| Sale of property and equipment                                                               |       | 30,465                                            |        | 80,900 |   |
| Net cash used in investing activities                                                        |       | (30,240,650                                       | )           | (277,534 | ) |
|                                                                                         |       |                                              |        |   |   |
| **Cash flows from financing activities:**                                                    |       |                                              |        |   |   |
| Proceeds from sale of stock, warrants and options                                            |       | 70,803                                            |        | 8,144,164 |   |
| Repayment of notes payable and leases                                                        |       | (1,436,797                                        | )           | (2,830,766 | ) |
| Proceeds from stock subscriptions receivable                                                 |       | —                                            |        | 2,650,000 |   |
| Net cash (used in) provided by financing activities                                          |       | $                                                 | (1,365,994  | ) | $ | 7,963,398 |   |
|                                                                                         |       |                                              |        |   |   |
| Increase (decrease) in cash (used in) and cash  equivalents                                  |       | (40,966,800                                       | )           | 1,457,188 |   |
| Cash and cash equivalents at beginning of period                                             |       | 68,286,820                                        |        | 333,888 |   |
| Cash and cash equivalents at end of period                                                   |       | $                                                 | 27,320,020  |   | $ | 1,791,076 |   |
|                                                                                         |       |                                              |        |   |   |
| **Non-cash investing and financing activities:**                                             |       |                                              |        |   |   |
| Gaming machines purchased as related party payables                                          |       | $                                                 | 15,770,411  |   | $ | — |   |
| Office equipment purchased as related party payables                                         |       | $                                                 | 570,486     |   | $ | — |   |
| Conversion of related party payables to trade credit  facility agreement                     |       | $                                                 | 15,000,000  |   | $ | — |   |
|                                                                                         |       |                                              |        |   |   |
| **Supplemental disclosure of cash flows  information**                                       |       |                                              |        |   |   |
| Cash paid for related party interest                                                         |       | $                                                 | 196,144     |   | $ | — |   |

 

See accompanying notes to consolidated financial statements.

 

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

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

** **

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

 

***Basis of Presentation***

 

The principal business activities ofElixir Gaming Technologies, Inc. and its subsidiaries (the “Company”) arethe owning and leasing of electronic gaming machines placed in resorts, hotelsand other venues throughout Asia and the developing and distributing ofproducts related to the gaming and automotive industries. These productsinclude electronic card shuffling devices, RFID casino chips and componentparts for the automotive industry.

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and with the instructions to Form 10-Qand Rule 8-03 of Regulation S-X promulgated by the Securities and ExchangeCommission (“SEC”) and reflect all adjustments, consisting of normal recurringadjustments and other adjustments, which management believes are necessary tofairly present the financial position, results of operations and cash flows ofthe Company, for the respective periods presented. The results of operationsfor an interim period are not necessarily indicative of the results that may beexpected for any other interim period or the year as a whole. The accompanyingunaudited consolidated financial statements should be read in conjunction withthe consolidated 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***

 

These consolidated financial statements are prepared in conformity withaccounting principles generally accepted in the United States (U.S.). Accordingly, the Company is required to make estimates, judgments andassumptions that it believes are reasonable based on its historical experience,contract terms, observance of known trends in the Company and the industry as awhole, and information available from other outside sources.  These estimatesaffect the reported amounts of assets, liabilities, revenues and expenses andrelated disclosures of contingent assets and liabilities.  On a regularbasis, the Company evaluates its estimates, including those related to revenuerecognition, product returns, long-lived assets, inventory obsolescence,stock-based compensation, income taxes, bad debts, warranty obligations,long-term contracts, contingencies and litigation.  Actual results maydiffer from initial estimates.

 

***Cash and Cash Equivalents***

 

All highly liquid debt instruments with an original maturity of threemonths or less are considered cash equivalents.  The Company places itscash and temporary investments with financial institutions.  At June 30,2008, the Company had deposits with financial institutions in excess of FDICinsured limits by $27.2 million.

 

The Company has restricted cash in the amount of $140,000, in the formof a $100,000 certificate of deposit as security on a lease and $40,000 as atreasury deposit for a venue in Cambodia. The restriction for the security deposit will be removed in February 2012upon termination of the lease.  Therestricted cash has been recorded in deposits and other assets in theaccompanying consolidated balance sheets.

 

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***Inventories***

 

Inventories are stated at the lower of cost, determined using thefirst-in, first-out method, or market.  Cost elements included inwork-in-process and finished goods include raw materials, direct labor, andmanufacturing overhead.

 

***Consignment Inventory***

 

As of June 30, 2008 and December 31, 2007, the Company has$658,632 and $65,908, respectively, of units, service supplies and parts onconsignment with distributors, which is recorded as inventory.  Revenue isnot recognized until ownership of the product and title passes to thedistributor which occurs upon the distributor’s use of the products evidencedby a purchase order or sales to third-party customers.

 

***Gaming Machines and Systems***

 

Gaming machines and systems are stated at cost.  The Companydepreciates gaming machines and systems over a five-year useful life to aminimal salvage value once placed in service. Depreciation of gaming machinesand systems of $2,095,892 and $0 and $3,388,646 and $0 is included in cost ofrevenues in the consolidated statement of operations for the three-month andsix-month periods ended June 30, 2008 and 2007, respectively.

 

***Property and Equipment***

 

Property and equipment is stated at cost. Depreciation is computedusing the straight-line method over the useful lives of the assets currentlyestimated to be 3-5 years, which, in the case of leasehold improvements, islimited to the life of the lease and renewal period so long as renewal isreasonably assured. Depreciation of property and equipment of $108,821 and$21,092 and $207,057 and $48,310 are included in cost of sales and research anddevelopments costs in the consolidated statements of operations for thethree-month and six-month periods ended June 30, 2008 and 2007,respectively.

 

***Goodwill and Intangible Assets***

 

Intangible assets consist of patents, customer relationships,trademarks and goodwill. They are recorded at cost and are amortized, exceptgoodwill, on a straight-line basis over the period of time the asset isexpected to contribute directly or indirectly to future cash flows, which rangefrom 10 to 13 years. The straight-line amortization method is utilizedbecause the Company believes there is not a more reliably determinable methodof reflecting the pattern in which the economic benefits of the intangibleassets are consumed or otherwise used up.

 

The Company measures and tests goodwill and intangible assets forimpairment in accordance 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 DoubtfulAccounts***

 

Accounts receivable are stated at face value less any allowance fordoubtful accounts.  Allowances for doubtful accounts are maintained atlevels determined by the Company’s management to adequately provide foruncollectible amounts.  In determining the estimated uncollected amounts,the Company evaluates a combination of factors, including, but not limited to,activity in the related market, financial condition of customers, specificcustomer collection experience and history of write-offs and collections.

 

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***Litigation and Other Contingencies***

 

The Company is involved in various legal matters, litigation and claimsof various types in the ordinary course of its business operations. The Companyhas regular 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.

 

SFAS No. 5, *Accounting forContingencies,* requires that liabilities for contingencies berecorded when it is probable that a liability has been incurred and that theamount can be reasonably estimated. Significant management judgment is requiredrelated to contingent liabilities and the outcome of litigation because bothare difficult to predict. For contingencies where unfavorable outcomes arereasonably possible and which are significant, the Company discloses the natureof the contingency and, where feasible, an estimate of the possible loss.

 

***Revenue Recognition***

 

The Company recognizes revenue when all of the following have beensatisfied:

 

·      persuasive evidence of an arrangementexists;

·      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*

 

The Company recognizes revenue from the sale of its products to endusers upon shipment against customer contracts or purchase orders. Revenue fromshuffler rentals is recorded at the first of each month in accordance withrental contract terms.  The Company completed its transition tooutsourcing all future sales to third-party distributors during the fourthquarter of 2007 and will thereafter no longer record rental revenue on itstable game products.

 

The Company recognizes revenue from its sales to independentdistributors upon shipment to the distributor against distributor contracts orpurchase orders for products.  The Company recognizes revenue onconsignment inventory when ownership of the product and title passes to thedistributor which occurs upon the distributor’s use of the product in itsservice organization or sale to an end user.

 

*Participation Revenues*

 

The Company earns recurring revenue by providing customers withelectronic gaming machines and casino management systems.  Revenues are recognized under the contractualterms of the participation agreements between the Company and the venue ownersor operators and are based on the Company’s share of net winnings, defined asall amounts played in, less all winnings paid out. The Company’s share of jointcosts, in accordance with applicable contracts, if any, is recorded in cost ofrevenues.

 

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

 

Freight-out and warehousing costs are included in cost of productrevenues in the accompanying consolidated statements of operations.

