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, 2010**

 

**OR**

 

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

 

**For the transition period from            to            .**

 

**Commission file number: 001-32161**

 

**EntertainmentGaming Asia Inc.**

 (Exact name of registrant as specified in itscharter)

 

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

 

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

**60 Wyndham Street**

**Central, Hong Kong**

(Addressof principal executive offices, including zip code)

 

**+ 852-3151-3800**

(Registrant’stelephone number, including area code)

 

**NotApplicable**

(Formername, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o  No o

 

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

 

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

 

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

 

As of August 1, 2010,115,879,394 shares of common stock of Entertainment Gaming Asia Inc. wereoutstanding.

 

 

 

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Table ofContents

 

**Table of Contents**

 
| ** **                                    | ** **                                                                                      | **Page** |
|-----------------------------------------------|-------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                            |     |
| **PART I —  FINANCIAL INFORMATION** |
|                                          |                                                                                            |     |
| **Item 1.**                                   | **Financial Statements**                                                                        | 3        |
|                                          |                                                                                            |     |
|                                          | Consolidated  Balance Sheets                                                                    | 3        |
|                                          |                                                                                            |     |
|                                          | Consolidated  Statements of Operations                                                          | 4        |
|                                          |                                                                                            |     |
|                                          | Consolidated  Statements of Cash Flows                                                          | 5        |
|                                          |                                                                                            |     |
|                                          | Notes to Consolidated Financial Statements                                                      | 6        |
|                                          |                                                                                            |     |
| **Item 2.**                                   | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations** | 18       |
|                                          |                                                                                            |     |
|                                          | Overview                                                                                        | 19       |
|                                          |                                                                                            |     |
|                                          | Results of Operations                                                                           | 21       |
|                                          |                                                                                            |     |
|                                          | Liquidity and Capital Resources                                                                 | 29       |
|                                          |                                                                                            |     |
|                                          | Critical Accounting Policies and Estimates                                                      | 31       |
|                                          |                                                                                            |     |
| **Item 3.**                                   | **Quantitative and Qualitative Disclosures  about Market Risk**                                 | 33       |
|                                          |                                                                                            |     |
| **Item 4.**                                   | **Controls and  Procedures**                                                                    | 34       |
|                                          |                                                                                            |     |
| **PART II  — OTHER INFORMATION**    |
|                                          |                                                                                            |     |
| **Item 1A.**                                  | **Risk Factors**                                                                                | 35       |
| ** **                                    | ** **                                                                                      |     |
| **Item 6.**                                   | **Exhibits**                                                                                    | 36       |

 

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Table of Contents

 

**PART I — FINANCIALINFORMATION**

 

**Item 1.****                                  ****FinancialStatements**

 

**ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

**(amounts in thousands, except pershare data)**

 
| ** **                                                                                                                    | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                                                                    | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                    |       |                   |       |                       |       |
| Current assets:                                                                                                               |       |                   |       |                       |       |
| Cash and cash equivalents                                                                                                     |       | $                      | 6,364      |                       | $          | 4,190 |   |
| Accounts receivable, trade, net                                                                                               |       | 2,003                  |       | 2,670                      |       |
| Amounts due from a related party                                                                                              |       | 7                      |       | 12                         |       |
| Other receivables                                                                                                             |       | 152                    |       | 195                        |       |
| Inventories                                                                                                                   |       | 818                    |       | 621                        |       |
| Assets held for sale                                                                                                          |       | 805                    |       | 930                        |       |
| Prepaid commitment fees                                                                                                       |       | 2,082                  |       | 4,838                      |       |
| Deferred tax assets                                                                                                           |       | 90                     |       | 90                         |       |
| Prepaid expenses and other current assets                                                                                     |       | 888                    |       | 770                        |       |
| Total current assets                                                                                                          |       | 13,209                 |       | 14,316                     |       |
|                                                                                                                          |       |                   |       |                       |       |
| Accounts receivable, trade, net of current portion                                                                            |       | 27                     |       | 106                        |       |
| Gaming equipment and systems, net                                                                                             |       | 24,114                 |       | 26,507                     |       |
| Property and equipment, net                                                                                                   |       | 4,775                  |       | 3,322                      |       |
| Intangible assets, net                                                                                                        |       | 2,823                  |       | 3,026                      |       |
| Goodwill                                                                                                                      |       | 84                     |       | 84                         |       |
| Contract amendment fees                                                                                                       |       | 1,299                  |       | 688                        |       |
| Prepaids, deposits, and other assets                                                                                          |       | 410                    |       | 408                        |       |
| Total assets                                                                                                                  |       | $                      | 46,741     |                       | $          | 48,457 |   |
|                                                                                                                          |       |                   |       |                       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                |       |                   |       |                       |       |
| Current liabilities:                                                                                                          |       |                   |       |                       |       |
| Accounts payable                                                                                                              |       | $                      | 1,209      |                       | $          | 1,125 |   |
| Amounts due to a related party                                                                                                |       | 15                     |       | 46                         |       |
| Accrued expenses                                                                                                              |       | 2,530                  |       | 2,325                      |       |
| Notes payable to a related party, current portion                                                                             |       | 458                    |       | 3,128                      |       |
| Capital lease obligations, current portion                                                                                    |       | 145                    |       | 187                        |       |
| Customer deposits and other current liabilities                                                                               |       | 389                    |       | 78                         |       |
| Total current liabilities                                                                                                     |       | 4,746                  |       | 6,889                      |       |
|                                                                                                                          |       |                   |       |                       |       |
| Notes payable to a related party, net of current  portion                                                                     |       | 9,164                  |       | 6,265                      |       |
| Capital lease obligations, net of current portion                                                                             |       | 328                    |       | 414                        |       |
| Other liabilities                                                                                                             |       | 759                    |       | 604                        |       |
| Deferred tax liability                                                                                                        |       | 1,063                  |       | 877                        |       |
| Total liabilities                                                                                                             |       | 16,060                 |       | 15,049                     |       |
|                                                                                                                          |       |                   |       |                       |       |
| Stockholders’ equity:                                                                                                    |       |                   |       |                       |       |
| Common stock, $.001 par value, 300,000,000 shares  authorized; 115,879,394 and 114,956,667 shares issued and outstanding |       | 116                    |       | 115                        |       |
| Additional paid-in-capital                                                                                                    |       | 415,403                |       | 414,864                    |       |
| Accumulated other comprehensive losses                                                                                        |       | (715                   | )          | (645                       | )          |
| Accumulated deficit                                                                                                           |       | (384,123               | )          | (380,926                   | )          |
| Total stockholders’ equity                                                                                               |       | 30,681                 |       | 33,408                     |       |
| Total liabilities and stockholders’ equity                                                                               |       | $                      | 46,741     |                       | $          | 48,457 |   |

 

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

 

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**ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES**

**ConsolidatedStatements of Operations**

**(amounts inthousands, except per share data)**

**(Unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues:                                            |       |                                 |       |                               |       |   |   |   |   |
| Gaming machine participation                         |       | $                                    | 3,539      |                               | $          | 1,743 |   | $ | 6,374 |   | $ | 2,689 |   |
| Table game products                                  |       | 232                                  |       | 3,191                              |       | 353 |   | 3,269 |   |
| Non-gaming products                                  |       | 1,294                                |       | 839                                |       | 2,705 |   | 1,517 |   |
|                                                 |       | 5,065                                |       | 5,773                              |       | 9,432 |   | 7,475 |   |
| Operating costs and expenses:                        |       |                                 |       |                               |       |   |   |   |   |
| Cost of gaming machine participation                 |       |                                 |       |                               |       |   |   |   |   |
| Machine depreciation                                 |       | 1,970                                |       | 2,425                              |       | 3,857 |   | 4,816 |   |
| Write-off of gaming assets                           |       | 75                                   |       | —                             |       | 191 |   | 379 |   |
| Other operating costs                                |       | 206                                  |       | 175                                |       | 432 |   | 515 |   |
| Cost of table game products                          |       | 173                                  |       | 1,891                              |       | 263 |   | 1,873 |   |
| Cost of non-gaming products                          |       | 1,320                                |       | 995                                |       | 2,721 |   | 1,751 |   |
| Selling, general and administrative                  |       | 1,762                                |       | 2,075                              |       | 3,477 |   | 4,873 |   |
| Product development expenses                         |       | 372                                  |       | 75                                 |       | 456 |   | 129 |   |
| Depreciation and amortization                        |       | 229                                  |       | 255                                |       | 458 |   | 565 |   |
| Restructuring charges                                |       | 210                                  |       | 89                                 |       | 247 |   | 588 |   |
| Total operating costs and expense                    |       | 6,317                                |       | 7,980                              |       | 12,102 |   | 15,489 |   |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Loss from operations                                 |       | (1,252                               | )          | (2,207                             | )          | (2,670 | ) | (8,014 | ) |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Other income/(expense):                              |       |                                 |       |                               |       |   |   |   |   |
| Interest expense and finance fees                    |       | (84                                  | )          | (112                               | )          | (206 | ) | (248 | ) |
| Interest income                                      |       | 25                                   |       | 26                                 |       | 38 |   | 64 |   |
| Foreign currency (loss)/gain                         |       | (69                                  | )          | 64                                 |       | (60 | ) | (63 | ) |
| Legal settlement gain                                |       | —                               |       | 656                                |       | — |   | 656 |   |
| Gain/(loss) on disposition of assets                 |       | 5                                    |       | (94                                | )          | 4 |   | (94 | ) |
| Other                                                |       | 61                                   |       | 70                                 |       | 152 |   | 83 |   |
| Total other (expense)/income                         |       | (62                                  | )          | 610                                |       | (72 | ) | 398 |   |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Loss before income tax and discontinued operations   |       | (1,314                               | )          | (1,597                             | )          | (2,742 | ) | (7,616 | ) |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Income tax expense                                   |       | (220                                 | )          | (296                               | )          | (455 | ) | (299 | ) |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Net loss from continuing operations                  |       | (1,534                               | )          | (1,893                             | )          | (3,197 | ) | (7,915 | ) |
| Net profit from discontinued operations, net of  tax |       | —                               |       | 1,760                              |       | — |   | 1,542 |   |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Net loss                                             |       | $                                    | (1,534     | )                                  | $          | (133 | ) | $ | (3,197 | ) | $ | (6,373 | ) |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Loss per share:                                      |       |                                 |       |                               |       |   |   |   |   |
| Loss from continuing operations                      |       | (0.01                                | )          | (0.02                              | )          | (0.03 | ) | (0.07 | ) |
| Income from discontinued operations                  |       | —                               |       | 0.02                               |       | — |   | 0.01 |   |
| Basic and diluted loss per share                     |       | $                                    | (0.01      | )                                  | $          | (0.00 | ) | $ | (0.03 | ) | $ | (0.06 | ) |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares outstanding           |       | 115,879                              |       | 114,957                            |       | 115,426 |   | 114,957 |   |

 

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

 

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**ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES**

 

**ConsolidatedStatements of Cash Flows**

**(amounts inthousands)**

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                          | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities:**                                                          |       |                               |       |   |   |
| Net loss                                                                                            |       | $                                  | (3,197     | ) | $ | (6,373 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                        |       |                               |       |   |   |
| Income tax expense                                                                                  |       | 455                                |       | 299 |   |
| Foreign currency losses                                                                             |       | 12                                 |       | 127 |   |
| Depreciation of gaming machines and systems and  property and equipment                             |       | 4,343                              |       | 5,291 |   |
| Restructuring charges                                                                               |       | —                             |       | 38 |   |
| Amortization of intangible assets                                                                   |       | 203                                |       | 265 |   |
| Amortization of deferred interest                                                                   |       | —                             |       | 7 |   |
| Stock-based compensation                                                                            |       | 540                                |       | 446 |   |
| Gain on sale of shuffler business                                                                   |       | —                             |       | (1,962 | ) |
| (Gain)/loss on disposition of assets                                                                |       | (5                                 | )          | 94 |   |
| Write-off of gaming assets                                                                          |       | 191                                |       | 379 |   |
| Provision for bad debt expense                                                                      |       | —                             |       | 12 |   |
| Provision for tax receivables                                                                       |       |                               | 27         |   | — |   |
| Changes in operating assets and liabilities:                                                        |       |                               |       |   |   |
| Accounts receivable and other receivables                                                           |       | 640                                |       | (1,860 | ) |
| Inventories                                                                                         |       | (200                               | )          | 54 |   |
| Prepaid expenses and other current assets                                                           |       | 46                                 |       | 334 |   |
| Prepaids, deposits and other assets                                                                 |       | (119                               | )          | 328 |   |
| Contract amendment fees                                                                             |       | (611                               | )          | — |   |
| Prepaid commitment fee                                                                              |       | 2,757                              |       | — |   |
| Accounts payable                                                                                    |       | 83                                 |       | 279 |   |
| Amount due from related parties                                                                     |       | (18                                | )          | 481 |   |
| Deferred revenue                                                                                    |       | —                             |       | 319 |   |
| Accrued expenses and other current liabilities                                                      |       | (251                               | )          | (2,493 | ) |
| Net cash provided by/(used in) operating  activities                                                |       | 4,896                              |       | (3,935 | ) |
|                                                                                                |       |                               |       |   |   |
| **Cash flows from investing  activities:**                                                          |       |                               |       |   |   |
| Acquisitions of property and equipment                                                              |       | (173                               | )          | — |   |
| Sale of shuffler business                                                                           |       | —                             |       | 2,800 |   |
| Purchases of gaming machines, systems and deposits  paid                                            |       | (1,547                             | )          | (1,236 | ) |
| Purchase of land and other project costs                                                            |       | (893                               | )          | — |   |
| Sales of gaming machines and systems                                                                |       | 45                                 |       | — |   |
| Sales of property and equipment                                                                     |       | 5                                  |       | 326 |   |
| Net cash (used in)/provided by investing  activities                                                |       | (2,563                             | )          | 1,890 |   |
|                                                                                                |       |                               |       |   |   |
| **Cash flows from financing  activities:**                                                          |       |                               |       |   |   |
| Repayment of short-term debt and leases                                                             |       | (112                               | )          | (167 | ) |
| Repayment of notes payable                                                                          |       | —                             |       | (2,905 | ) |
| Net cash used in financing activities                                                               |       | $                                  | (112       | ) | $ | (3,072 | ) |
|                                                                                                |       |                               |       |   |   |
| Effect of exchange rate change on cash                                                              |       | (47                                | )          | 128 |   |
| Net increase/(decrease) in cash and cash  equivalents                                               |       | 2,174                              |       | (4,989 | ) |
| Cash and cash equivalents at beginning of period                                                    |       | 4,190                              |       | 14,504 |   |
| Cash and cash equivalents at end of period                                                          |       | $                                  | 6,364      |   | $ | 9,515 |   |
|                                                                                                |       |                               |       |   |   |
| **Supplemental disclosure of cash  flows information:**                                             |       |                               |       |   |   |
| Interest paid                                                                                       |       | $                                  | 16         |   | $ | 272 |   |
| Income taxes paid                                                                                   |       | $                                  | 66         |   | $ | — |   |
| ** **                                                                                          |       |                               |       |   |   |
| **Non-cash investing and  operating activities:**                                                   |       |                               |       |   |   |
| Purchase of land and other project costs reported  as accrued expense and other current liabilities |       | $                                  | (955       | ) | $ | — |   |

 

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

 

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**ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

(Unaudited)

 

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

 

The principal businessactivities of Entertainment Gaming Asia Inc., formerly known as ElixirGaming Technologies, Inc., and its subsidiaries (the “Company”) are theowning and leasing of electronic gaming machines placed in premier hotels and othervenues across certain countries in Asia and the development and distribution ofproducts related to the gaming and automotive industries.  These products include RFID casino chips andplaques and component parts for the automotive industry.

 

In May 2010, theCompany formed two legal entities in Cambodia for the purpose of acquiring aparcel of land and the development of a new casino project. The Companymaintains the effective control of the landholding company through certainshareholders arrangements and the other entity is a wholly-owned subsidiary ofthe Company and, therefore their assets, liabilities and the results ofoperations are incorporated into the Company’s consolidated financialstatements.

 

***Basis of Presentation***

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States (U.S.) forinterim financial information and with the instructions to Form 10-Q andRule 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, 2009, filed withthe SEC on March 30, 2010.

 

***Principles of Consolidation***

 

These consolidated financialstatements include the accounts of Entertainment Gaming Asia Inc. and itssubsidiaries. All intercompany accounts and transactions have been eliminated.

 

***Use of Estimates***

 

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

 

***Cash and Cash Equivalents***

 

All highly liquidinstruments with an original maturity of three months or less are consideredcash equivalents.  The Company places its cash with financialinstitutions.  At June 30, 2010, the Company had deposits withfinancial institutions in excess of FDIC insured limits by approximately $6.1million.

 

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

 

Accounts receivable arestated at face value less any allowance for doubtful accounts.  Allowancefor doubtful accounts are maintained at levels determined by Company managementto adequately provide for uncollectible amounts.  In determining theestimated uncollected amounts, the Company evaluates a combination of factors,including, but not limited to, activity in the related market, financial conditionof customers, specific customer collection experience and history of write-offsand collections.

 

***Inventories***

 

Inventories are stated atthe lower of cost, determined using the first-in, first-out method, ormarket.  Cost elements included in work-in-process and finished goodsinclude raw materials, direct labor and manufacturing overheads.

 

***Long-Lived Assets***

 

The Company accounts forimpairment of long-lived assets in accordance with Financial AccountingStandards Board (FASB) 

 

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Accounting StandardsCodification (ASC) 360, *Property, Plant andEquipment*.  Long-lived assetsare reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.  In such instances, the Company estimates theundiscounted future cash flows that result from the use of the asset and itsultimate disposition.  If the sum of theundiscounted cash flows is less than the carrying value, the Company recognizesan impairment loss, measured as the amount by which the carrying value exceedsthe fair value of the asset, determined principally using discounted cash flows. There were no impairment charges forlong-lived assets for the three months ended June 30, 2010 except forthe $75,000 write-off of gaming machines and accessories.

 

***Prepaids, Deposits and Other Current Assets***

 

Prepaids, deposits and othercurrent assets consist primarily of prepaid value-added taxes in foreigncountries, sales tax in dispute and deposits. The Company has restricted cash in the amount of $100,000, in the formof a certificate of deposit as security on a lease.  The restriction for the security deposit willbe removed in February 2012 upon termination of the lease.  Restricted cash has been recorded in depositsand other assets in the accompanying consolidated balance sheets.

 

***Gaming Machines and Systems***

 

Gaming machines and systemsare stated at cost.  The Company depreciates new gaming machines andsystems over a five-year useful life and depreciates refurbished gamingmachines over a three-year useful life once placed in service. Depreciation ofgaming machines and systems of approximately $2.0 million and $2.4 million and$3.9 million and $4.8 million were included in cost of gaming machineparticipation in the consolidated statement of operations for the three-monthand six-month periods ended June 30, 2010 and 2009, respectively.

 

***Property and Equipment***

 

Property and equipment isstated at cost. Depreciation is computed using the straight-line method overthe useful lives of the assets currently estimated to be three to five years,which in the case of leasehold improvements, is limited to the life of thelease and throughout the renewal period so long as renewal is reasonablyassured. Depreciation of property and equipment of approximately $117,000 and$79,000 and $231,000 and $175,000 were included in cost of operations (tablegaming products or non-gaming products) in the consolidated statements ofoperations for the three-month and six-month periods ended June 30, 2010and 2009, respectively.

 

***Goodwill and Intangible Assets***

 

Intangibleassets consist of patents, customer relationships, trademarks and goodwill.They are recorded at cost and are amortized, except goodwill, on thestraight-line basis over the period of time the asset is expected to contributedirectly or indirectly to future cash flows, which ranges from ten tothirteen years. The straight-line amortization method is utilized becausethe Company believes there is not a more reliably determinable method ofreflecting the pattern for which the economic benefits of the intangible assetsare consumed or otherwise used.

 

TheCompany measures and tests goodwill and intangible assets for impairment inaccordance with ASC 350, *Intangible —Goodwill and Other*, and ASC 360, *Property,Plant and Equipment*, at least annually on December 31 or moreoften if there are indicators of impairment.

 

***Litigation and Other Contingencies***

 

TheCompany may be involved in legal matters, litigation and claims of varioustypes in the ordinary course of its business operations. The Company hasregular litigation reviews, including updates from corporate and outsidecounsel, to assess the need for accounting recognition or disclosure of thesecontingencies. The status of a significant legal matter is summarized inNote 17.

 

ASC450, *Contingencies,* requires thatliabilities for contingencies be recorded when it is probable that a liabilityhas been incurred and that the amount can be reasonably estimated. Significantmanagement judgment is required related to contingent liabilities and theoutcome of litigation because both are difficult to predict. For contingenciesfor which unfavorable outcomes are reasonably possible and which aresignificant, the Company discloses the nature of the contingency and, wherefeasible, estimates of the possible losses.

 

***Revenue Recognition***

 

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

 

·                  persuasive evidence of anarrangement exists;

·                  the price to the customer isfixed and determinable;

 

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·                  delivery has occurred andany acceptance terms have been fulfilled;

·                  no significant contractualobligations remain; and

·                  collection is reasonablyassured.

 

*ParticipationRevenues*

 

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

 

Commitmentfees paid to the venue operator where the agreement stipulates that the feeswill be recovered from the daily net win sharing are capitalized as assets. Asrequired by ASC 605-50, *Customer Paymentsand Incentives*, the cash consideration received for the portion ofnet winnings relating to the commitment fees is amortized as a reduction ofrevenue if the expected benefit from commitment fees cannot be separatelyidentified or reasonably estimated.  TheCompany had prepaid commitment fees of approximately $2.1 million and $4.8million as of June 30, 2010 and December 31, 2009, respectively.

 

Commitmentfees paid to the venue operators relating to contract amendments are alsocapitalized as assets and amortized as a reduction of revenue fees over theterm of the amended contracts.   TheCompany had contract amendment fees of approximately $1.3 million and $688,000as of June 30, 2010 and December 31, 2009, respectively.

 

*Table Gameand Non-Gaming Product Revenues*

 

The Company recognizesrevenue from the sale of its products to end users upon shipment againstcustomer contracts or purchase orders.

 

The Company recognizesrevenue from its sales to independent distributors upon shipments to thedistributors against distributor contracts or purchase orders forproducts.  The Company recognizes revenue on consignment inventory whenownership of product and title passes to the distributor, which occurs upon thedistributor’s use of the product in its service organization or sale to an enduser.

 

***Stock-Based Compensation***

 

Underthe fair value recognition provisions of ASC 718, Compensation-StockCompensation, for stock-based compensation accrued to employees andnon-employee directors, the Company recognizes stock-based compensation expensefor all service-based awards with graded vesting schedules on the straight-linebasis over the requisite service period for the entire award.  Estimates are revised if subsequent information indicates that forfeitures willdiffer from previous estimates, and the cumulative effect on compensation costof a change in the estimated forfeitures is recognized in the period of thechange.  For non-employee awards, the Company remeasures compensation costeach period until the service condition is complete and recognizes compensationcost on the straight-line basis over the requisite service period.  Optionvaluation models require the input of highly subjective assumptions, andchanges in the assumptions used can materially affect the fair value estimates.Judgment is required in estimating stock price volatility, forfeiture rates,expected dividends, and expected terms that options remain outstanding. Forrestricted stock awards with performance conditions, the Company evaluates ifperformance conditions are probable in each reporting period. The compensationexpense of restricted awards is recognized ratably over the implicit service periodif achieving performance conditions is probable. Cumulative catch-upadjustments are required in the event of changes in assessment of probability.

 

Stock-based compensationexpense totaled approximately $246,000 and $244,000 and $540,000 and $446,000 forthe three-month and six-month periods ended June 30, 2010 and 2009,respectively, and is included in selling, general and administrative expense inthe accompanying consolidated statements of operations.  See Note 12 foradditional information regarding these assumptions.

 

***Product Development Expenses***

 

Product development expensesare charged to expense as incurred.  Employee related costs associatedwith product development are included in product development expenses.  The Company incurred approximately $372,000and $75,000 and $456,000 and $129,000 in product development expenses for thethree-month and six-month periods ended June 30, 2010 and 2009,respectively.

 

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***Income Taxes***

 

TheCompany is subject to income taxes in the U.S. (including federal and state)and several foreign jurisdictions in which it operates. Deferred income taxbalances reflect the effects of temporary differences between the carryingamounts of assets and liabilities and their tax bases and are stated at enactedtax rates expected to be in effect when taxes are actually paid or recovered.ASC 740, *Income Taxes*,requires that deferred tax assets be evaluated for future realization andreduced by a valuation allowance to the extent the Company believes a portionwill not be realized. The Company considers many factors when assessing thelikelihood of future realization of its deferred tax assets, including itsrecent cumulative earnings experience and expectations of future taxable incomeby taxing jurisdiction, the tax loss carry-forward periods available to theCompany for tax reporting purposes, and other relevant factors.