 

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***Stock-Based Compensation***

 

The Company adopted SFAS No. 123R, *Share-BasedPayment*(“SFAS No. 123R”), to account for all its stock-basedcompensation beginning January 1, 2006, and elected the modifiedprospective method of transition. Under the fair value recognition provisionsof SFAS No. 123R, the Company estimates stock-based compensation on themeasurement date, generally the award grant date, and recognizes expense overthe requisite service period. Option valuation models require the input ofhighly subjective assumptions, and changes in the assumptions used canmaterially affect the fair value estimate. Judgment is required in estimatingstock price volatility, forfeiture rates, expected dividends, and expectedterms that options remain outstanding. Stock-based compensation expense totaled$2,565,258 and $1,390,128 and $4,367,579 and $1,765,587 for the three-month andsix-month periods ended June 30, 2008 and 2007, respectively, and isincluded in selling, general and administrative expense in the accompanyingconsolidated statements of operations.  See Note 11 for additionalinformation regarding these assumptions.

 

***Research and Development Expenses***

 

Research and development costs are charged to expense asincurred.  Employee related costs associated with product development areincluded in research and development costs.

 

***Income Taxes***

 

The Company is subject to income taxes in the U.S. (including federaland state) and several foreign jurisdictions in which it operates. Deferredincome tax balances reflect the effects of temporary differences between thecarrying amounts of assets and liabilities and their tax basis and are statedat enacted tax rates expected to be in effect when taxes are actually paid orrecovered. 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.

 

Significant judgment is required in evaluating the Company’s taxpositions and determining its provision for income taxes. During the ordinarycourse of business, there are many transactions and calculations for which theultimate tax determination is uncertain. Effective January 1, 2007, theCompany adopted the provisions of FIN No. 48, *Accounting**for Uncertainty in Income Taxes and Interpretationof FASB Statement No. 109*, which contains a two-step approachto recognizing and measuring uncertain tax positions accounted for inaccordance with SFAS No. 109. The first step is to evaluate the taxposition for recognition by determining if the weight of available evidenceindicates it is more likely than not that the position will be sustained onaudit, including resolution of related appeals or litigation processes, if any.The second step is to measure the tax benefit as the largest amount which ismore than 50% likely of being realized upon ultimate settlement. TheCompany considers many factors when evaluating and estimating its tax positionsand tax benefits, which may require periodic****adjustmentsand which may not accurately anticipate actual outcomes.

 

We are subject to income tax examination by federal and state taxauthorities from 2003 through the present period in the jurisdictions in whichwe operate. There are currently no income tax returns under examination by theInternal Revenue Service or any other major tax authorities.

 

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***Loss Per Share***

 

Basic loss per share is computed by dividing the reported net loss bythe weighted average number of shares of common stock outstanding during theyear. There is no difference in diluted loss per share from basic loss pershare as the assumed exercise of common stock equivalents would have ananti-dilutive effect due to losses.

 

***Foreign Currency Translations and Transactions***

 

The functional currency of the Company’s international subsidiaries isthe local currency, except for Cambodia where the functional currency is theU.S. dollar.  For these subsidiaries, the Company translates the assetsand liabilities at exchange rates in effect at the balance sheet date and incomeand expense accounts at average exchange rates during the year.  Resultingcurrency translation adjustments are recorded directly to accumulated othercomprehensive income within stockholders’ equity.  Gains and lossesresulting from transactions in non-functional currencies are recorded inoperations.

 

**NOTE 2.                SEGMENTS**

 

The Company currently operates in three operating segments: (i) gamingmachine participation 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.

 

The table below presents information as to the Company’s revenues andoperating loss by segment:

 
| ** **                                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                            |       |                                                |       |                                              |       |   |   |   |   |
| Gaming machine participation operations              |       | $                                                   | 768,911    |                                              | $          | — |   | $ | 1,287,528 |   | $ | — |   |
| Table game product operations                        |       | 570,472                                             |       | 1,682,956                                         |       | 1,250,502 |   | 3,638,979 |   |
| Non-gaming product operations                        |       | 2,328,581                                           |       | 1,729,848                                         |       | 4,061,458 |   | 3,160,725 |   |
| Total revenues                                       |       | $                                                   | 3,667,964  |                                              | $          | 3,412,804 |   | $ | 6,599,488 |   | $ | 6,799,704 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Operating loss:                                      |       |                                                |       |                                              |       |   |   |   |   |
| Gaming machine participation operations gross margin |       | $                                                   | (1,440,830 | )                                                 | $          | — |   | $ | (2,310,414 | ) | $ | — |   |
| Table game product operations gross margin           |       | 297,330                                             |       | 226,703                                           |       | 326,155 |   | 695,663 |   |
| Non-gaming product operations gross margin           |       | 390,196                                             |       | 179,194                                           |       | 590,588 |   | 15,874 |   |
| Corporate and other operating costs and expenses     |       | (8,623,916                                          | )          | (4,595,202                                        | )          | (14,485,916 | ) | (8,127,011 | ) |
| Total operating loss                                 |       | $                                                   | (9,377,220 | )                                                 | $          | (4,189,305 | ) | $ | (15,879,587 | ) | $ | (7,415,474 | ) |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Depreciation and amortization:                       |       |                                                |       |                                              |       |   |   |   |   |
| Gaming machine participation operations              |       | $                                                   | 2,095,892  |                                              | $          | — |   | $ | 3,388,646 |   | $ | — |   |
| Table game product operations                        |       | 240,383                                             |       | 227,601                                           |       | 428,747 |   | 501,477 |   |
| Non-gaming product operations                        |       | 60,310                                              |       | 65,692                                            |       | 131,376 |   | 127,174 |   |
| Corporate                                            |       | 46,043                                              |       | 50,521                                            |       | 115,970 |   | 74,057 |   |
| Total depreciation and amortization(1)               |       | $                                                   | 2,442,628  |                                              | $          | 343,814 |   | $ | 4,064,739 |   | $ | 702,708 |   |

 

----

(1)   Includes$2,204,713 and $21,092 and $3,595,703 and $48,310 for the three-month andsix-month periods ended June 30, 2008 and 2007, respectively, that wasreported in cost of sales and research and development costs on theconsolidated statements of operations (see Note 1).

 

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Geographic segment revenues for the three-month and six-month periodsended June 30, 2008 and 2007 are as follows:

 
| ** **    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **    | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Asia          |       | $                                                   | 1,104,835  |                                              | $          | 950,033 |   | $ | 1,723,233 |   | $ | 2,635,638 |   |
| United States |       | 86,884                                              |       | 555,789                                           |       | 640,340 |   | 763,908 |   |
| Australia     |       | 2,254,864                                           |       | 1,793,058                                         |       | 4,011,684 |   | 3,223,935 |   |
| Europe        |       | 210,160                                             |       | 102,316                                           |       | 210,160 |   | 143,012 |   |
| Other         |       | 11,221                                              |       | 11,608                                            |       | 14,071 |   | 33,211 |   |
|          |       | $                                                   | 3,667,964  |                                              | $          | 3,412,804 |   | $ | 6,599,488 |   | $ | 6,799,704 |   |

 

For the three-month and six-month periods ended June 30, 2008, inthe table game products segment, one customer represented 48% and 64%,respectively, of total table game product sales. For the three-month andsix-month periods ended June 30, 2008, within the non-gaming productssegment, one customer represented 46% and 45%, respectively, of totalnon-gaming product sales.

 

**NOTE 3.                INVENTORIES**

 

Inventories consist of the following:

 
| ** **       | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **       | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| Raw materials    |       | $                           | 863,674    |                            | $          | 577,980 |   |
| Work-in-progress |       | 259,457                     |       | 230,449                         |       |
| Finished goods   |       | 442,093                     |       | 878,241                         |       |
|             |       | $                           | 1,565,224  |                            | $          | 1,686,670 |   |

 

Included in the inventory balance is inventory on consignment totaling$658,632 and $65,908 as of June 30, 2008 and December 31, 2007,respectively.

 

**NOTE 4.                PREPAIDEXPENSES AND OTHER CURRENT ASSETS**

 

Prepaid expenses and other current assets consist of the following:

 
| ** **                               | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| Prepaid taxes                            |       | $                           | 560,578    |                            | $          | 701,527 |   |
| Prepaid service and licensing agreements |       | 136,026                     |       | 71,879                          |       |
| Prepayment of suppliers                  |       | 67,092                      |       | 26,860                          |       |
| Other                                    |       | 151,383                     |       | 175,283                         |       |
|                                     |       | $                           | 915,079    |                            | $          | 975,549 |   |

 

**NOTE 5.                RECEIVABLES**

 

Accounts receivable consists of the following:

 
| ** **                            | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| Trade accounts                        |       | $                           | 3,390,918  |                            | $          | 1,926,996 |   |
| Other                                 |       | 467,101                     |       | 298,940                         |       |
|                                  |       | 3,858,019                   |       | 2,225,936                       |       |
| Less: allowance for doubtful accounts |       | (316,272                    | )          | (176,666                        | )          |
| Net                                   |       | $                           | 3,541,747  |                            | $          | 2,049,270 |   |
| Non-current portion                   |       | $                           | —     |                            | $          | 60,421 |   |

 

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**NOTE 6.                PROPERTYAND EQUIPMENT**

 

Property and equipment consists of the following:

 
| ** **                                     | ** ** | **Useful Life  (years)** | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | ** **                    | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| Equipment rented by customers                  |       | 3 – 5                    |       | $                           | 15,914     |                            | $          | 85,011 |   |
| Equipment and vehicles, furniture and fixtures |       | 3 – 5                    |       | 7,490,809                   |       | 6,329,146                       |       |
| Leasehold improvements                         |       | 5                             |       | 787,211                     |       | 560,308                         |       |
|                                           |       |                          |       | 8,293,934                   |       | 6,974,465                       |       |
| Less accumulated depreciation                  |       |                          |       | (3,568,336                  | )          | (3,039,933                      | )          |
|                                           |       |                          |       | $                           | 4,725,598  |                            | $          | 3,934,532 |   |

 

Of the Company’s property and equipment, $1.6 million represents assetsthat are held under capital leases (see Note 10).