 

The Company accounts foruncertain tax positions in accordance with ASC 740, which contains a two-stepapproach to recognizing and measuring uncertain tax positions.  The first step is to evaluate the taxposition for recognition by determining if the weight of available evidenceindicates it is more likely than not that the position will be sustained onaudit, including resolution of related appeals or litigation processes, 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.

 

***Loss Per Share***

 

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

 

***Foreign Currency Translations and Transactions***

 

The functional currency ofthe Company’s international subsidiaries is the local currency.  For thesesubsidiaries, the Company translates the assets and liabilities at exchangerates in effect at the balance sheet date and income and expense accounts ataverage exchange rates during the year.  Resulting currency translationadjustments are recorded directly to accumulated other comprehensiveincome/(losses) within stockholders’ equity.  Gains and losses resultingfrom transactions in non-functional currencies are recorded in operations.

 

***Fair Value Measurements***

 

Fair value is defined underSFAS No. 157 as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. Valuation techniques usedto measure fair value under ASC 820 must maximize the use of observable inputsand minimize the use of unobservable inputs. The standard establishes a fairvalue hierarchy based on three levels of input, of which the first two areconsidered observable and the last unobservable.

 

·                  Level 1 - Quoted prices inactive markets for identical assets or liabilities. These are typicallyobtained from real-time quotes for transactions in active exchange marketsinvolving identical assets.

 

·                  Level 2 - Input, other thanquoted prices included within Level 1, which are observable for the asset orliability, either directly or indirectly. These are typically obtained fromreadily-available pricing sources for comparable instruments.

 

·                  Level 3 - Unobservableinput, where there is little or no market activity for the asset or liability.This input reflects the reporting entity’s own assumptions of the data thatparticipants would use in pricing the asset or liability, based on the bestinformation available in the circumstances.

 

At June 30, 2010, cashand cash equivalent included $784,000 in bank deposits, which are reported atfair value.  The fair values of cash andcash equivalents, restricted cash, accounts receivable and accounts payableapproximate carrying values due to the short maturity of these items.

 

***Recently Issued Accounting Standards***

 

TheFinancial Accounting Standards Board (FASB) issued Accounting StandardsCodification (ASC) effective for financial statements issued for interim andannual periods ending after September 15, 2009. The ASC is an aggregationof previously issued authoritative U.S. generally accepted accountingprinciples (GAAP) in one comprehensive set of guidance organized by subjectarea. In accordance with the ASC, references to previously issued accountingstandards have been replaced by ASC references. Subsequent revisions to GAAPwill be incorporated into the ASC through Accounting Standards Updates (ASU).

 

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InApril 2009, the FASB amended ASC 820, *FairValue Measurement and Disclosures,* in which, if an entity determinesthat the level of activity for an asset or liability has significantly decreasedand that a transaction is not orderly, further analysis of the transaction orquoted prices is needed, and a significant adjustment to the transaction orquoted prices may be necessary to estimate fair value in accordance with ASC820. The Company adopted this amendment and there was no material impact on thefinancial position, results of operations or cash flows.

 

InApril 2009, the FASB amended ASC 825, *FinancialInstruments*, and ASC 270, *InterimReporting.* The amendment requires an entity to provide disclosuresabout fair value of financial instruments in interim financial information.This amendment is to be applied prospectively and is effective for interim andannual periods ending after June 15, 2009 with early adoption beingpermitted for periods ending after March 15, 2009. The Company adoptedthis amendment and there was no impact on the financial position, results ofoperations or cash flows.

 

InMay 2009, the FASB issued ASC 855, *SubsequentEvents.*  This Standard sets forth: 1) the period after thebalance sheet date during which management of a reporting entity shouldevaluate events or transactions that may occur for potential recognition ordisclosure in the financial statements; 2) the circumstances under which anentity should recognize events or transactions occurring after the balancesheet date in its financial statements; and 3) the disclosures that an entityshould make about events or transactions that occurred after the balance sheetdate. This statement is effective for interim and annual periods ending afterJune 15, 2009. The Company adopted this statement and there was no impacton the financial position, results of operations or cash flows.

 

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

 

TheCompany currently conducts business in three operating segments: (i) gamingmachine participation operations; (ii) table game product operations,which after the sale of the shuffler and deck checker assets that was completedin April 2009, consist exclusively of gaming chips and plaques; and(iii) non-gaming product operations, which consist primarily of theDolphin Advanced Technologies Pty Ltd (“Dolphin”) automotive components. Theaccounting policies of these segments are consistent with the Company’spolicies for the accompanying consolidated financial statements.  Thefollowing table presents the financial information for each of the Company’soperating segments.

 
| ** **                                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(amounts  in thousands)**                           | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues:                                             |       |                                 |       |                               |       |   |   |   |   |
| Gaming  machine participation operations              |       | $                                    | 3,539      |                               | $          | 1,743 |   | $ | 6,374 |   | $ | 2,689 |   |
| Table  game product operations                        |       | 232                                  |       | 3,191                              |       | 353 |   | 3,269 |   |
| Non-gaming  product operations                        |       | 1,294                                |       | 839                                |       | 2,705 |   | 1,517 |   |
| Total  revenues                                       |       | $                                    | 5,065      |                               | $          | 5,773 |   | $ | 9,432 |   | $ | 7,475 |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Operating  income/(loss):                             |       |                                 |       |                               |       |   |   |   |   |
| Gaming  machine participation operations gross margin |       | $                                    | 1,288      |                               | $          | (857 | ) | $ | 1,894 |   | $ | (3,021 | ) |
| Table  game product operations gross margin           |       | 59                                   |       | 1,300                              |       | 90 |   | 1,396 |   |
| Non-gaming  product operations gross margin           |       | (26                                  | )          | (156                               | )          | (16 | ) | (234 | ) |
| Corporate  and other operating costs and expenses     |       | (2,573                               | )          | (2,494                             | )          | (4,638 | ) | (6,155 | ) |
| Total  operating loss                                 |       | $                                    | (1,252     | )                                  | $          | (2,207 | ) | $ | (2,670 | ) | $ | (8,014 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Depreciation  and amortization:                       |       |                                 |       |                               |       |   |   |   |   |
| Gaming  machine participation operations              |       | $                                    | 1,970      |                               | $          | 2,425 |   | $ | 3,857 |   | $ | 4,816 |   |
| Table  game product operations                        |       | 128                                  |       | 158                                |       | 256 |   | 344 |   |
| Non-gaming  product operations                        |       | 89                                   |       | 23                                 |       | 179 |   | 42 |   |
| Corporate                                             |       | 129                                  |       | 139                                |       | 254 |   | 354 |   |
| Total  depreciation and amortization                  |       | $                                    | 2,316      |                               | $          | 2,745 |   | $ | 4,546 |   | $ | 5,556 |   |

 

Geographic segment revenuesfor the three-month and six-month periods ended June 30, 2010 and 2009 areas follows:

 
| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(amount in  thousands)** | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Cambodia                   |       | $                                    | 2,620      |                               | $          | 1,006 |   | $ | 4,622 |   | $ | 1,324 |   |
| Macau                      |       | 148                                  |       | 3,191                              |       | 221 |   | 3,191 |   |
| Philippines                |       | 919                                  |       | 737                                |       | 1,752 |   | 1,365 |   |
| Other  Asian countries     |       | 92                                   |       | 50                                 |       | 202 |   | 126 |   |
| Australia                  |       | 1,138                                |       | 774                                |       | 2,297 |   | 1,421 |   |
| Other                      |       | 148                                  |       | 15                                 |       | 338 |   | 48 |   |
|                       |       | $                                    | 5,065      |                               | $          | 5,773 |   | $ | 9,432 |   | $ | 7,475 |   |

 

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For the three-month andsix-month periods ended June 30, 2010 and 2009, in the gaming machineparticipation segment, one customer represented 74% and 58% and 73% and 49%,respectively, of total participation revenue. For the three-month and six-month periods ended June 30, 2010 and2009, in the table game products segment, one customer represented 5% and 93%and 4% and 93%, respectively, of total table game product sales. For thethree-month and six-month periods ended June 30, 2010 and 2009, in thenon-gaming products segment, one customer represented 26% and 35% and 29% and34%, respectively, of total non-gaming product sales.

 

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

 

Inventories consist of thefollowing:

 
| **(amount in  thousands)** | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| Raw  materials             |       | $                      | 550        |                       | $          | 369 |   |
| Finished  goods            |       | 268                    |       | 252                        |       |
|                       |       | $                      | 818        |                       | $          | 621 |   |

 

**Note 4.****                                 ****Prepaid Expenses and Other Current Assets**

 

Prepaid expenses and othercurrent assets consist of the following:

 
| **(amount in  thousands)**         | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| Prepaid  taxes                     |       | $                      | 386        |                       | $          | 374 |   |
| Prepayments  to suppliers          |       | 272                    |       | 355                        |       |
| Deposits  on gaming machine orders |       | 230                    |       | 31                         |       |
| Other                              |       | —                 |       | 10                         |       |
|                               |       | $                      | 888        |                       | $          | 770 |   |

 

**Note 5.             Receivables**

 

Accounts and otherreceivables consist of the following:

 
| **(amount in  thousands)**             | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| Trade  accounts                        |       | $                      | 2,036      |                       | $          | 2,784 |   |
| Other                                  |       | 152                    |       | 195                        |       |
|                                   |       | 2,188                  |       | 2,979                      |       |
| Less:  allowance for doubtful accounts |       | (6                     | )          | (8                         | )          |
| Net                                    |       | $                      | 2,182      |                       | $          | 2,971 |   |
| Current  portion                       |       | 2,155                  |       | 2,865                      |       |
| Non-current  portion                   |       | $                      | 27         |                       | $          | 106 |   |

 

Bad debt expenses for thethree-month and six-month periods ended June 30, 2010 and 2009 wereapproximately $NIL and $NIL and $NIL and $12,000, respectively, which wererecorded in selling, general and administrative expenses in the consolidatedstatements of operations.

 

**Note 6.             Gaming Equipment and Systems**

 

The major categories ofgaming equipment and systems and accumulated depreciation are presented below.

 
| **(amount in  thousands)**      | ** ** | **Useful Life  (years)** | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------|------------|--------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | ** **               | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| Gaming  equipment               |       | 3  – 5              |       | $                      | 40,826     |                       | $          | 39,730 |   |
| Systems                         |       | 5                        |       | 3,630                  |       | 3,520                      |       |
|                            |       |                     |       | 44,456                 |       | 43,250                     |       |
| Less:  accumulated depreciation |       |                     |       | (20,342                | )          | (16,743                    | )          |
|                            |       |                     |       | $                      | 24,114     |                       | $          | 26,507 |   |

 

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Depreciation expenses forthe three-month and six-month periods ended June 30, 2010 and 2009 wereapproximately $2.0 million and $2.4 million and $3.9 million and $4.8 million,respectively, which were recorded in cost of gaming machine participation inthe consolidated statements of operations.

 

**Note 7.             Property and Equipment**

 

Property and equipmentconsist of the following:

 
| **(amount in  thousands)**                      | ** ** | **Useful Life  (years)** | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | ** **               | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| Equipment  and vehicles, furniture and fixtures |       | 3  – 5              |       | $                      | 6,312      |                       | $          | 6,349 |   |
| Land  and other project costs                   |       | N/A                      |       | 1,848                  |       | —                     |       |
| Leasehold  improvements                         |       | 5                        |       | 800                    |       | 814                        |       |
|                                            |       |                     |       | 8,960                  |       | 7,163                      |       |
| Less:  accumulated depreciation                 |       |                     |       | (4,185                 | )          | (3,841                     | )          |
|                                            |       |                     |       | $                      | 4,775      |                       | $          | 3,322 |   |

 

**Note 8.             Intangible Assets, includingGoodwill**

 

In accordance with ASC 350, *Intangibles—Goodwill and Other,* and ASC360, *Property, Plant, and Equipment,*the Company reviews goodwill and intangibles for impairment on an annual basisat December 31 or more frequently if events or circumstances indicate thatthe carrying values may not be recoverable. No circumstances indicate anyfurther impairment provisions were necessary during the three-month and six-monthperiods ended June 30, 2010.

 

The Company’s definite-lifeintangible assets are subject to amortization as follows:

 
| **(amounts in thousands)**           | ** ** | **Useful Life  (years)** | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------|------------|--------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | ** **               | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| Patents                              |       | 10                       |       | $                      | 2,577      |                       | $          | 2,577 |   |
| Less:  accumulated amortization |       |                     |       | (1,031                 | )          | (902                       | )          |
|                                 |       |                     |       |                   |       |                       |       |
| Customer relationships               |       | 10-13                    |       | 1,684                  |       | 1,684                      |       |
| Less:  accumulated amortization |       |                     |       | (752                   | )          | (698                       | )          |
|                                 |       |                     |       |                   |       |                       |       |
| Trademarks                           |       | 10-13                    |       | 505                    |       | 505                        |       |
| Less:  accumulated amortization |       |                     |       | (160                   | )          | (140                       | )          |
| Total                                |       |                     |       | $                      | 2,823      |                       | $          | 3,026 |   |

 

AtJune 30, 2010 and December 31, 2009, the Company’s goodwill wasapproximately $84,000.

 

**Note 9.             Prepaids, Deposits and Other Assets**

 

Depositsand other assets consist of the following:

 
| **(amounts  in thousands)**      | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| Office equipment rental deposits |       | $                      | 59         |                       | $          | 74 |   |
| Sales tax in dispute             |       | 56                     |       | 84                         |       |
| Restricted cash                  |       | 115                    |       | 113                        |       |
| Prepaid value-added tax          |       | 179                    |       | 136                        |       |
| Other                            |       | 1                      |       | 1                          |       |
| Total                            |       | $                      | 410        |                       | $          | 408 |   |

 

**Note 10.          Accrued Expenses**

 

Accruedexpenses consist of the following:

 
| **(amounts in thousands)**            | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| Payroll and related costs             |       | $                      | 496        |                       | $          | 599 |   |
| Interest                              |       | 75                     |       | 128                        |       |
| Legal, accounting and tax fees        |       | 226                    |       | 146                        |       |
| Deposits from customers               |       | —                 |       | 28                         |       |
| Accrued tax expenses                  |       | 572                    |       | 747                        |       |
| Land purchase and other project costs |       | 955                    |       | —                     |       |
| Deferred rent                         |       | 50                     |       | 46                         |       |
| Other                                 |       | 156                    |       | 631                        |       |
| Total                                 |       | $                      | 2,530      |                       | $          | 2,325 |   |

 

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**Note 11.          Debt and Capital Lease Obligations**

 

Debtand capital lease obligations consist of the following:

 
| **(amounts in thousands)**                                                                                 | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                                                 | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| Note payable to a related party with interest at  5% (Note 13)                                             |       | $                      | 9,622      |                       | $          | 9,393 |   |
| Capital lease obligations to an Australian bank at  various interest rates and collateralized by equipment |       | 473                    |       | 599                        |       |
| Capital lease obligations for furniture, tooling  and equipment                                            |       | —                 |       | 2                          |       |
| Total                                                                                                      |       | 10,095                 |       | 9,994                      |       |
| Less: current portion                                                                                      |       | (603                   | )          | (3,315                     | )          |
| Long-term portion                                                                                          |       | $                      | 9,492      |                       | $          | 6,679 |   |

 

OnNovember 6, 2008, in accordance with the amended Trade Credit FacilityAgreement (the “Facility Agreement”), Elixir International Limited (“ElixirInternational”), a wholly-owned subsidiary of EGT Entertainment Holding Limited(“EGT Entertainment”) (formerly known as Elixir Group Limited), which is theprincipal shareholder of the Company, exchanged its promissory note issuedunder the Facility Agreement in the original principal amount advance of $15.0million for a new promissory note issued by the Company for the then outstandingprincipal amount of approximately $12.1 million.  The outstandingprincipal and the interest accrued (revised from 8% to 5%) thereon were to berepaid in 24 equal monthly installments reset from January 1, 2009.

 

On July 24, 2009, theCompany entered into a second amendment (the “Second Amendment”) to theFacility Agreement with Elixir International to defer the repayment ofprincipal and interest on the outstanding principal balance of approximately$9.2 million during the period from July 1, 2009 to June 30, 2010although interest at the rate of 5% per annum continued to accrue on theoutstanding principal balance of approximately $9.2 million (the “OutstandingPrincipal Balance”).  Repayments in 18equal monthly installments were to resume on July 1, 2010.  (See Note 13)

 

OnApril 20, 2010, the Company entered into a Deed of Assignment and Novationand Consent (the “Deed of Assignment”) with Elixir International and EGTEntertainment. Pursuant to the Deed of Assignment, the Company agreed to theassignment and transfer by Elixir International of all its rights andobligations under the Facility Agreement and the related promissory note to EGTEntertainment, our principal shareholder, with immediate effect. The saidassignment and transfer was made in relation to the disposal of ElixirInternational by EGT Entertainment and does not have any impact on the noteterms or the repayment obligations of the Company save and except that when therepayment schedule resumes, the monthly repayment of principal and interestunder the note will be made to or at the direction of EGT Entertainment insteadof Elixir International. (See Note 13)

 

OnMay 25, 2010, the Company entered into a third amendment (“Third Amendment”)to the Facility Agreement with EGT Entertainment, pursuant to which the paymentschedule of the Outstanding Principal Balance and the interest accrued thereon werefurther restructured in the following manner: (i) the total interestaccrued on the Outstanding Principal Balance during the period fromJuly 1, 2009 to June 30, 2010 in the amount of approximately $458,000will be paid by the Company in a lump sum payment on July 1, 2010; (ii) on the first day of each calendar month during the period from August 1,2010 to June 1, 2011, the Company will pay interest in arrears on theOutstanding Principal Balance at the same rate of 5% per annum for thepreceding month; and (iii)   theCompany will repay the Outstanding Principal Balance and interest accruedthereon at the rate mentioned above in 18 equal monthly installments commencingon July 1, 2011. Pursuant to the terms of the Third Amendment, the Companypaid a total of $458,000 on July 1, 2010 to EGT Entertainment.

 

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**Note 12.          Stock-Based Compensation**

 

**Options**

 

At the annual shareholdersmeeting on September 8, 2008, a new stock option plan, the “2008 StockIncentive Plan” (the “Plan”), was voted on and became effective January 1,2009.

 

The Plan allows forincentive awards to eligible recipients consisting of:

 

·                  Options topurchase shares of common stock that qualify as incentive stock options withinthe meaning of the Internal Revenue Code;

 

·                  Non-statutorystock options that do not qualify as incentive options;

 

·                  Restrictedstock awards; and

 

·                  Performance stockawards, which are subject to future achievement of performance criteria or befree of any performance or vesting.

 

The maximum number of sharesreserved for issuance under the Plan was originally 5,000,000, and in July 2010the Company’s shareholders approved an increase in the number of share reservedfor issuance to ten million.  Theexercise price shall not be less than 100% of the fair market value of oneshare of common stock on the date of grant, unless the participant owns morethan 10% of the total combined voting power of all classes of stock of theCompany or any parent or subsidiary corporation of the Company, in which casethe exercise price shall then be 110% of the fair market value.

 

Duringthe six-month period ended June 30, 2010, stock options for the purchaseof 2,775,000 shares of common stock were granted with a weighted averageexercise price of $0.27 and weighted average fair value of $0.25 per share andwill vest from six-month and one day periods to three-year periods.  During the six-month period ended June 30, 2010, 472,727 restricted stockawards with a fair value of $0.27 per share were issued.  The shares ofrestricted stock shall vest, subject to and upon the recipient’s achievement ofkey operational and financial performance milestones. For restricted stockawards with performance conditions, the Company evaluates if performanceconditions are probable in each reporting period. The compensation expense ofrestricted awards is recognized ratably over the implicit service period ifachieving performance conditions is probable. Cumulative catch-up adjustmentsare required in the event of change in assessment of probability.

 

Inaddition, during the six-month period ended June 30, 2010, the Companygranted 450,000 performance stock awards with a fair value of $0.27 per share.

 

Priorto January 1, 2009, the Company had two stock options plans, the Amendedand Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’Stock Option Plan (the “Stock Option Plans”), through which 15,000,000 sharesand 300,000 shares were authorized, respectively.  Both Stock Option Plansexpired on December 31, 2008, however options granted under the StockOption Plans that were outstanding as of the date of termination remain outstandingand subject to termination according to their terms.

 

Asof June 30, 2010, 9,881,630 stock options were exercisable with a weightedaverage exercise price of $1.85, a weighted average fair value of $0.13, and anaggregate intrinsic value of $417,000.

 

**StockOptions**

 
| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (in thousands)** | ** ** |
|------------------------------------------|------------|-----------------------|------------|---------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| Outstanding as of December 31, 2009 |       | 10,737,065            |       | $                                     | 1.84       |                                                           | 4.32       |                                            | $          | 502 |   |
| Granted                                  |       | 2,775,000             |       | $                                     | 0.27       |                                                           | —     |                                            | —     |   |
| Exercised                                |       | —                |       | —                                |       | —                                                         |       | —                                          |       |
| Cancelled                                |       | (597,098              | )          | $                                     | 1.31       |                                                           | —     |                                            | —     |   |
| Outstanding as of June 30, 2010     |       | 12,914,967            |       | $                                     | 1.53       |                                                           | 4.91       |                                            | $          | 502 |   |
| Exercisable as of June 30, 2010     |       | 9,881,630             |       | $                                     | 1.85       |                                                           | 3.56       |                                            | $          | 417 |   |

 

**RestrictedStock**

 
| ** **                                    | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Fair Value at  Grant Date** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------|------------|
| Unvested balance as of December 31, 2009 |       | —                |       | $                                                | —     |                                                           | —     |   |
| Granted                                       |       | 922,727               |       | $                                                | 0.27       |                                                           | —     |   |
| Vested                                        |       | (648,545              | )          | $                                                | 0.27       |                                                           | —     |   |
| Unvested balance as of June 30, 2010     |       | 274,182               |       | $                                                | 0.27       |                                                           | 0.5        |   |

 

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**Warrants**

 

A summary of the status ofthe Company’s warrants outstanding at June 30, 2010 and changes during thesix-month period then ended is presented in the table below.

 
| ** **                             | ** ** | **Warrants** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|--------------|------------|----------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------|------------|
| Warrants, as of december 31, 2009 |       | 13,125,000   |       | $                                      | 1.86       |                                                           | 1.12       |                            | —     |   |
| Grant/(exercised or cancelled)         |       | —       |       | —                                 |       | —                                                         |       | —                          |       |
| Exercisable as of June 30, 2010   |       | 13,125,000   |       | 1.86                                   |       | 0.62                                                           |       | —                          |       |
|                                        |            |              |            |                                        |            |                                                                |            |                                 |            |  |

 

There were no warrantsgranted, exercised or cancelled during the three-month and six-month periodsending June 30, 2010.  Outstandingand exercisable warrants have no aggregate intrinsic value as of June 30,2010 due to the fair market value of the Company’s stock as of that date.

 

The table set forth aboveincludes warrants to purchase ten million common shares held by EGT Entertainment,all of which will expire on December 31, 2010.

 

*Recognitionand Measurement*

 

The fair value of eachstock-based award to employees and non-employee directors is estimated on themeasurement date which generally is the grant date while awards to non-employeesare measured at the earlier of the performance commitment date or the servicecompletion date using the Black-Scholes-Merton option-pricing model.  Option valuation models require the input ofhighly subjective assumptions, and changes in assumptions used can materiallyaffect the fair value estimates.  TheCompany estimates the expected life of the award by taking into considerationthe vesting 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 interest rate on themeasurement date is based on U.S. Treasury constant maturity rates for a periodapproximating the expected life of the award. The Company historically has not paid dividends, nor does it expect topay dividends in the foreseeable future and, therefore, the expected dividendrate is zero.

 

Thefollowing 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 periods ended June 30, 2010 and2009:

 
| ** **               | ** ** | **June 30,** | ** ** |
|--------------------------|------------|-------------------|------------|
| ** **               | ** ** | **2010**          | ** ** | **2009** | ** ** |
| ** **               | ** ** | **Low**           | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** |
| Range of values:         |       |              |       |   |   |   |   |   |   |
| Expected volatility      |       | 129.51            | %          | 173.79 | % | 303.32 | % | 303.32 | % |
| Expected dividends       |       | —            |       | — |   | — |   | — |   |
| Expected term (in years) |       | 1.88              |       | 9.88 |   | 3.73 |   | 3.73 |   |
| Risk-free rate           |       | 0.58              | %          | 2.94 | % | 2.75 | % | 2.75 | % |

 

For stock-based compensationaccrued to employees and non-employee directors, the Company recognizes stock-basedcompensation expense for all service-based awards with graded vesting scheduleson the straight-line basis over the requisite service period for the entireaward.  Initial accruals of compensationexpense are based on the estimated number of shares for which requisite serviceis expected to be rendered.  Estimatesare revised if subsequent information indicates that forfeitures will differfrom previous estimates, and the cumulative effect on compensation cost of achange in the estimated forfeitures is recognized in the period of the change.