 

**NOTE 7.                GOODWILLAND 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 impairment is necessary during the six-month period ended June 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)** | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **                    | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| Patents                              |       | 10                            |       | 4,986,314                   |       | 4,986,314                       |       |
| Less:  accumulated amortization |       |                          |       | (1,407,217                  | )          | (1,147,900                      | )          |
|                                 |       |                          |       |                        |       |                            |       |
| Customer relationships               |       | 10-13                         |       | 1,684,103                   |       | 1,684,103                       |       |
| Less:  accumulated amortization |       |                          |       | (534,690                    | )          | (478,712                        | )          |
|                                 |       |                          |       |                        |       |                            |       |
| Trademarks                           |       | 10-13                         |       | 505,000                     |       | 505,000                         |       |
| Less:  accumulated amortization |       |                          |       | (79,585                     | )          | (62,484                         | )          |
|                                 |       |                          |       | $                           | 5,153,925  |                            | $          | 5,486,321 |   |
|                                      |            |                               |            |                             |            |                                 |            |  |  |

 

**NOTE8.           PREPAIDCOMMISSIONS, DEPOSITS AND OTHER 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 EITF No. 96-18.  The 2006 Warrants wereclassified in the Company’s balance sheet as prepaid commissions subject toamortization to commission expense at a rate of 8% of the gross revenuegenerated by the distributor.

 

For the first half of 2008, table game revenue has 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 may not be recoverable.  Per

 

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SFAS No. 144, a long-lived asset (asset group) shall be tested forrecoverability whenever events or changes in circumstances indicate that itscarrying amount may not be recoverable including an accumulation of costssignificantly in excess of the amount originally expected for the acquisition.

 

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.  Based upon the above,the Company recorded an impairment to the asset of $1,368,829 and included theamount in loss from operations in our consolidated statement of operations.

 

*Deposits and Other Assets*

** **
| ** **                                       | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| Deposits with a related party on gaming machines |       | $                           | 5,785,258  |                            | $          | — |   |
| Office equipment rental deposits                 |       | 98,129                      |       | 67,505                          |       |
| Sales tax in dispute                             |       | 433,513                     |       | 418,449                         |       |
| Restricted cash                                  |       | 146,497                     |       | 104,363                         |       |
| Prepaid non-current taxes                        |       | 330,395                     |       | —                          |       |
| Other                                            |       | —                      |       | 27,577                          |       |
| Total                                            |       | $                           | 6,793,792  |                            | $          | 617,894 |   |

 

**NOTE 9.                ACCRUEDEXPENSES**

 

Accrued expenses consist of the following:

 
| ** **                        | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| Payroll and related costs         |       | $                           | 668,170    |                            | $          | 1,832,175 |   |
| Restructuring and severance costs |       | —                      |       | 1,290,837                       |       |
| Legal, accounting and tax         |       | 36,579                      |       | 419,516                         |       |
| Litigation                        |       | 1,358,553                   |       | 1,318,994                       |       |
| Sales tax                         |       | 104,209                     |       | —                          |       |
| Deferred rent                     |       | 168,589                     |       | —                          |       |
| Overpayment from customer         |       | 163,206                     |       | 148,812                         |       |
| Other                             |       | 406,583                     |       | 238,124                         |       |
| Total                             |       | $                           | 2,905,889  |                            | $          | 5,248,458 |   |

 

Included in accrued liabilities at June 30, 2008 is $1.3 millionfor potential charges in relation to a lawsuit with the former owner of Dolphin(see Note 15).

 

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**NOTE 10.              DEBT ANDCAPITAL LEASE OBLIGATIONS**

 

Debt and capital lease obligations consist of the following:

 
| ** **                                                                                                       | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                       | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| Note payable to a related party at interest of 8%  (Note 12)                                                     |       | $                           | 13,839,326 |                            | $          | — |   |
| Short-term line of credit at an Australian bank at  interest between 13.83% and 13.98%                           |       | 13,544                      |       | 31,893                          |       |
| Capital lease obligation to an Australian bank at  interest between 7.22% and 13.54% collateralized by equipment |       | 1,031,157                   |       | 1,051,713                       |       |
| Capital lease obligations for furniture and equipment  at 10.0% interest                                         |       | 108,179                     |       | 345,394                         |       |
|                                                                                                             |       | 14,992,206                  |       | 1,429,000                       |       |
| Less current portion                                                                                             |       | (7,596,160                  | )          | (512,556                        | )          |
| Long-term portion                                                                                                |       | $                           | 7,396,046  |                            | $          | 916,444 |   |

 

**NOTE 11.              STOCK-BASEDCOMPENSATION**

 

**Options**

 

The Company has two stock options plans: the Amended and Restated 1999Stock Option Plan and the Amended and Restated 1999 Directors’ Stock OptionPlan (the “Stock Option Plans”), through which 15,000,000 shares and 300,000shares are authorized, respectively. In May 2007, stock options for thepurchase of 5,000,000 of common stock were granted by the board of directorsoutside of the Stock Option Plans pursuant to the initial closing of thetransactions under the Participation Agreement to certain employees andnon-employees.  Each option had an exercise price of $2.90 per share andwill vest over a three-year period and have a five-year term.  During thesix-month period ended June 30, 2008, stock options for the purchase of7,183,539 shares of common stock were granted with a weighted average exerciseprice of $4.47 and will vest over a three-year period.

 

As of June 30, 2008, there were options for the purchase of15,169,271 shares of common stock issued and outstanding under the two plansand stock options for purchase of common stock granted under the ParticipationAgreement.

 

A summary of the Stock Option Plans and stock options for purchase ofcommon stock granted under the Participation Agreement as of June 30,2008, and changes during the six-month period then ended, is presented below:

 
| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding as of December 31, 2007 |       | 8,218,369                  |       | $                                          | 2.56       |                                                                     |       |                            | $          | 14,311,016 |   |
| Granted                                  |       | 7,183,539                  |       | $                                          | 4.47       |                                                                     |       |                            |       |   |
| Exercised                                |       | (41,737                    | )          | $                                          | 1.70       |                                                                     |       |                            |       |   |
| Forfeited or expired                     |       | (190,900                   | )          | $                                          | 4.43       |                                                                     |       |                            |       |   |
| Outstanding as of June 30, 2008     |       | 15,169,271                 |       | $                                          | 3.45       |                                                                     | 5.19       |                            | —     |   |
| Exercisable as of June 30, 2008     |       | 5,141,392                  |       | $                                          | 2.47       |                                                                     | 3.43       |                            | —     |   |
|                                          |            |                            |            |                                            |            |                                                                          |            |                                 |            |  |  |

 

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

 

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**Warrants**

 

A summary of the status of the Company’s warrants outstanding at June 30,2008 and changes during the six-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 |   |
| Granted                                |       | —       |       |                                   |       |                                                                     |       |                            |       |
| Exercised                              |       | —       |       |                                   |       |                                                                     |       |                            |       |
| Cancelled                              |       | —       |       |                                   |       |                                                                     |       |                            |       |
| Warrants, as of June 30, 2008     |       | 79,761,375   |       | $                                      | 2.51       |                                                                     | 4.76       |                            | —     |   |
| Exercisable as of June 30, 2008   |       | 13,761,375   |       | $                                      | 1.86       |                                                                     | 3.60       |                            | —     |   |
|                                        |            |              |            |                                        |            |                                                                          |            |                                 |            |  |  |

 

Outstanding and exercisable warrants have no aggregate intrinsic valueas of June 30, 2008 due to the fair value of the Company’s stock as ofthat date.