 

For non-employee awards, theCompany remeasures compensation costs each period until the service conditionis complete and recognizes compensation costs on the straight-line basis overthe requisite service period.

 

The Company estimatesforfeitures and recognizes compensation costs only for those awards expected tovest, assuming all awards would vest, and reverses recognized compensationcosts for forfeited awards when the awards are actually forfeited.

 

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

 

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straight-line basis over theestimated requisite service period.

 

**Note 13.          Related Party Transactions**

 

AtJune 30, 2010 and December 31, 2009, the notes payable to EGTEntertainment and Elixir International, respectively, (see Note 11) relating topurchases of electronic gaming machines, casino management systems and otherperipherals had outstanding principal amounts and additional accrued interesttotaling approximately $9.2 million and $458,000, respectively.

 

OnApril 21, 2008, the Company entered into a Trade Credit Facility Agreement(the “Facility Agreement”) with Elixir International.  Pursuant to theFacility Agreement, Elixir International provided trade credits to the Companyfor its purchases of electronic gaming machines from Elixir International inexchange for the Company’s issuance of unsecured notes to Elixir Internationalbearing interest at a fixed rate of eight percent (8.0%) per annum. Titles for any gaming machines offered in exchange for the notes passed to theCompany upon issuance of the notes.

 

Uponentering into the Facility Agreement, the Company immediately issued the firstnote pursuant to the terms of the Facility Agreement in the then principalamount of $15.0 million (the “Initial Advance”).  The Initial Advanceextinguished a then trade payable of an equivalent amount to ElixirInternational with respect to gaming machines previously acquired.

 

Pursuantto the Facility Agreement, the Company was obligated to repay the principal,plus any accrued interest thereon, of the Initial Advance in 24 equal monthlyinstallments after the date of issue.  The Initial Advance is subject todemand by Elixir International for immediate payment only if there is either anevent of default or a change of control as defined in the Facility Agreement.Pursuant to an amendment to the Facility Agreement dated November 6, 2008between the parties, Elixir International surrendered the note of InitialAdvance to the Company in exchange for the issuance of a new promissory notefor the then outstanding principal amount of $12.1 million with the followingnew repayment terms: (i)  the outstanding principal amount and theinterest accrued thereon shall be repaid in 24 equal monthly installments resetfrom January 1, 2009; (ii) interest shall be accrued on theoutstanding principal at the rate of five percent (5.0%)  per annumstarting from January 1, 2009; and no monthly repayments under the newnote were required for the months of October, November andDecember 2008.

 

OnJuly 24, 2009, the Company entered into another agreement with ElixirInternational to further amend the unsecured promissory note issued by the Company.Under these amended note terms, which became effective as of July 1, 2009,the Company was entitled to defer the repayment of principal and interest onthe outstanding principal balance of the note of $9.2 million untilJuly 2010 with interest at the same rate of 5% continuing to accrue. (SeeNote 11)

 

OnApril 20, 2010, in relation to the disposal of Elixir International by ourprincipal shareholder, EGT Entertainment, Elixir International assigned andtransferred all its rights and obligations under the Facility Agreement and thenote to EGT Entertainment. The said assignment and transfer does not have anyimpact on the note terms or the repayment obligations of the Company save andexcept that when the repayment schedule resumes, the monthly repayment ofprincipal and interest under the note will be made to or at the direction ofEGT Entertainment instead of Elixir International. (See Note 11)

 

OnMay 25, 2010, the Company entered into a third amendment to the FacilityAgreement with EGT Entertainment, pursuant to which the payment schedule of theOutstanding Principal Balance and the interest accrued thereon were furtherrestructured in the following manner: (i)   the total interestaccrued on the Outstanding Principal Balance during the period from July 1,2009 to June 30, 2010 in the amount of approximately $458,000 will be paidby the Company in a lump sum payment on July 1, 2010; (ii) on the firstday of each calendar month during the period from August 1, 2010 toJune 1, 2011, the Company will pay interest in arrears on the OutstandingPrincipal Balance at the same rate of 5% per annum for the preceding month; and(iii)  the Company will repay the Outstanding Principal Balance andinterest accrued thereon at the rate mentioned above in 18 equal monthlyinstallments commencing on July 1, 2011. Pursuant to the terms of theThird Amendment, the Company paid a total of $458,000 on July 1, 2010 toEGT Entertainment.

 

Significantrevenues, purchases and expenses arising from transactions with related partiesfor the three-month and six-month periods ended June 30, 2010 and 2009 areas follows:

 
| ** **                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(amounts  in thousands)**                   | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Melco Crown Gaming (Macau) Limited**        |       |                                 |       |                               |       |   |   |   |   |
| Trade  sales of gaming products               |       | $                                    | 40         |                               | $          | 2,976 |   | $ | 40 |   | $ | 2,976 |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| **Melco Services Limited**                    |       |                                 |       |                               |       |   |   |   |   |
| Technical  services                           |       | 7                                    |       | 15                                 |       | 17 |   | 15 |   |
| Office  rental                                |       | 36                                   |       | —                             |       | 72 |   | — |   |
| Expenses  paid on behalf of the Company (net) |       | (67                                  | )          | —                             |       | (83 | ) | — |   |
|                                               |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |

 

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**Note 14.          Income Taxes**

 

The Company’s reportedincome tax rates for the three-month and six-month periods ended June 30,2010 and 2009 were (16.7)% and (18.5)% and (16.6)% and (3.9)%, respectively.For the six-month period ended June 30, 2010, the Company recorded taxableincome from one of its foreign operations while it incurred a net loss fromoperations on a consolidated basis. Such foreign operations are expected tocontinue to be profitable for the full year of 2010 and, accordingly, taxexpense recorded in the six-month period ended June 30, 2010 resulted in anegative effective tax rate.

 

**Note 15.          Restructuring Charges**

 

Inaccordance with ASC 420, *Exit and DisposalCost Obligations*, the Company incurred restructuring charges forthree-month and six-month periods ended June 30, 2010 and 2009 ofapproximately $210,000 and $89,000 and $247,000 and $588,000,respectively.  The restructuring charges during the three-month andsix-month periods ended June 30, 2010 were for severance wages andbenefits related to the termination of employees. The restructuring chargesduring the three-month and six-month periods ended June 30, 2009 were forthe write-down of the remaining China plant equipment and the severance wagesand benefits related to the termination of employees.  The amountsrepresented contractual and other agreements with employees, which onlyincluded charges for termination benefits measured at the estimated fair valueat the termination date.  Restructuringexpenses and related charges incurred at June 30, 2010 were subsequentlypaid or settled.

 

**Note 16.          Discontinued Operations**

 

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

 

Inrelation to this Purchase and Settlement Agreement, the Company terminated adistributorship arrangement of the relevant products with a distributor inEurope and, pursuant to the termination arrangement the Company was required tobuy back certain inventories of the relevant products kept by the distributor.The estimated liability was approximately $248,000, which was recorded asliabilities related to discontinued operations. After taking into account suchbuy-back obligation, the Company recognized a gain relating to the assetdisposal of approximately $1.7 million in the three-month period endedJune 30, 2009.

 

Asa result of the sale to Shuffle Master, the China facility became redundantand, therefore, was completely closed at the end of April 2009. Thisoperation was part of the table game segment and the Company classified theChina facility as discontinued operations.

 

The following table detailsselected financial information for the discontinued operations in theconsolidated statements of operations.

 
| ** **                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(amounts  in thousands)**                      | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Loss  from operations                            |       | $                                    | —     |                               | $          | (202 | ) | $ | — |   | $ | (420 | ) |
| Gain  on disposal                                |       | —                               |       | 1,962                              |       | — |   | 1,962 |   |
| Income  tax benefit/(expense)                    |       | —                               |       | —                             |       | — |   | — |   |
| Income  from discontinued operations, net of tax |       | $                                    | —     |                               | $          | 1,760 |   | $ | — |   | $ | 1,542 |   |

 

Theestimated effective tax for discontinued operations is $NIL. Therefore, thereis no income tax benefit associated with the loss from operations.

 

**Note 17.          Commitments and Contingencies**

 

**LegalMatters**

 

The Company is a party tocertain legal matters as discussed below.

 

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*Sales Tax Audit*

 

InFebruary 2004, the State of Nevada initiated a sales/use tax audit of ourequipment lessors. In June 2010, the State of Nevada determined there hadbeen a double tax payment of the sales/use tax and a refund of $56,000 iscurrently being processed by the Nevada State Tax Department.  As ofJune 30, 2010, this balance was included in the prepaids, deposits andother assets account.

 

*Prime Mover/Strata Litigation*

 

OnMarch 26, 2010, a complaint (as subsequently amended on May 28, 2010)(the “Complaint”) was filed by certain shareholders of the Company includingPrime Mover Capital Partners L.P., Strata Fund L.P., Strata Fund Q.P. L.P., andStrata Offshore Fund, Ltd (collectively, the “Plaintiffs”) in the United StatesDistrict Court for the Southern District of New York against certain defendantsincluding the Company and certain other current and former directors andofficers of the Company.

 

TheComplaint alleges claims related to disclosures concerning the Company’selectronic gaming machine participation business (the “Participation Business”),including but not limited to the alleged violations of Sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder, violations of Nevada Revised Statutes Sections90.580(e) and 90.660(3), breach of fiduciary duty, and negligentmisrepresentations.  The Plaintiffs allege that the Company and certainother defendants made false and misleading statements about the ParticipationBusiness in filings with the SEC, press releases, and other industry andinvestor conferences and meetings during the period from June 13, 2007 andAugust 13, 2008 and that the Plaintiffs then purchased the securities atthe inflated prices and later suffered economic losses when the price of theCompany’s securities decreased.

 

ThePlaintiffs seek unspecified damages, as well as interest, costs and attorneys’fees.  The Company has engaged legal counsel to consider the claims setforth in the Complaint and the Company intends to defend vigorously and respondto the Complaint in a time and manner consistent with applicable federal andstate laws. As the litigation is at a very preliminary stage, it is notpossible to predict the likely outcome of the case or the probable loss, ifany, and, accordingly, no accrual has been made for any possible losses inconnection with this matter.

 

The Company believes thatthe Plaintiffs’ claims against the Company and its present and former officersand directors are covered by the Company’s directors and officers insurancepolicies, which provide the covered parties with up to $15 million of potentialinsurance coverage, subject to a retention amount payable by the Company in theamount of $150,000.

 

**Note 18.          Loss Per Share**

 

Basic loss per share iscomputed by dividing the reported net loss for the period by the weightedaverage number of common shares outstanding during the period.  Loss pershare is unchanged on a diluted basis since the assumed exercise of commonstock equivalents would have an anti-dilutive effect.

 

**Note 19.          Subsequent Events**

 

**Amendment to the Articles of Incorporation to Change the Corporate Name**

 

On July 23, 2010, atthe annual meeting of stockholders, the Company’s shareholders approved theamendment to the articles of incorporation of the Company to change thecorporate name from Elixir Gaming Technologies, Inc. to EntertainmentGaming Asia Inc.  The Company believesthat renaming itself is appropriate given the material transformation of theCompany following the restructuring of its operations over the past two andone-half years.  The name EntertainmentGaming Asia more aptly reflects the Company’s expanded gaming business model,particularly in relation to the strategy to own and operate casinos in theIndo-China region to complement its existing electronic gaming machinesparticipation business.

 

On July 23, 2010, theCompany filed the certificate of amendment to its articles of incorporationwith the Nevada Secretary of State. However, regardless of the change of thecorporate name, the Company’s common stock continues to trade on the NYSE Amexunder the symbol “EGT”.

 

The change in corporate namehas no effect on shareholders’ ownership of the Company’s common shares.

 

**Item 2.             Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

***CAUTIONARY STATEMENT***

 

You should read thefollowing discussion and analysis in conjunction with our unauditedconsolidated financial statements and the related notes thereto containedelsewhere in this report. The information contained in this quarterly report onForm 10-Q is not a complete description of our business or the risksassociated with an investment in our common stock. We urge you to carefullyreview and consider the various disclosures made by us in this report and inour other reports filed with the Securities and Exchange Commission, or SEC,including our annual report on Form 10-K for the year endedDecember 31, 2009, filed with the SEC on

 

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March 30, 2010 andsubsequent reports on Form 8-K, which discuss our business in greaterdetail.