 

**Recognition and Measurement**

 

The fair value of each stock-based award to employees and non-employeedirectors is estimated on the measurement date, which generally is the grantdate, using the Black-Scholes-Merton option-pricing model. Option valuationmodels require the input of highly subjective assumptions, and changes inassumptions used can materially affect the fair value estimates. The Companyestimates the expected life of the award by taking into consideration thevesting period, contractual term, historical exercise data, expected volatility,blackout periods and other relevant factors. Volatility is estimated byevaluating the Company’s historical volatility data. The risk-free interestrate at the date of grant is based on U.S. Treasury constant maturity rates fora period approximating the expected life of the award. The Company historicallyhas not paid dividends, nor does it expect to pay dividends in the foreseeablefuture; 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 six-month period ended June 30, 2008 and2007:

 
| ** **                     | ** ** | **June 30,** | ** ** |
|--------------------------------|------------|-------------------|------------|
| ** **                     | ** ** | **2008**          | ** ** | **2007** | ** ** |
| **Range of values:** | ** ** | **Low**           | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** |
| Expected volatility            |       | 60.00             | %          | 63.59 | % | 82.29 | % | 83.75 | % |
| Expected dividends             |       | —            |       | — |   | — |   | — |   |
| Expected term (in years)       |       | 3.13              |       | 10.00 |   | 3.59 |   | 6.00 |   |
| Risk free rate                 |       | 2.72              | %          | 4.01 | % | 4.51 | % | 4.75 | % |

 

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,

 

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and recognizes compensation expense for eachtranche on a straight-line basis over the estimated requisite service period.

 

**NOTE 12.              RELATEDPARTY TRANSACTIONS**

 

During the six-month period ended June 30, 2008, the Companypurchased $26.7 million of electronic gaming machines, casino managementsystems and other peripherals from Elixir International Limited (“ElixirInternational”), the Company’s largest shareholder, a related party, at costplus fifteen percent (15%).  At June 30, 2008 and December 31,2007, the Company had accounts payable of $6.3 million and $29.6 million,respectively, due to Elixir International for purchases of electronic gamingmachines, casino management systems and other peripherals and a note payable of$13.8 million and $0, respectively.  The accounts payable have cash paymentterms of fifty percent (50%) due upon order and the balance 45 days thereafterwith no required interest payments.  In addition, at June 30, 2008,the Company had deposits on orders with Elixir International totaling $5.8million, and a further $1.5 million of deposits were not paid or recorded as ofthe balance sheet date.

 

On April 21, 2008, the Company entered into a Trade CreditFacility Agreement (the “Facility Agreement”) with Elixir International, awholly-owned subsidiary of Elixir Group. Pursuant to the Facility Agreement, Elixir International may, from timeto time at its option, provide 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 accrued interestthereon, of the Initial Advance in 24 equal monthly installments after the dateof issue.  The Initial Advance is subjectto demand by Elixir International for immediate payment only if there is eitheran event of default or a change of control as defined in the FacilityAgreement.  Any further notes, however,will be subject to demand by Elixir International for immediate payment of anyoutstanding sums owed to Elixir International at anytime and at the solediscretion of Elixir International.

 

The Facility Agreement does not include a commitment on the part ofElixir International and all further borrowings by the Company are subject tothe approval of Elixir International at its sole discretion.

 

Elixir International and the Company will continue to review financingarrangements from time to time. However, there can be no assurance of anyfurther amount of credit obtainable under the Facility Agreement or other financingarrangements.

 

During the quarter, the Company purchased certain office equipment,furniture and other assets from Elixir International for use at its offices inthe Philippines.  The total value of suchassets, which were acquired at net book value with no mark-up, wasapproximately $300,000.

 

For the three-month and six-month periods ended June 30, 2008 and2007, the Company recorded sales of table game products of $304,021 and $0 and$373,377 and $0, respectively, to Elixir International.

 

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**NOTE 13.              INCOME TAXES**

 

The Company’s effective tax rate for the six-month periods ended June 30,2008 and 2007 approximates 0.6% 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.              RESTRUCTURINGCHARGES**

 

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 Companyvacated during the first quarter of 2008. The liability was calculated based upon the remaining lease rentals,reduced by a combination of actual sublease rentals and estimated subleaserentals and recorded at fair value.  Theliability is reduced as lease payments are made.  The liability of $168,589 and $0 as of June 30,2008 and December 31, 2007, respectively, is recorded in accrued expensesin the accompanying consolidated balance sheets.  For the three-month and six-month periodsended June 30, 2008, total costs of $2,706 and $168,276 have been incurredand recorded as restructuring costs in the accompanying consolidated statementsof operations.

 

**NOTE 15.              COMMITMENTSAND 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 being briefed to theU.S. Court of Appeals for the Federal Circuit.

 

*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.  The matter isproceeding toward trial and the Company will vigorously defend its position.

 

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*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 the salesof the products to the equipment lessors is the level at which sales/use taxshould have been collected, liability of the leasing companies could be passedon to the Company and may not be recoverable. The outcome could range from arefund 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.

 

**Dolphin Advanced Technologies**

 

In April 2008, the Company entered into a non-binding letter ofintent for the possible sale of Dolphin Advanced Technologies Pty. Ltd. (“Dolphin”).  Pursuant to the terms of the letter, thetransaction was to be completed by April 30, 2008.  After additional negotiations with theinterested party, the Company has decided to defer any decision on the matteruntil a later date.

 

**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.              SUBSEQUENTEVENTS**

 

On June 25, 2008,the board of directors, by unanimous written consent, approved a new StockOption Plan to replace the current plan. The new plan is subject to shareholder approval at the upcomingshareholder meeting.

 

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**ITEM 2.****                                                ****MANAGEMENT’S DISCUSSION ANDANALYSIS 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 other representativesmade by us to analysts, stockholders, investors, news organizations and others,and discussions with management and other of our representatives. For suchstatements, we claim the protection of the safe harbor for forward-lookingstatements contained in the Private Securities Litigation Reform Act of 1995.

 

Our future results, including results related to forward-lookingstatements, involve a number of risks and uncertainties. No assurance can begiven that the results reflected in any forward-looking statements will beachieved. Any forward-looking statement speaks only as of the date on whichsuch statement is made. Our forward-looking statements are based uponassumptions that are sometimes based upon estimates, data, communications and otherinformation from suppliers, government agencies and other sources that may besubject 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,*Random Ejection*TM, *Random Plus*TM, *PokerOne*TM, *Chip Wa**$**her*TM, *ShufflePro*TM, *DeckSetter*® and*Dolphin*TM. This report also makesreference to trademarks and trade names of other companies.

 

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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 (“Participation Agreement”) dated June 12,2007 between us and Elixir Group Limited (“Elixir Group”).  Since then our primary business focus hasbeen on the ownership and leasing of electronic gaming machines and gamingmanagement systems placed with venue owners on a revenue share basis acrossseveral countries in Asia where we or our affiliates have established astrategic presence.  Revenue from our electronic gaming machine participationoperations comprised 21% and 19% of our total revenues for the three-month andsix-month periods ended June 30, 2008.

 

Our principal shareholder, Elixir Group, a wholly-owned subsidiary ofMelco International Development Limited, is our strategic partner in theelectronic gaming machine business.  Through its wholly-owned subsidiary,Elixir International Limited (“Elixir International”), Elixir Group identifiesand secures on our behalf venues for the placement of electronic gamingmachines and casino management systems, which track game performance andprovide statistics on each installed electronic gaming machine owned and leasedby us.  We contract with the venue owner or operator for the placement ofthe electronic gaming machines on a revenue sharing basis. Elixir Group assiststhe venue owner or operator with the licensing and regulatory process, thephysical design of the gaming floor and the construction and installation ofelectronic gaming machines and systems.  Elixir Group targets venues with noexisting gaming operations and offers a turn-key solution whereby a gamingfloor is delivered in a fully operational state to the venue owner. Elixir Group acquires and installs the gaming machines, casino managementsystems and other gaming peripherals and upon completion of the set-up of thegaming floor, sells us the gaming machines and systems and peripherals at itscost plus fifteen percent (15%).

 

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**Resultsof Operations for the Three-Month Periods Ended June 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 three-month periods ended June 30, 2008and 2007:  gaming machine participation, table game products andnon-gaming products.