 

In this report we make, andfrom time to time we otherwise make, written and oral statements regarding our businessand prospects, such as projections of future performance, statements ofmanagement’s plans and objectives, forecasts of market trends, and othermatters that are forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. Statements containing the words or phrases “willlikely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,”“projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,”“objective,” “should” or similar expressions identify forward-lookingstatements, which may appear in documents, reports, filings with the Securitiesand Exchange Commission, news releases, written or oral presentations made byofficers or other representatives made by us to analysts, stockholders,investors, news organizations and others, and discussions with management andother 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-looking statements, involve a number ofrisks and uncertainties. No assurance can be given that the results reflectedin any forward-looking statements will be achieved. Any forward-lookingstatement speaks only as of the date on which such statement is made. Ourforward-looking statements are based upon assumptions that are sometimes basedupon estimates, data, communications and other information from suppliers,government agencies and other sources that may be subject to revision. Exceptas required by law, we do not undertake any obligation to update or keepcurrent either (i) any forward-looking statement to reflect events orcircumstances arising after the date of such statement, or (ii) theimportant factors that could cause our future results to differ materially fromhistorical results or trends, results anticipated or planned by us, or whichare reflected from time to time in any forward-looking statement.

 

In addition to other mattersidentified or described by us from time to time in filings with the SEC, thereare several important factors that could cause our future results to differmaterially from historical results or trends, results anticipated or planned byus, or results that are reflected from time to time in any forward-lookingstatement. Some of these important factors, but not necessarily all importantfactors, include those matters included in the section “Risk Factors” in ourannual report on Form 10-K for the year ended December 31, 2009 filedwith the SEC on March 30, 2010.

 

We own or have rights tocertain trademarks that we used in connection with our business or products,including, but not limited to, DolphinTM. Other than this trademark, this reportalso makes reference to trademarks and trade names of other companies.

 

**Overview**

 

We currently conductbusiness in three operating segments: (i) gaming machine participationoperations; (ii) table game product operations, which after the sale ofthe shuffler and deck checker assets that was completed in April 2009,consist exclusively of gaming chips and plaques; and (iii) non-gamingproduct operations, which consist primarily of the Dolphin AdvancedTechnologies Pty Ltd (“Dolphin”) automotive components.

 

Ourprimary focus is on leasing electronic gaming machines on a revenue sharingbasis to gaming establishments within Pan-Asian markets.  We identify andsecure venues for the placement of electronic gaming machines and casinomanagement systems, which track game performance and provide statistics on eachinstalled electronic gaming machine owned and leased by us.  We contractwith the venue owners or operators for the placement of the electronic gamingmachines on a revenue sharing basis. In addition, we acquire and install thegaming machines, casino management systems and other gaming peripherals at therelevant gaming venues.

 

Asof June 30, 2010, our gaming machine participation operations wereconcentrated in two countries, Cambodia and the Philippines. In Cambodia, wehad a total of 624 gaming machine seats in operation at one venue, NagaWorld, awholly-owned subsidiary of Hong Kong listed NagaCorp Ltd. (HKSE: 3918). In the Philippines, we had a total of 878 gaming machine seats in operation atsix venues.

 

In Cambodia, our participation operations currently focus entirely onoperating a substantial portion of the slot area in prime casino floorlocations at NagaWorld, Cambodia’s premier luxury destination gaming resort andthe only licensed full service casino in a specified area in and around thecapital city of Phnom Penh.  Our slotoperations at NagaWorld, which we brand as Dreamworld and jointly operate withNagaWorld, have provided us strong growth in participation revenues and cashflow.  As a result, since our firstmachine installations in January 2009, we have dramatically grown ourinstalled base at this venue and expect to reach 670 seats in operation in August 2010,fulfilling our total gaming machine seats under contract with NagaWorld.

 

Inaddition, we continue to selectively pursue expansion opportunities in new andexisting markets, where we can leverage our expertise and relationships. In April 2010, we entered into a machine participation agreement with anew partner to place approximately 60 gaming machine seats on a participationbasis at its new casino in the Kampong Cham province of Cambodia (north east ofPhnom Penh) near the Vietnam border. This is an attractive opportunity for usas it not only provides us the ability to expand with minimal capitalexpenditure as we anticipate using machines from existing inventory but alsoenables us to enter a new and well-trafficked location in Cambodia withpartners that are established gaming operators in the region.  Full deployment of these gaming machine seatsis expected in November 2010.

 

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Inthe Philippines, we have strategically managed our machine placements to focuson growing win per day at our most promising venues and, with the support ofour venue partners, are implementing targeted marketing programs to acceleratenet win per machine growth. We believe this strategy positions us for long-termgrowth in this market.

 

Inan effort to better leverage our established market presence and relationshipsto capitalize on the growth opportunities that exist in our target markets, in May 2010we announced our two-pronged approach to our growth strategy for our gamingoperations as a provider of gaming machines on a participation basis and as acasino owner and operator in certain emerging gaming markets in Pan Asia.

 

Webelieve this expanded business strategy will allow us the potential for higherlong-term incremental returns on our operations given the ability to collect100% of the net win compared to a percentage as per our existing participationcontracts.  In addition, it provides usgreater long-term control of our operations.

 

Infurtherance of this growth strategy, on May 26, 2010, we formed a newcompany in Cambodia, Dreamworld (Takeo) Investment Holding Limited (“DreamworldHolding”), which entered into a Land Sale & Purchase Agreement (the “S&PAgreement”) for the acquisition of a parcel of land in Takeo Province ofCambodia (the “Land”) with the owner of the Land (the “Seller”).

 

TheLand has a total area of approximately seven acres (30,000 square meters) andis located in the Takeo Province, a border area of Cambodia and Vietnam, whichis approximately 125 miles (200 kilometers) south of Cambodia’s capital cityPhnom Penh and connects the major cities of Southern Vietnam and Phnom Penh.The total consideration for the Land was $1.76 million, of which $850,000 waspaid to the Seller in May 2010 as a deposit. The registration of the titleof the Land under the name of Dreamworld Holding by the land office and therelevant authorities in Cambodia was completed on June 28, 2010 and,accordingly, we paid the balance of $910,000 to the Seller in mid-July 2010.

 

OnMay 21, 2010, a license to build and open a casino hotel in the TakeoProvince of Cambodia was granted by the Government of the Kingdom of Cambodiato Dreamworld Leisure (Cambodia) Limited (“Dreamworld Leisure”), another newwholly-owned subsidiary of the Company. Pursuant to the License, DreamworldLeisure is allowed to construct and open a casino hotel for table games andslot machines with the proposed name of Dreamworld Casino and Resort (“DreamworldCasino”). It is anticipated that Dreamworld Casino will be constructed on theLand and upon its completion, a formal casino license will be granted toDreamworld Leisure, which will be the operating company of Dreamworld Casino.

 

Weintend to develop Dreamworld Casino in phases, as detailed in the table below,subject to demand and the availability of capital.

 
| ** ** | ** ** | **Casino**                  | ** ** | ** **          | ** ** | **Incremental** | ** ** |
|------------|------------|-----------------------------|------------|---------------------|------------|-----------------|------------|
| ** ** | ** ** | **Approx. Area  (sq. ft.)** | ** ** | **Slot   Machines** | ** ** | **Table Games** | ** ** | **Hotel Rooms** | ** ** | **Investment********USD Millions** | ** ** |
| Phase 1    |       | 54,000                      |       | 150                 |       | 20              |       | 50 |   | $ | 8-10 |   |
| Phase 2    |       | —                      |       | 150                 |       | 20              |       | 50 |   | 2 |   |
| Phase 3    |       | 32,000                      |       | 150                 |       | 20              |       | 100 |   | 5 |   |
| Total      |       | 86,000                      |       | 450                 |       | 60              |       | 200 |   | $ | 15-17 |   |

 

Capitalexpenditures for Phase 1 include $1.76 million for the purchase of the land,which has been fully paid by two installments of approximately $850,000 in May 2010and $910,000 in July 2010.  Based onour preliminary estimated project timeline, projected cash flows, and the deferralof principal repayments until July 2011 on our unsecured promissory notedue to EGT Entertainment, we believe we will be able to fund Phase 1 from cashon hand and projected cash flow from operations.

 

Asa border casino, Dreamworld Casino will be strategically positioned tocapitalize on the attractive Southern Vietnam and the greater Phnom Penh areafeeder markets.  We intend to leverageour marketing expertise and the Dreamworld brand from our operations atNagaWorld to make Dreamworld Casino a destination location for players in thearea.

 

Wecontinue to actively pursue casino development projects with a focus on theIndo-China region where we can leverage our existing market presence andrelationships and capitalize on the attractive economic and socio demographictrends in our target markets. In the event we were to commit to additional andconcurrent projects, it could require us to reallocate resources and adjustproject timelines in order to give priority to the highest potential return project.

 

Inaddition to our core gaming business, we are focused on deriving greater valuefrom our gaming chip and plaque operations.  We have directed greaterresources to these operations in the form of marketing and product developmentto further strengthen our strong customer relationships and penetration in ourkey existing markets of Macau and Australia and to expand our distributionchannels 

 

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intonew markets.  These efforts include the development of higher price perunit plaques.  Based on these initial efforts, we believe we have betterpositioned ourselves to capitalize on the future growth opportunities for theglobal gaming chip and plaque market.

 

Withregard to our non-gaming operations, Dolphin auto component sales volumesposted a modest quarterly sequential decline but solid improvement from theprior year period as the automotive parts industry has shown signs ofstabilization.  Due to the recent downturn in the global automotive industry,there has been rationalization and consolidation of our competitor base. As a designated tier1 and tier 2 supplier to several major manufacturers, we believe Dolphin isbetter positioned togain market share and increase sales orders in the future.

 

We also have implementeddramatic cost reductions initiatives, which resulted in a 34% decline incash-based selling, general, and administrative expenses in 2010 compared to2009 levels.  We continue to exercisestrict cost control and, as a result, have maintained cash-based selling,general and administrative expenses at the low end of our targeted range of$1.5 to $1.8 million for the second quarter of 2010.  Importantly, we have effected thesereductions without hindering our operational capabilities and still remain flexibleenough to act on our growth plans.

 

Withour refined operations and streamlined cost structure, we have significantlyimproved our execution capabilities, operational efficiency and financialperformance.  Our consolidated revenue for the three months endedJune 30, 2010 was approximately $5.1 million, of which revenue from ourgaming machine participation, table games and non-gaming operations comprised70%, 4% and 26%, respectively, of consolidated revenue.  This compares toconsolidated revenue of approximately $5.8 million for the three months endedJune 30, 2009, of which revenue from our gaming machine participation,table games and non-gaming operations comprised 30%, 55% and 15%, respectively,of consolidated revenue.

 

Revenuefrom our gaming machine participation operations increased to $3.5 million forthe three months ended June 30, 2010 doubling from $1.7 million in thesame period in the prior year.  Grossmargin for the gaming participation business improved to 36% in the threemonths ended June 30, 2010 compared to negative gross margin of 49% in thesame period in the prior year.  Excludingnon-cash items such as machine depreciation and asset write-downs, gross marginfor the gaming participation business improved to 94% from 90%, respectively.

 

Basedon the solid revenue performance, particularly from our operations atNagaWorld, and our continued strict cost control efforts, we have significantlyimproved our ability to generate and grow positive cash flow.  We achieved positive Adjusted EBITDA (asdefined below) of approximately $1.4 million for the three months endedJune 30, 2010 up from approximately $1.3 million for the three monthsended March 31, 2010.  Cash flowprovided from operations amounted to approximately $4.9 million for the sixmonths ended June 30, 2010 compared with cash used in operations ofapproximately $3.9 million in the same period in the prior year.

 

Inaddition, we made further progress in improving our liquidity and financialflexibility to pursue selective growth opportunities in our gamingoperations.  In May 2010, we entered into another agreement with EGTEntertainment to further amend the unsecured promissory note originally issuedin April 2008.  Under these newterms, which became effective July 1, 2010, we will defer the repayment ofprincipal on the outstanding principal balance of the note of approximately$9.2 million until July 2011.  Wewill make interest only payments on a monthly basis at a rate of 5% perannum.  In July 2011, we will resumemonthly payments of principal and interest for a period of 18 months.  The amended terms also require that we payall the accrued interest for the period of July 1, 2009 to June 30,2010, which had accrued at a rate of 5% per annum on the principal amount ofapproximately $9.2 million, in the total amount of approximately $458,000 on July 1,2010.

 

**Results ofOperations for the Three-Month andSix-Month Periods Ended June 30, 2010 and 2009**

 

The following is a scheduleshowing summarized operating results on a consolidated basis and separately byeach of our three business segments for the three-month and six-month periodsended June 30, 2010 and 2009, namely gaming machine participation, tablegame products and non-gaming products.