 
| ** **                          | ** ** | ** **                                          | ** ** | **Increase/(Decrease)** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** | **Dollar**              | ** ** | **%** | ** ** |
| ** **                          | ** ** | **2008**                                            | ** ** | **2007**                | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Total:                              |       |                                                |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                                   | 3,667,964  |                    | $          | 3,412,804 |   | $ | 255,160 |   | 7 | % |
| Gross (loss)/profit                 |       | $                                                   | (753,305   | )                       | $          | 405,897 |   | $ | (1,159,202 | ) | (286 | )% |
| Gross margin percentage             |       | (21                                                 | )%         | 12                      | %          | (33 | )% | (277 | )% |
| Operating loss                      |       | $                                                   | (9,377,220 | )                       | $          | (4,189,305 | ) | $ | (5,187,915 | ) | (124 | )% |
| Net loss                            |       | $                                                   | (9,551,046 | )                       | $          | (4,829,179 | ) | $ | (4,721,867 | ) | (98 | )% |
|                                |       |                                                |       |                    |       |   |   |   |   |
| Basic and diluted loss per share    |       | $                                                   | (0.08      | )                       | $          | (0.14 | ) | $ | 0.06 |   | 40 | % |
| Weighted average shares outstanding |       | 114,956,451                                         |       | 35,008,041              |       |   |   |   |   |
|                                |       |                                                |       |                    |       |   |   |   |   |
| Gaming machine participation:       |       |                                                |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                                   | 768,911    |                    | $          | — |   | $ | 768,911 |   | 100 | % |
| Gross loss                          |       | $                                                   | (1,440,830 | )                       | $          | — |   | $ | (1,440,830 | ) | (100 | )% |
| Gross margin percentage             |       | (187                                                | )%         | —                  | %          | (187 | )% | (100 | )% |
|                                |       |                                                |       |                    |       |   |   |   |   |
| Table game products:                |       |                                                |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                                   | 570,472    |                    | $          | 1,682,956 |   | $ | (1,112,484 | ) | (66 | )% |
| Gross profit                        |       | $                                                   | 297,329    |                    | $          | 226,703 |   | $ | 70,626 |   | 31 | % |
| Gross margin percentage             |       | 52                                                  | %          | 13                      | %          | 39 | % | 47 | % |
|                                |       |                                                |       |                    |       |   |   |   |   |
| Units sold:                         |       |                                                |       |                    |       |   |   |   |   |
| Shufflers                           |       | 46                                                  |       | 2                       |       | 44 |   | 2,200 | % |
| DeckCheckers                        |       | —                                              |       | 4                       |       | (4 | ) | (100 | )% |
| ChipWashers                         |       | 1                                                   |       | —                  |       | — |   | 100 | % |
| RFID chips                          |       | 71,000                                              |       | 257,000                 |       | (186,000 | ) | (72 | )% |
|                                |       |                                                |       |                    |       |   |   |   |   |
| Non-gaming products:                |       |                                                |       |                    |       |   |   |   |   |
| Revenues                            |       | $                                                   | 2,328,581  |                    | $          | 1,729,848 |   | $ | 598,733 |   | 35 | % |
| Gross profit                        |       | $                                                   | 390,197    |                    | $          | 179,194 |   | $ | 211,003 |   | 118 | % |
| Gross margin percentage             |       | 17                                                  | %          | 10                      | %          | 35 | % | 340 | % |

 

Total revenues for thethree-month period ended June 30, 2008 increased from the correspondingperiod in the prior year due to an increase in non-gaming product sales and anincrease in participation revenues. Revenue from non-gaming products improvedas 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 sales.

 

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.

 

Operating loss and loss pershare for the three-month period ended June 30, 2008 were impacted by ournegative gross margin and increased selling, general and administrativeexpenses, which increased due to higher management compensation and increasedshare-based compensation.

 

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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 August 12, 2008 we had placed a total of 1,262 gaming machines inservice which are generating revenue in five venues in the Philippines and ninevenues in Cambodia. The term “gaming machine” refers to gaming machine “seats”as multi-player gaming machines have more than one seat.

 

We have installed an additional 186 gaming machines in three existingvenues in the Philippines that are expected to be in service and begingenerating revenue by the end of August 2008.

 

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 on a timely basis and increase our averagerevenue share.

 

Since the inception of our gaming machine participation business inCambodia, two contracted venues have been cancelled resulting in the removal of233 gaming machines. Currently one venue in Cambodia at which 137 gamingmachines are installed is subject to temporary closure due to a gaming licenseissue, hence the gaming machines are currently not in service or generatingrevenue, and there can be no assurance that this venue will reopen at a futurepoint.

 

An additional 108 gaming machines that have been installed in twovenues in Vietnam are undergoing the final stages of contract renegotiation andare expected to be in service and generating revenue before the end of thirdquarter.

 

We anticipate additional machine placements through the addition ofmachines in existing high-performing venues and through the rollout of newcontracts in the Philippines and the Indo-China region.  However, in the event gaming machineperformance at a contracted venues does not meet our expectations, we maychoose to withdraw all or a portion of our gaming machines from that venue forfuture redeployment in existing better performing venues or new venues whichmay cause gaming machines in service and generating revenue to fluctuate.

 

**Table Game Products**

 

Table game products revenuedecreased primarily as a result of decreases in DeckChecker, RFID chip and servicerevenue offset by increases in Shuffler revenue and ChipWasher revenue.  DeckChecker revenue decreased $862,000 to$33,700 for the three-month period ended June 30, 2008 compared to$895,800 in the corresponding period of the prior year due to a decrease inorders from our distributors.  In theprior year quarter, our two new distributors placed their initial orders as theresult of the transition to our distributor model.  All revenue in the current three-month periodis from the sale of parts as no units were sold.  RFID chip revenue decreased $114,100 to$220,400 for the three-month period ended June 30, 2008 compared to$334,500 in the corresponding period of the prior year due to a decrease inlarge chip orders for new casino openings. Service revenue decreased $158,200 to $33,200 for the three-month periodended June 30, 2008 compared to $191,400 in the corresponding period ofthe prior year due to the transfer of all service to our distributor.  This revenue line is expected to continue todecrease as existing service contracts terminate.  Shuffler revenue increased by approximately$30,000 to $238,600 for the three-month period ended June 30, 2008compared to $208,600 in the corresponding period in the prior year. Theincrease in shuffler revenue is a result of an increase in sales to ourEuropean distributor.  ChipWasher revenueincreased $26,000 for the three-month period ended June 30, 2008 comparedto $0 in the corresponding period in the prior year.

 

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Our gross margin on tablegame products improved in the three-month period ended June 30, 2008 overthe corresponding period of the prior year due to an impairment of inventorybooked in the prior year period.

 

**Non-Gaming Products**

 

Non-gaming products revenue,which consists of automotive tooling and parts, increased in the three-monthperiod ended June 30, 2008 by $598,700 to $2,328,600 compared to $1,729,900in the corresponding period of the prior year.  The increase is related toincreased sales to our largest customer as they have increased their productionfor the year.

 

Gross margins improved by$211,003 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.

 

**Operating Expenses**

 

The following is a scheduleshowing expenses on a consolidated basis:

 
| ** **                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** | **Dollar** | ** ** | **%**                   | ** ** |
| ** **                          | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Amount**              | ** ** | **Amount** | ** ** |
| Cost of products                    |       | $                                                   | 4,421,268  |       | $          | 3,006,907               |       | $ | 1,414,361 |   | 47 | % |
| Selling, general and administrative |       | 4,173,619                                           |       | 2,734,476  |       | 1,439,143               |       | 53 | % |
| Stock-based compensation expense    |       | 2,565,258                                           |       | 1,390,128  |       | 1,175,130               |       | 85 | % |
| Impairment of assets                |       | 1,368,829                                           |       | —     |       | 1,368,829               |       | 100 | % |
| Research and development            |       | 275,589                                             |       | 147,876    |       | 127,713                 |       | 86 | % |
| Depreciation and amortization       |       | 237,915                                             |       | 322,722    |       | (84,807                 | )          | (26 | )% |
| Restructuring charges               |       | 2,706                                               |       | —     |       | 2,706                   |       | 100 | % |
|                                |       | $                                                   | 13,045,184 |       | $          | 7,602,109               |       | $ | 5,443,075 |   | 72 | % |

 

**Selling, General andAdministrative Expense**

 

During three-month periodended June 30, 2008, selling, general and administrative expensesincreased $1,439,100, which is primarily due to increased salaries and wagesexpense of $885,200 as a result of an expanded senior management team andexpanded accounting and business development personnel. Additionally, travelexpense increased by $279,300 due to the expansion of international officelocations, consulting and accounting fees increased by $140,900 due to SOXimplementation and new auditors, insurance costs increased by $38,800 as aresult of increases in coverage of property and equipment and increased cost ofdirectors and officers insurance, bad debt expense increased by $219,900 due tothe inability to collect on past due table game product sales due tosurrendering our gaming licenses in U.S. jurisdictions and investor relationsexpense increased by $65,500 due to increased investor relations activity.

 

**Stock-Based Compensation Expense**

 

Stock-based compensationexpensed increased by $1,175,100 to $2,565,300 for the three-month period endedJune 30, 2008, compared to $1,390,100 in the corresponding period of theprior year due to additional stock option grants issued to executive managementand other employees.

 

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**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.

 

For the first half of 2008, table game revenue has not met ourexpectations.  In addition, future orderplacements indicate the remaining value on June 30, 2008 of $1,368,829 maynot be recoverable.  Per SFAS No. 144,a long-lived asset (asset group) shall be tested for recoverability wheneverevents or changes in circumstances indicate that its carrying amount may not berecoverable including an accumulation of costs significantly in excess of theamount originally expected for the acquisition.

 

We estimated 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.  Based upon the above,we recorded an impairment to the asset of $1,368,829 and included the amount inloss from operations in our consolidated statement of operations and deficit.

 

**Research and Development Expenses**

 

Research and developmentexpenses increased as a result of increased headcount at our new research anddevelopment facility in Zhuhai, China. This increase in headcount is to upgrade and improve our existing tablegame products.

 

**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 Statementof Accounting Standards (“SFAS”) No. 146, *Accounting forCost Associated with Exit or Disposal Activities*, the Companyincurred restructuring charges of $2,700 during the three-month period ended June 30,2008 for operating leases the Company ceased use of during the three-monthperiod ended March 31, 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.