 

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

 

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| ** **                                                                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(amounts in thousands, except per share data)** | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Total:                                                                          |       |                                                |       |                                              |       |   |   |   |   |
| Revenues                                                                        |       | $                                                   | 5,065      |                                              | $          | 5,773 |   | $ | 9,432 |   | $ | 7,475 |   |
| Gross  profit/(loss)                                                            |       | $                                                   | 1,321      |                                              | $          | 287 |   | $ | 1,968 |   | $ | (1,859 | ) |
| Gross  margin percentage                                                        |       | 26                                                  | %          | 5                                                 | %          | 21 | % | (25 | )% |
| Adjusted  EBITDA/(LBITDA)(1)                                                    |       | $                                                   | 1,382      |                                              | $          | 1,478 |   | $ | 2,703 |   | $ | (1,051 | ) |
| Operating  loss from continuing operations                                      |       | $                                                   | (1,252     | )                                                 | $          | (2,207 | ) | $ | (2,670 | ) | $ | (8,014 | ) |
| Net  loss from continuing operations                                            |       | $                                                   | (1,534     | )                                                 | $          | (1,893 | ) | $ | (3,197 | ) | $ | (7,915 | ) |
|                                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Basic  and diluted loss per share                                               |       | $                                                   | (0.01      | )                                                 | $          | (0.02 | ) | $ | (0.03 | ) | $ | (0.07 | ) |
| Weighted  average shares outstanding                                            |       | 115,879                                             |       | 114,957                                           |       | 115,426 |   | 114,957 |   |
|                                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Gaming  machine participation:                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Revenues                                                                        |       | $                                                   | 3,539      |                                              | $          | 1,743 |   | $ | 6,374 |   | $ | 2,689 |   |
| Gross  profit/(loss)                                                            |       | $                                                   | 1,288      |                                              | $          | (857 | ) | $ | 1,894 |   | $ | (3,021 | ) |
| Gross  margin percentage                                                        |       | 36                                                  | %          | (49                                               | )%         | 30 | % | (112 | )% |
|                                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Table  game products:                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Revenues                                                                        |       | $                                                   | 232        |                                              | $          | 3,191 |   | $ | 353 |   | $ | 3,269 |   |
| Gross  profit                                                                   |       | $                                                   | 59         |                                              | $          | 1,300 |   | $ | 90 |   | $ | 1,396 |   |
| Gross  margin percentage                                                        |       | 25                                                  | %          | 41                                                | %          | 25 | % | 43 | % |
|                                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Non-gaming  products:                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Revenues                                                                        |       | $                                                   | 1,294      |                                              | $          | 839 |   | $ | 2,705 |   | $ | 1,517 |   |
| Gross  loss                                                                     |       | $                                                   | (26        | )                                                 | $          | (156 | ) | $ | (16 | ) | $ | (234 | ) |
| Gross  margin percentage                                                        |       | (2                                                  | )%         | (19                                               | )%         | (1 | )% | (15 | )% |

 

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(1)          “Adjusted EBITDA/(LBITDA)” is earnings (losses) beforeinterest, taxes, depreciation, amortization, stock-based compensation, and othernon-cash operating income and expenses. Adjusted EBITDA/(LBITDA) is presentedexclusively as a supplemental disclosure because management believes that it iswidely used to measure the performance, and as a basis for valuation, of gamingcompanies. Management uses Adjusted EBITDA/(LBITDA) as a measure of theoperating performance of its segments and to compare the operating performanceof its operations with those of its competitors. The Company also presentsAdjusted EBITDA/(LBITDA) because it is used by some investors as a way tomeasure a company’s ability to incur and service debt, make capitalexpenditures and meet working capital requirements. Gaming companies havehistorically reported EBITDA/(LBITDA) as a supplement to financial measures inaccordance with generally accepted accounting principles in the United States (“GAAP”).Adjusted EBITDA/(LBITDA) should not be considered as an alternative tooperating income as an indicator of the Company’s performance, as analternative to cash flows from operating activities as a measure of liquidity,or as an alternative to any other measure determined in accordance with GAAP.Unlike net income/(loss), Adjusted EBITDA/(LBITDA) does not includedepreciation or interest expense and,  therefore, does not reflect currentor future capital expenditures or the cost of capital. The Company compensatesfor these limitations by using Adjusted EBITDA/(LBITDA) as only one of severalcomparative tools, together with GAAP measurements, to assist in the evaluationof operating performance. Such GAAP measurements include operating income, netincome/(loss), cash flows from operations and cash flow data. The Company hassignificant uses of cash flows, including capital expenditures, interestpayments, debt principal repayments, taxes and other non-recurring charges,which are not reflected in Adjusted EBITDA/(LBITDA). Entertainment Gaming Asia’scalculation of Adjusted EBITDA/(LBITDA) may be different from the calculationmethods used by other companies and, therefore, comparability may be limited.

 

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

 
| ** **                                                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(amounts in thousands, except per share data)** | ** ** | **2010**                                        | ** ** | **2009**                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  loss — GAAP                                                           |       | $                                               | (1,534     | )                                             | $          | (133 | ) | $ | (3,197 | ) | $ | (6,373 | ) |
| Income  from discontinued operations                                            |       | —                                          |       | (1,760                                        | )          | — |   | (1,542 | ) |
| Interest  expense and finance fees                                              |       | 84                                              |       | 112                                           |       | 206 |   | 248 |   |
| Interest  income                                                                |       | (25                                             | )          | (26                                           | )          | (38 | ) | (64 | ) |
| Income  tax expense                                                             |       | 220                                             |       | 296                                           |       | 455 |   | 299 |   |
| Depreciation  and amortization                                                  |       | 2,316                                           |       | 2,745                                         |       | 4,546 |   | 5,556 |   |
| Stock  option expense                                                           |       | 246                                             |       | 244                                           |       | 540 |   | 446 |   |
| Write  down of gaming assets                                                    |       | 75                                              |       | —                                        |       | 191 |   | 379 |   |
| EBITDA/(LBITDA),  as adjusted                                                   |       | $                                               | 1,382      |                                          | $          | 1,478 |   | $ | 2,703 |   | $ | (1,051 | ) |

 

Total revenue decreasedapproximately $708,000 to approximately $5.1 million for the three-month periodended June 30, 2010 compared to approximately $5.8 million in the sameperiod in the prior year due to a decrease in table game revenue partiallyoffset by an increase in gaming machine participation and non-gaming productsrevenue.  Revenue from table gameproducts decreased as a result of lower chip volumes compared to thethree-month period ended June 30, 2009 during which time we delivered alarge RFID gaming chip order for a new casino in Macau. Revenue from gamingmachine participation increased as a result of higher average net win permachine and machines in operation. Revenue from non-gaming products increasedas a result of increased orders from major customers.

 

Gross profit increasedapproximately $1.0 million to approximately $1.3 million for the three-monthperiod ended June 30, 2010 compared to a gross profit of approximately$287,000 in the same period in the prior year primarily as a result of higherrevenue and gross margin for our gaming machine participation operations andnon-gaming operations, partially offset by lower revenue and gross margin onour table game products operations. Gross profit from gaming machine participation operations increased dueto higher revenue for this business segment and lower depreciation expense onthe machines, which is recorded in cost of operations, as a result ofimpairment charges recorded at the end of 2009. Revenue from gaming machine participation increased significantlygreater than depreciation expenses for our gaming machine participationoperations. Gross loss from non-gaming products decreased primarily due tohigher revenue and production efficiencies resulting from higher sales volumesduring the three-month period ended June 30, 2010 compared to the prioryear period.  Gross profit from tablegame products decreased primarily due to lower sales volumes and loss ofproduction efficiencies relating to the sales volumes during the three-monthperiod ended June 30, 2010 compared to the prior year period, whichincluded a large RFID gaming chip order for a new casino in Macau.

 

Operating loss from continuingoperations decreased approximately $955,000 to approximately $1.3 million forthe three-month period ended June 30, 2010 compared to an operating lossof approximately $2.2 million in the same period in the prior year primarily asa result of higher gross profit and reduced operating expenses.  Net loss from continuing operations declinedapproximately $359,000 to approximately $1.5 million compared to a net loss ofapproximately $1.9 million for the same period in the prior year primarily dueto the reduction in the operating loss, a slight gain on the disposition of assets compared to a loss on thedisposition of assets, all of which were partially offset by the one-time gainof $656,000 related to the settlement of a lawsuit during the three-monthperiod ended June 30, 2009 and a foreign currency loss compared to aforeign currency gain in the prior year period.

 

Total revenue increasedapproximately $1.9 million to approximately $9.4 million for the six-monthperiod ended June 30, 2010 compared to approximately $7.5 million in thesame period in the prior year due to an increase in gaming machineparticipation revenue and non-gaming product sales, partially offset by adecrease in table game products sales compared to the prior year period.  Revenue from gaming machine participationrevenue increased significantly as a result of higher average net win permachine and machines in operation. Revenue from non-gaming products increased as a result of increasedorders from major customers arising from a recovery in the economy. Revenuefrom table game products decreased as a result of lower sales volumes comparedto the three-month period ended June 30, 2009 during which time wedelivered a large RFID gaming chip order for a new casino in Macau.

 

Gross profit increasedapproximately $3.9 million to approximately $2.0 million for the six-monthperiod ended June 30, 2010 compared to a gross loss of approximately $1.9million in the same period in the prior year primarily as a result of the highergross margins for our gaming machine participation and non-gaming productsoperations, partially offset by a lower gross margin for our table gameproducts operations. Gross profit from gaming machine participation operationsincreased due to higher revenues for this business segment and lowerdepreciation expense on the machines as a result of impairment charges recordedat the end of 2009.  Revenue from gamingmachine participation increased significantly greater than depreciationexpenses for our gaming machine participation operations. Gross loss fromnon-gaming products decreased primarily due to higher revenues and gross margindue to production efficiencies resulting from higher sales volumes during thesix-month period ended June 30, 2010 compared to the prior yearperiod.  Gross profit from table gameproducts decreased primarily due to lower sales volumes and loss of productionefficiencies 

 

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relating to the salesvolumes during the six-month period ended June 30, 2010 compared to theprior year period, which included a large RFID gaming chip order for a newcasino in Macau.

 

Operating loss fromcontinuing operations decreased approximately $5.3 million to approximately$2.7 million for the six-month period ended June 30, 2010 compared to anoperating loss of approximately $8.0 million in the same period in the prioryear primarily as a result of higher gross profit and reduced operatingexpenses.  Net loss from continuingoperations decreased approximately $4.7 million to approximately $3.2 millionfor the six-month period ended June 30, 2010 compared to a net loss of approximately$7.9 million in the same period in the prior year primarily due to higher grossprofit and reduced operating expenses, partially offset by the absence of gainsrelated to the settlement of the legal suit which benefited the prior yearperiod.

 

**GamingMachine Participation**

 

In September 2007, webegan our electronic gaming machine participation operations in Asia as part ofour primary focus on placing gaming machines on a revenue sharing basis. 

 
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(amounts  in thousands, except per share data)** | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009 (1)** | ** ** |
| Net revenue to the Company                         |       |                                 |       |                               |       |   |   |   |   |
| Cambodia                                           |       | $                                    | 2,620      |                               | $          | 1,006 |   | $ | 4,622 |   | $ | 1,324 |   |
| Philippines                                        |       | $                                    | 919        |                               | $          | 737 |   | $ | 1,752 |   | $ | 1,365 |   |
| Consolidated total                                 |       | $                                    | 3,539      |                               | $          | 1,743 |   | $ | 6,374 |   | $ | 2,689 |   |
| Average net win per unit per day                   |       |                                 |       |                               |       |   |   |   |   |
| Cambodia                                           |       | $                                    | 196        |                               | $          | 197 |   | $ | 195 |   | $ | 145 |   |
| Philippines (2)                                    |       | $                                    | 59         |                               | $          | 58 |   | $ | 57 |   | $ | 57 |   |
| Consolidated total                                 |       | $                                    | 115        |                               | $          | 95 |   | $ | 111 |   | $ | 79 |   |

 
| ** **                 | ** ** | **June 30,** | ** ** |
|----------------------------|------------|-------------------|------------|
| ** **                 | ** ** | **2010**          | ** ** | **2009** | ** ** |
| Machine Units in operation |       |              |       |   |   |
| Cambodia                   |       | 624               |       | 240 |   |
| Philippines                |       | 878               |       | 797 |   |
| Consolidated total         |       | 1,502             |       | 1,037 |   |

 

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(1)          Since March 2009,our Cambodia operations have consisted solely of our operations at NagaWorld.

(2)          Average net winfigures for our Philippines’ operations exclude venues during the soft launchopening period and for one venue for the period of January to September 2009when revenue was recognized on a cash basis.