 

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**Other Income (Expenses):**

 
| ** **                        | ** ** | ** **                                          | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                        | ** ** | **Three Months Ended June 30,** | ** ** | **Dollar** | ** ** | **%**                   | ** ** |
| ** **                        | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Amount**              | ** ** | **Amount** | ** ** |
| Interest expense and finance fees |       | $                                                   | (220,234   | )          | $          | (636,632                | )          | $ | 416,398 |   | (65 | )% |
| Interest income                   |       | 155,436                                             |       | 89,286     |       | 66,150                  |       | 74 | % |
| Foreign currency gains            |       | (198,439                                            | )          | —     |       | (198,439                | )          | 100 | % |
| Acquisition costs                 |       | —                                              |       | (72,006    | )          | 72,006                  |       | (100 | )% |
| Other                             |       | 79,768                                              |       | (20,522    | )          | 100,290                 |       | (489 | )% |
| Total                             |       | $                                                   | (183,469   | )          | $          | (639,874                | )          | $ | 456,405 |   | (71 | )% |
| Income tax provisions             |       | 9,643                                               |       | —     |       | 9,643                   |       | 100 | % |

 

**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 June 30, 2008 versus the corresponding periodin the prior year as a result of the pay-off of $11.0 million in long-term debtin November 2007 accruing interest at 13% offset by a $15.0 millionincrease in long-term debt in April 2008 accruing interest at 8%.

 

**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 $25.5 million to $27.3 million from June 30, 2007 to June 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 thePhilippines peso.

 

**Other**

 

In the three-month periodended June 30, 2008, we recorded $0.09 million income related to a grantfrom the Australian Federal Government.

 

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**Results of Operations for theSix-Month Periods Ended June 30, 2008 and 2007:**

 

The following schedule showing summarized operating results on aconsolidated basis and separately by each of our three segments for thesix-month periods ended June 30, 2008 and 2007: gaming machine participation, table game products and non-gaming machineproducts.

 
| ** **                          | ** ** | ** **                                        | ** **  | ** ** | ** ** | **Increase (Decrease)** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|-------------|------------|------------|------------------------------|------------|
| ** **                          | ** ** | **Six Months Ended June 30,** | ** **  | **Dollar** | ** ** | **%**                        | ** ** |
| ** **                          | ** ** | **2008**                                          | ** **  | **2007**   | ** ** | **Amount**                   | ** ** | **Amount** | ** ** |
| Total:                              |       |                                              |        |       |       |                         |       |   |   |
| Revenues                            |       | $                                                 | 6,599,488   |       | $          | 6,799,704                    |       | $ | (200,216 | ) | (3 | )% |
| Gross (loss)/profit                 |       | $                                                 | (1,393,671  | )          | $          | 711,537                      |       | $ | (2,105,208 | ) | (296 | )% |
| Gross margin percentage             |       | (21                                               | )%          | 10         | %          | (31                          | )%         | (302 | )% |
| Operating loss                      |       | $                                                 | (15,879,587 | )          | $          | (7,415,474                   | )          | $ | (8,464,113 | ) | (114 | )% |
| Net loss                            |       | $                                                 | (14,852,597 | )          | $          | (8,225,140                   | )          | $ | (6,627,457 | ) | (81 | )% |
|                                |       |                                              |        |       |       |                         |       |   |   |
| Basic and diluted loss per share    |       | $                                                 | (0.13       | )          | $          | (0.24                        | )          | $ | 0.11 |   | 47 | % |
| Weighted average shares outstanding |       | 114,940,007                                       |        | 33,691,311 |       |                         |       |   |   |
|                                |       |                                              |        |       |       |                         |       |   |   |
| Gaming machine participation:       |       |                                              |        |       |       |                         |       |   |   |
| Revenues                            |       | $                                                 | 1,287,528   |       | $          | —                       |       | $ | 1,287,528 |   | 100 | % |
| Gross loss                          |       | $                                                 | (2,310,414  | )          | $          | —                       |       | $ | (2,310,414 | ) | 100 | % |
| Gross margin percentage             |       | (179                                              | )%          | —     | %          | (179                         | )%         | 100 | % |
|                                |       |                                              |        |       |       |                         |       |   |   |
| Table game products:                |       |                                              |        |       |       |                         |       |   |   |
| Revenues                            |       | $                                                 | 1,250,502   |       | $          | 3,638,979                    |       | $ | (2,388,477 | ) | (66 | )% |
| Gross profit                        |       | $                                                 | 326,155     |       | $          | 695,663                      |       | $ | (369,508 | ) | (53 | )% |
| Gross margin percentage             |       | 26                                                | %           | 19         | %          | 7                            | %          | 81 | % |
|                                |       |                                              |        |       |       |                         |       |   |   |
| Units sold:                         |       |                                              |        |       |       |                         |       |   |   |
| Shufflers                           |       | 145                                               |        | 12         |       | 133                          |       | 1,180 | % |
| DeckCheckers                        |       | —                                            |        | 13         |       | (13                          | )          | (100 | )% |
| ChipWashers                         |       | 2                                                 |        | 1          |       | 1                            |       | 100 | % |
| RFID chips                          |       | 124,400                                           |        | 934,000    |       | (809,600                     | )          | (87 | )% |
|                                |       |                                              |        |       |       |                         |       |   |   |
| Non-gaming products:                |       |                                              |        |       |       |                         |       |   |   |
| Revenues                            |       | $                                                 | 4,061,458   |       | $          | 3,160,725                    |       | $ | 900,733 |   | 28 | % |
| Gross profit                        |       | $                                                 | 590,588     |       | $          | 15,874                       |       | $ | 574,714 |   | 3,620 | % |
| Gross margin percentage             |       | 15                                                | %           | 1          | %          | 64                           | %          | 12,704 | % |

 

Total revenues for thesix-month period ended June 30, 2008 decreased from the correspondingperiod in the prior year due to a decrease in table game product sales as aresult of reduced sales of RFID chips and DeckCheckers.  The decrease was partly offset by increasesin gaming machine participation revenue as a result of the introduction of thissegment in the third quarter of fiscal 2007. Sales of RFID chips during the six-month period ended June 30, 2007were favorably impacted by new casino openings in Macau.  Additionally, revenue from non-gamingproducts improved as a result of an increased order from our majorcustomer.  In the prior year our majorcustomer did not meet its internal targets, which had adverse effect on ourproduction and sales of 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.

 

Operating loss and loss pershare for the six-month period ended June 30, 2008 were impacted by ournegative gross margin and increased selling, general and administrativeexpenses, which increased due to increased management compensation andincreased share-based compensation.

 

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**Gaming Machine Participation**

 

InSeptember 2007, we began our electronic gaming machine participationoperations in Asia as part of our primary focus on placing gaming machines on arevenue share basis.

 

Asof August 12, 2008 we had placed a total of 1,262 gaming machines in servicewhich are generating revenue in five venues in the Philippines and nine venuesin Cambodia. The term “gaming machine” refers to gaming machine “seats” asmulti-player gaming machines have more than one seat.

 

Wehave installed an additional 186 gaming machines in three existing venues inthe Philippines that are expected to be in service and begin generating revenueby the end of August 2008.

 

Inrecent months, we actively renegotiated contracts with gaming venue licenseholders to strengthen our ability to monitor gaming machine performance andprocedures at numerous venues in Cambodia, participate in cash handlingenabling us to collect receivables on a timely basis and increase our averagerevenue share.

 

Sincethe inception of our gaming machine participation business in Cambodia, twocontracted venues have been cancelled resulting in the removal of 233 gamingmachines. Currently one venue in Cambodia at which 137 gaming machines areinstalled is subject to temporary closure due to a gaming license issue, hencethe gaming machines are currently not in service or generating revenue, andthere can be no assurance that this venue will reopen at a future point.

 

Anadditional 108 gaming machines that have been installed in two venues inVietnam are undergoing the final stages of contract renegotiation and areexpected to be in service and generating revenue before the end of thirdquarter.

 

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 offset by increases in Shuffler revenue.  DeckChecker revenue decreased $964,200 to $47,500for the six-month period ended June 30, 2008 compared to $1,011,700 in thecorresponding period of the prior year due to a decrease in orders from ourdistributors.  In the prior year quarter,our two new distributors placed their initial orders of DeckCheckers.  RFID chip revenue decreased $1,556,100 to$315,900 for the six-month period ended June 30, 2008 compared to$1,872,000 in the corresponding period of the prior year due to a decrease inlarge chip orders for new casino openings. Service revenue decreased $304,800 to $39,000 for the six-month periodended June 30, 2008 compared to $343,800 in the corresponding period ofthe prior year due to the transfer of all service to our distributor.  This revenue line is expected to continue todecrease as service contracts terminate. Shuffler revenue increased by approximately $495,300 to $747,200 for thesix-month period ended June 30, 2008 compared to $251,900 in thecorresponding period in the prior year primarily as a result of increased salesto our European distributor.

 

Our gross margin on tablegame products improved in the six-month period ended June 30, 2008 overthe corresponding period of the prior year due to an impairment of inventorybooked in the prior year period.

 

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**Non-Gaming Products**

 

Non-gaming products revenue,which consists of automotive tooling and parts, increased in the six-month periodended June 30, 2008 by $900,700 to $4,061,400 compared to $3,160,700 inthe corresponding period of the prior year.  The increase is related toincreased sales to our largest customer as they have increased their productionfor the year.

 

Gross margins improved by$574,714 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.

 

**Operating Expenses**

 
| ** **                          | ** ** | ** **                                        | ** ** | **Increase (Decrease)** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **Six Months Ended June 30,** | ** ** | **Dollar**                   | ** ** | **%** | ** ** |
| ** **                          | ** ** | **2008**                                          | ** ** | **2007**                     | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Cost of products                    |       | $                                                 | 7,993,159  |                         | $          | 6,088,167 |   | $ | 1,904,992 |   | 31 | % |
| Selling, general and administrative |       | 7,512,886                                         |       | 5,296,392                    |       | 2,216,494 |   | 42 | % |
| Stock-based compensation expense    |       | 4,367,579                                         |       | 1,765,587                    |       | 2,601,992 |   | 147 | % |
| Impairment of assets                |       | 1,368,829                                         |       | —                       |       | 1,368,829 |   | 100 | % |
| Research and development            |       | 599,310                                           |       | 410,634                      |       | 188,676 |   | 46 | % |
| Depreciation and amortization       |       | 469,036                                           |       | 654,398                      |       | (185,362 | ) | (28 | )% |
| Restructuring charges               |       | 168,276                                           |       | —                       |       | 168,276 |   | 100 | % |
|                                |       | $                                                 | 22,479,075 |                         | $          | 14,215,178 |   | $ | 8,263,897 |   | 58 | % |

 

**Selling, General andAdministrative Expense**

 

During six-month periodended June 30, 2008, selling, general and administrative expensesincreased $2,216,500 which is primarily due to increased salaries and wagesexpense of $1,337,900 as a result of an expanded senior management team andexpanded accounting and business development personnel.  Additionally, travel expense increased by$363,200 due to the expansion of international office locations and increasedinternational customers and business lines, insurance costs increased by$80,500 as a result of increases in coverage of property and equipment andincreased cost of directors and officers insurance, bad debt expense increasedby $290,300 due to the inability to collect on past due table game productsales due to the surrendering our gaming licenses in U.S. jurisdictions andinvestor relations expense increased by $153,100 due to increased investorrelations activity.

 

**Stock-Based Compensation Expense**

 

Stock-based compensationexpensed increased by $2,602,000 to $4,367,600 for the six-month period ended June 30,2008, compared to $1,765,600 in the corresponding period of the prior year dueto additional stock option grants issued to executive management and otheremployees.

 

**Impairmentof Assets**

 

OnJanuary 25, 2007, we issued warrants to purchase up to 16,000,000 sharesof our common stock (the “2006 Warrants”) to Elixir Group, which at the timewas our Asian distributor of table game products, as an incentive to meetcertain sales targets.  These warrants were accounted for in accordancewith the EITF No. 96-18.  The 2006 Warrants were classified in ourbalance sheet as prepaid commissions subject to amortization to commissionexpense at a rate of 8% of the gross revenue generated by the distributor.

 

Forthe first half of 2008, table game revenue has not met sales targets.  In addition, future order placements indicatethe remaining value on June 30, 2008 of $1,368,829 may not berecoverable.  Per

 

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SFASNo. 144, a long-lived asset (asset group) shall be tested forrecoverability whenever events or changes in circumstances indicate that itscarrying amount may not be recoverable including an accumulation of costssignificantly in excess of the amount originally expected for the acquisition.

 

Weestimated fair value using present value techniques based on estimates of cashflows.  In accordance with SFAS No. 144, an impairment loss shall berecognized if the carrying amount of an intangible asset is not recoverable andits carrying amount exceeds its fair value. After an impairment loss isrecognized, the adjusted carrying amount of the intangible asset shall be itsnew accounting basis.  Based upon the above, we recorded an impairment tothe asset of $1,368,829 and included the amount in loss from operations in ourconsolidated statement of operations and deficit.

 

**Research and Development Expenses**

 

Research and developmentexpenses increased as a result of increased headcount at our new research anddevelopment facility in Zhuhai, China. This increase in headcount is to upgrade and improve our existing tableproducts.

 

**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**

 

Duringthe first quarter ended March 31, 2008, we moved our corporate offices andceased use of a warehouse.  In accordancewith Statement of Accounting Standards (“SFAS”) No. 146, *Accounting for Cost Associated with Exit or Disposal Activities*,the Company incurred restructuring charges of $168,300 for operating leases theCompany ceased use of during the six-month period ended June 30,2008.  The liability was calculated basedupon the remaining lease rentals, reduced by a combination of actual sublease rentalsand estimated sublease rentals and recorded at fair value.

 

**Other Income (Expenses):**

 
| ** **                        | ** ** | **Six Months Ended June 30,** | ** ** | **Increase/(Decrease)** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **2008**                                          | ** ** | **2007**                | ** ** | **Dollar  Amount** | ** ** | **%  Amount** | ** ** |
| Interest expense and finance fees |       | $                                                 | (274,520   | )                       | $          | (1,307,744 | ) | $ | 1,033,224 |   | (79 | )% |
| Interest income                   |       | 522,187                                           |       | 103,159                 |       | 419,028 |   | 406 | % |
| Foreign currency gains            |       | 641,527                                           |       | —                  |       | 641,527 |   | 100 | % |
| Acquisition costs                 |       | —                                            |       | (72,006                 | )          | 72,006 |   | (100 | )% |
| Patent sale and other             |       | 160,294                                           |       | 466,925                 |       | (306,631 | ) | (66 | )% |
| Total                             |       | $                                                 | 1,049,488  |                    | $          | (809,666 | ) | $ | 1,859,154 |   | (230 | )% |
| Income tax provisions             |       | (22,498                                           | )          | —                  |       | (22,498 | ) | 100 | % |

 

**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 $25.5 million to $27.3 million from June 30, 2007 to June 30,2008.

 

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**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 thePhilippines peso.

 

**Patent Sale and Other**

 

In the six-month periodended June 30, 2008, we recorded $0.2 million income related to a grantfrom the Australian Federal Government.

 

In the six-month periodended June 30, 2007, we recorded a $0.5 million gain on the sale of ourintellectual property related to our previously discontinued Secure Drop productline.

 

**Income Tax Provisions**

 

Oureffective tax rate for the six-month periods ended June 30, 2008 and 2007approximates 0.00%.  We will continue toreview the tax losses and income generated in the future by our foreignsubsidiaries to evaluate whether they should be reflected as a benefit orprovision in our consolidated financial statements.

 

**FINANCIAL CONDITION**

 

**Liquidityand Capital Resources**

 

OnApril 21, 2008, we entered into a Trade Credit Facility Agreement (the “FacilityAgreement”) with Elixir International. Pursuant to the Facility Agreement, Elixir International may, from timeto time at its option, provide trade credits to us for our purchase ofelectronic gaming machines from Elixir International in exchange for ourissuance of unsecured notes to Elixir International bearing interest at a fixedrate of eight percent (8.0%) per annum. Title of any gaming machines offered in exchange for the notes passes tothe Company upon issuance of the notes.

 

Uponentering into the Agreement, we immediately issued the first note pursuant tothe terms of the Facility Agreement in the principal amount of $15,000,000 (the“Initial Advance”).  The Initial Advanceextinguished an existing current trade payable of an equivalent amount toElixir International in respect to gaming machines previously acquired.

 

Underthe current terms, we are obligated to repay the principal, plus any accruedinterest thereon, of the Initial Advance in 24 equal monthly installments afterthe date of issue.  The Initial Advance issubject to demand by Elixir International for immediate payment only if thereis either an event of default or a change of control defined in the FacilityAgreement.  Any further notes, however,will be subject to demand by Elixir International for immediate payment of anyoutstanding sums owed to Elixir International at anytime and at the solediscretion of Elixir International.

 

TheFacility Agreement does not include a commitment on the part of ElixirInternational and all further borrowings by us are subject to the approval ofElixir International at its sole discretion. The

 

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balanceof the Facility Agreement is $13.8 million and $0 as of June 30, 2008 and December 31,2007, respectively.

 

We will continue to evaluate future financing needs with ElixirInternational from time to time. However there can be no assurance of anyfurther amount of credit obtainable by the Company under the FacilityAgreement. 

 

As of June 30, 2008, we hadtotal cash and cash equivalents of $27.3 million and working capital of $14.1million, however our working capital position has continued to decrease.  The working capital included $6.3 million ofrelated party trade payables and $7.3 million of the current portion of thetotal amount of $13.8 million due to Elixir International drawn on a $15.0million trade credit facility agreement. Our primary working capital requirements are the purchase of gamingmachines and casino management systems and the funding of operations as webuild our revenue base and achieve positive cash flow.

 

Primarily as a result of restructuring our contractedvenues in Cambodia, our current gaming machine inventory level is in excess of600 gaming machines in inventory or on order, which we will seek to redeployinto new projects and existing sites. We do not expect to conduct significantpurchases of gaming machines during the remainder of 2008; however, we maychoose to purchase a limited number of multi-player machines, which are provenas strong performers in the Cambodia market. If we pursue the purchase of additional machines, we may be able tolease gaming machines from Elixir International subject to the availability ofthe gaming machines in its inventory available for lease. Any leasing of gamingmachines from Elixir International will create a lease expense and there is nocertainty that revenue from the placement of leased machines would exceed theexpense.  We will also purchase casinomanagement systems during the second half of 2008 for placement in previouslypurchased gaming machines.

 

During the six months ended June 30, 2008, we incurrednegative cash flow from operations of approximately $9.4 million.  Based on our current business rollout plans,we believe our available working capital, along with cash expected to begenerated from operations, is sufficient to meet our working capital needs forthe remainder of 2008 and the first half of 2009 without any further financingarrangements with Elixir International. In the meantime, we will endeavor tostrengthen our base of revenue by focusing our placement of gaming machines inbetter performing venues and increasing the net win per machine. 

 

However, we may require additional funding in 2009, inwhich case we will look into the option of raising additional funds throughvarious financing sources, including the sale of debt or equity securities andthe procurement of commercial debt financing and vendor financing. However,there can be no guarantees that such funds will be available on commerciallyreasonable terms, if at all. If such financing is not available on satisfactoryterms, we may be unable to expand or continue our business as desired andoperating results may be adversely affected. Any debt financing will increaseexpenses and must be repaid regardless of operating results and may involverestrictions limiting our operating flexibility and any equity financing willbe dilutive to our present stockholders.

 

**Cash Flows Summary**

 
| ** **                  | ** ** | **Six Months Ended June 30,** | ** **  | ** ** | ** ** |
|-----------------------------|------------|---------------------------------------------------|-------------|------------|------------|
| ** **                  | ** ** | **2008**                                          | ** **  | **2007**   | ** ** | **Increase (Decrease)** | ** ** |
| Cash provided by (used in): |       |                                              |        |       |       |   |   |
| Operations                  |       | $                                                 | (9,360,156  | )          | $          | (6,228,676 | ) | $ | (3,131,480 | ) |
| Investing                   |       | (30,240,650                                       | )           | (277,534   | )          | (29,963,116 | ) |
| Financing                   |       | (1,365,994                                        | )           | 7,963,398  |       | (9,329,392 | ) |
|                        |       | $                                                 | (40,966,800 | )          | $          | 1,457,188 |   | $ | (42,423,988 | ) |

 

**Operations**

 

Cash used in operationsincreased as a result of the increase in our net loss including one-timepayments for the restructuring and prepayments on insurance and leased officedeposits.

 

**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 $15.8 million in the six-month period ended June 30,2008. Cash payments of $29.9 million were made in the six-month period ended June 30,2008 on previous non-cash purchases.

 

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**Financing**

 

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

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Our consolidated financialstatements were prepared in conformity with accounting principles generallyaccepted in the United States. Accordingly, we are required to make estimates incorporatingjudgments and assumptions we believe are reasonable based on our historicalexperience, contract terms, observance of known trends in our company and theindustry as a whole, as well as information available from other outsidesources. Our estimates affect amounts recorded in the financial statements andactual results may differ from initial estimates.

 

We consider the followingaccounting estimates to be the most critical to fully understanding andevaluating our reported financial results. They require us to make subjectiveor complex judgments about matters that are inherently uncertain or variable.Senior management discussed the development, selection and disclosure of thefollowing accounting estimates, considered most sensitive to changes fromexternal factors, 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.

 

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 June 30, 2008 andDecember 31, 2007, we have $658,632 and $65,908, respectively, of units,service supplies and parts on consignment with distributors, which is recordedas inventory at June 30, 2008.  Revenue is not recognized, and theinventory remains ours, until ownership of the product and title passes to thedistributor which occurs upon the distributor’s use of the products or sales tothird-party customers.

 

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**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.

 

**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**

 

Werecognize revenue when all of the following have been satisfied:

 

·      persuasiveevidence of an arrangement exists;

·      the priceto the customer is fixed and determinable;

·      deliveryhas occurred and any acceptance terms have been fulfilled;

·      nosignificant contractual obligations remain; and

·      collection is reasonably assured.

 

*Gamingand Non-Gaming Products Revenues*

 

Werecognize revenue from the sale of our products to end users upon shipmentagainst customer contracts or purchase orders. Revenue from shuffler rentals isrecorded at the first of each month in accordance with rental contractterms.  We completed our transition to outsourcing all future sales tothird-party distributors during the fourth quarter 2007 and will no longer recordrental revenue on our table game products.

 

Werecognize revenue from our sales to independent distributors upon shipment tothe distributor against distributor contracts or purchase orders of ourproduct.  We recognize revenue on consignment inventory when ownership ofthe 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.

 

*ParticipationRevenues*

 

Weearn recurring revenue by providing customers with electronic gaming machinesand casino management systems, which are owned by us and leased to venueowners. Revenues are recognized on the contractual terms of the participationagreements between us and the venue owners and are based on our share of netwinnings defined as all amount played in, less all winnings paid out. Our shareof joint costs in accordance with applicable contracts, if any, is recorded incost 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

 

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used can materially affectthe fair value 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 other relevantfactors.

 

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 StatementNo. 109, which contains a two-step approach to recognizing and measuringuncertain tax positions accounted for in accordance with SFAS No. 109. Thefirst step is to evaluate the tax position for recognition by determining ifthe weight of available evidence indicates it is more likely than not that theposition will be sustained on audit, including resolution of related appeals orlitigation processes, if any. The second step is to measure the tax benefit asthe largest amount which is more than 50% likely of being realized uponultimate settlement. We consider many factors when evaluating and estimatingour tax positions and tax benefits, which may require periodic adjustments andwhich may not accurately anticipate actual outcomes.

 

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

 

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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 the non-controllinginterests. The statement also establishes reporting requirements that providesufficient disclosure that clearly identify and distinguish between theinterest of the parent and those of the non-controlling owners. We adopted thisstatement as of January 1, 2008. The adoption had no material impact on our financial position, resultsof operations or cash flows.

 

In March 2008, the FASBissued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*, an amendment of FASB StatementNo. 133 (“SFAS No. 161”).  Thisstatement is effective for financial statements issued for fiscal years andinterim 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.

 

**ITEM 3.****         ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**.

 

Notapplicable.

 

## ***ITEM 4.***          CONTROLS AND PROCEDURES

 

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

 

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

 

An evaluation was performed under the supervision and with theparticipation of our management, including our chief executive officer andchief financial officer, of the effectiveness of the design and operation ofour disclosure controls and procedures as of June 30, 2008.  Based on that evaluation, our management,including our chief executive officer and chief financial officer, hasconcluded that our disclosure controls and procedures were effective as of June30, 2008.

 

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

 

Duringthe first quarter of 2008, we became aware that a significant number of gamingmachines were purchased by us and placed in various gaming venues throughoutCambodia in the fourth quarter of 2007 without proper reporting to personnelwithin our accounting department.  This represented a break down in theoperation of our internal control over fixed asset acquisitions in that purchaseorders and shipping documents were not properly obtained and forwarded to theaccounting department to ensure proper financial statement recordation in atimely manner.  These events represent a material weakness in our internalcontrol over financial reporting at December 31, 2007, as reported in our2007 Form 10-K filed with the SEC on March 31, 2008.  However, we mitigated the risk associatedwith this material weakness by performing a full count of these fixed assetsand verifying through examination of shipping documents

 

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andinvoices that these assets were purchased by us and placed in the gaming venuesprior to their relevant balance sheet date.

 

Duringthe quarter ended June 30, 2008, we implemented new controls andprocedures to correct the material weakness, including informing ElixirInternational that product orders are only valid if signed by upper managementand that the only valid form of a product order is that generated by ouraccounting department from the Oracle financial reporting system.  Additional accounting personnel have beenhired to adequately review all invoices and shipping documents to agree tosystem generated product orders.  Inaddition, we perform a full count of these fixed assets on a regularbasis.  Except as described in theforegoing, we made no changes to our internal control over financial reportingduring the quarter ended June 30, 2008 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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# **PART II– OTHER INFORMATION**

 

**ITEM 6.****        EXHIBITS**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                              | ** ** | **Method  of Filing**         |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|
| 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:     August 13,  2008 |       | By:                                  | /s/ Gordon Yuen |
|                                                     |       |                                 | Gordon Yuen |
|                                                     |       | Its:                                 | President, Chief Executive Officer |
|                                                     |       |                                 |   |
|                                                     |       |                                 |   |
| Date:     August 13,  2008 |       | By:                                  | /s/ David R. Reberger |
|                                                     |       |                                 | David R. Reberger |
|                                                     |       | Its:                                 | Chief Financial Officer |

 

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