 

Revenue from gaming machineparticipation operations increased approximately $1.8 million to approximately$3.5 million for the three-month period ended June 30, 2010 compared to revenueof approximately $1.7 million in the same period in the prior year primarily asa result of higher average net win per machine and number of machines inoperation compared to the three-month period ended June 30, 2009.

 

Gross profit from gamingmachine participation operations increased approximately $2.1 million toapproximately $1.3 million for the three-month period ended June 30, 2010compared to a gross loss of approximately $857,000 in the same period in theprior year primarily due to the increase in gaming machine participationrevenue and a decrease in depreciation expense for our gaming machineparticipation operations as a result of impairment charges recorded at the endof 2009. Cost of goods sold for the three-month period ended June 30, 2010included approximately $2.0 million of depreciation of electronic gamingmachines, approximately $206,000 of other expenses and approximately $75,000 inwrite-offs of gaming assets.

 

Revenue from gaming machineparticipation operations increased approximately $3.7 million to approximately$6.4 million for the six-month period ended June 30, 2010 compared torevenue of approximately $2.7 million in same period in the prior year. Theincrease in revenue was primarily a result of higher average net win permachine and number of machines in operation compared to the six-month periodended June 30, 2009.

 

Gross profit from gamingmachine participation operations increased approximately $4.9 million toapproximately $1.9 million for the six-month period ended June 30, 2010compared to a gross loss of approximately $3.0 million in the same period inthe prior year primarily due to an increase in gaming machine participationrevenue and a decrease in gaming machine depreciation as a result of impairmentcharges recorded at the end of 2009. Cost of goods sold for the six-month period ended June 30, 2010included approximately $3.9 million of depreciation expense of electronicgaming machines, approximately $432,000 of other expenses and approximately$191,000 in write-offs of gaming assets.

 

Asof June 30, 2010, we had a total of 1,800 gaming machine seats of which298 were held in inventory and 1,502 were in operation.  Of the 1,502gaming machine seats in operation, 624 were in operation in one venue inCambodia and 878 were in operation in six venues in the Philippines.
| ** **                               | ** ** | **June 30,** | ** ** | **December 31,**   | ** ** |
|------------------------------------------|------------|-------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **2010**          | ** ** | **2009**                | ** ** |
| **(amounts in thousands)**     | ** ** | **Units**         | ** ** | **Carrying Value** | ** ** | **Units** | ** ** | **Carrying Value** | ** ** |
| Machines and systems used in operations  |       | 1,502             |       | $                       | 19,296     |   | 1,299 |   | $ | 19,248 |   |
| Machines and systems held for future use |       | 298               |       | 4,818                   |       | 403 |   | 7,259 |   |
| Total gaming machines and systems        |       | 1,800             |       | $                       | 24,114     |   | 1,702 |   | $ | 26,507 |   |

 

InCambodia, regulatory changes at the end of 2008 and early 2009 impacted thecompetitive landscape of gaming operations in this market.  Due todirectives issued by the Cambodian government in December 2008 andFebruary 2009, all slot clubs in the Phnom Penh area, including our thencontracted venues, were closed with the exception of the slot operations withinNagaWorld.  In December 2008, we established a relationship to placeelectronic gaming machines on a participation basis at NagaWorld hotel casinoresort in the capital city of Phnom Penh.  NagaWorld operates under an exclusivecasino license in Phnom Penh and our operations within NagaWorld are currentlyour only operations in Cambodia.

 

Duringthe fiscal year ended December 2009, we placed 440 gaming machine seats inprime locations of NagaWorld’s casino resort pursuant to three contractsbetween us and NagaWorld.  On December 30, 2009, we entered intoanother contract with NagaWorld entitled Machines Operation andParticipation Consolidation Agreement (the “Consolidation Agreement”). The Consolidation Agreement: (a) provides for our exercise of the optiongranted by NagaWorld pursuant to an option deed dated July 25, 2009 toplace an additional 200 electronic gaming machines on a participation basis atNagaWorld’s casino resort; and (b) with effect from the date of theConsolidation Agreement, supersedes and replaces the three previous agreementsexecuted with NagaWorld dated 

 

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December 13,2008 (“December 08 Agreement”), June 15, 2009 (“June 09Agreement”) and July 25, 2009 (“July 09 Agreement”) (collectively,the “Previous Agreements”) which covered the operation of 440 electronic gamingmachines at the NagaWorld Casino.

 

Underthe Previous Agreements: (i) we and NagaWorld shared the win per unit perday from the existing 440 machines and certain operating costs related tomarketing and floor staff at a weighted average of 22.4% / 77.6% split,respectively; (ii) win per unit per day from only 200 out of 440 existingmachines was settled and distributed daily to us; and (iii) both the termof the December 08 Agreement and the June 09 Agreement were to expirein the first quarter of 2014 while the term of the July 09 Agreement wasto expire at the end of the third quarter of 2014.

 

Pursuantto the terms of the Consolidation Agreement, we and NagaWorld now have jointcontrol over the operation of a total of 640 electronic gaming machines(comprising the 200 additional machines and the existing 440 machines placedand in operation pursuant to the Previous Agreements), including floor staffand respective audit rights. We and NagaWorld now share the win per unit perday from all the 640 machines and certain operating costs related to marketingand floor staff at a 25% / 75% split, respectively (subject to our right toreceive 100% of the win per unit per day from certain machines during a certainperiod of time as described below). Win per unit per day from all the 640machines are settled and distributed daily to us. The Consolidation Agreementis for a term of six years commencing March 1, 2010.

 

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

 

OnMay 25, 2010, we entered into a supplemental agreement (“SupplementalAgreement”) with NagaWorld to place an additional 30 electronic gaming machineson a participation basis at NagaWorld casino resort.  Pursuant to the terms of the SupplementalAgreement, our area of operation on the lobby gaming floor of NagaWorld will beexpanded to include two new areas and the maximum number of machines that weare permitted to operate and manage in this operation area will be increased by30 units from 640 units to 670 units. Save for certain modifications inrelation to the aforesaid expansion of operation area and increase in themachines number, all the existing operation terms under the ConsolidationAgreement will continue to apply to the 670 machines including the newly added30 units.

 

Inconsideration for the entering of the Supplemental Agreement, we paid toNagaWorld a commitment fee of $1.0 million on June 15, 2010.  While we and NagaWorld will share the win perunit per day from the 670 machines at a 25%/75% split, respectively, we will beentitled to 100% of the win per unit per day from the newly added 30 machinesand the 200 machines placed under the Consolidation Agreement until we havereceived a total accumulated win per unit per day of $6.8 million from these230 machines (representing the aggregate of $4.1 million commitment fee paidfor the 200 machines under the Consolidation Agreement, the $1.0 millioncommitment fee under the Supplemental Agreement and our 25% share of win perunit per day from these 230 machines).

 

Belowis a table showing various agreements with NagaWorld and respective commitmentfees paid and remaining on the balance sheet as of June 30, 2010:

** **
| **Agreement**           | ** ** | **Number of  Machine Seats** | ** ** | **Prepaid Commitment  Fees (in millions)** | ** ** | **Prepaid Commitment Fees  Remaining on the Balance Sheet  as of June 30, 2010 (in millions)** | ** ** |
|-------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| December 08        |       | 200                                    |       | $                                                         | —     |                                                                                                                                                  | $          | — |   |
| May 09             |       | 40                                     |       | 1.00                                                      |       | —                                                                                                                                                |       |
| August 09          |       | 200                                    |       | 5.84                                                      |       | —                                                                                                                                                |       |
| Previous Agreements     |       | 440                                    |       | 6.84                                                      |       | —                                                                                                                                                |       |
| Consolidation Agreement |       | 200                                    |       | 4.10                                                      |       | 1.08                                                                                                                                                  |       |
| Supplemental Agreement  |       | 30                                     |       | 1.00                                                      |       | 1.00                                                                                                                                                  |       |
|                    |       | 670                                    |       | $                                                         | 11.94      |                                                                                                                                                  | $          | 2.08 |   |

 

Asof August 1, 2010, we had 656 gaming machine seats in operation atNagaWorld in Cambodia, representing an increase of 32 seats since June 30,2010.  In Cambodia, we expect to add 14additional gaming machine seats to our operations at NagaWorld in August 2010,fulfilling our total contract for 670 seats at this venue, and to addapproximately 60 gaming machine seats at the new Grand Golden Casino in theKampong Cham province in November 2010.  Asof August 1, 2010, in the Philippines, we had 888 gaming machine seats inoperation, an increase of 10 seats since June 30, 2010 due to ourcontinued efforts to implement our strategic initiative to reallocate ourgaming assets to focus on higher-performing venues.

 

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InApril 2010, we entered into a Machine Participation Agreement with GrandGolden Co. Ltd. (“Grand Golden”), to place approximately 60 electronic gamingmachine seats on a participation basis at its new Grand Golden casino in theKampong Cham province of Cambodia near the Vietnam border.  We anticipatethe full deployment of the 60 gaming machines seats in November 2010following the completion of the renovations to the designated floor space bythe venue owner.  Under the terms of this agreement, we will have jointcontrol over the operation of all our electronic gaming machine seats,including full audit rights. We and Grand Golden will share the revenue and marketingcosts, at a 30% / 70% split, respectively, and we will receive on a monthlybasis our relevant portion of the daily win in cash. The contract duration isfive years commencing once the 60 gaming machine seats become operational.

 

Inaddition, we are selectively pursuing potential new projects for our gamingparticipation operations in the Indo-China region, where there is gamingdevelopment.  However, total company-wide machine placements can fluctuatedue to our strategic efforts to optimize average daily net wins.  In theevent gaming machine performance at our contracted venues does not meetexpectations, we may discuss with the relevant venue owner withdrawing all or aportion of our gaming machines from such venues for future redeployment in newor existing venues with better performance prospects.

 

**Table GameProducts**

 

Revenue from table gameproducts, which consists of RFID and traditional non-RFID gaming chips andplaques, decreased approximately $3.0 million to approximately $232,000 for thethree-month period ended June 30, 2010 compared to revenue ofapproximately $3.2 million in the same period in the prior year.  The decrease was the result of lower salesorders compared to the prior year period, which included a large gaming chiporder to a new casino in Macau.

 

Gross profit from table gameproducts decreased approximately $1.2 million to approximately $59,000 for thethree-month period ended June 30, 2010 compared to a gross profit ofapproximately $1.3 million in the same period in the prior year.  The decrease was primarily a result of lowersales volumes compared to the three-month period ended June 30, 2009 whenwe recorded a large RFID gaming chip order for a new casino in Macau.

 

Revenue from table gameproducts decreased approximately $2.9 million to approximately $353,000 for thesix-month month period ended June 30, 2010 compared to approximately $3.3million in the same period in the prior year. The decrease was the result of lower sales volumes compared to the prioryear period, which included a large RFID gaming chip order to a new casino inMacau.

 

Gross profit from table gameproducts decreased approximately $1.3 million to approximately $90,000 in thesix-month period ended June 30, 2010 compared to a gross profit ofapproximately $1.4 million in the same period in the prior year due to lowerrevenue and sales volume for our RFID gaming chips resulting in reducedproduction efficiencies.

 

**Non-GamingProducts**

 

Revenue from non-gamingproducts, which consists of automotive tooling and parts, increasedapproximately $455,000 to approximately $1.3 million for the three-month periodended June 30, 2010 compared to approximately $839,000 in the same periodin the prior year due to an increase in sales to our largest customer, which increasedtheir production for the year due to an overall improvement in the localeconomy and the automotive industry.

 

Gross loss decreasedapproximately $130,000 to approximately $26,000 for the three-month periodended June 30, 2010 compared to approximately a gross loss of $156,000 inthe same period in the prior year due to the increased sales to our largestcustomer and resulting improvements in production efficiencies.

 

Revenue from non-gamingproducts increased approximately $1.2 million to approximately $2.7 million forthe six-month period ended June 30, 2010 compared to approximately $1.5million in the same period in the prior year due to an increase in sales to ourlargest customer as they increased their production for the year.

 

Gross loss decreasedapproximately $218,000 to approximately $16,000 for the six-month period endedJune 30, 2010 compared to a gross loss of approximately $234,000 in thesame period in the prior year due to the increase in sales orders from ourmajor customer and resulting improvements in production efficiencies.

 

**OperatingExpenses**

 

The following is a scheduleof expenses on a consolidated basis:

 

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| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(amount in thousands)**  | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Selling,  general and administrative |       | $                                                   | 1,516      |                                              | $          | 1,831 |   | $ | 2,937 |   | 4,427 |   |
| Stock-based  compensation expense    |       | 246                                                 |       | 244                                               |       | 540 |   | 446 |   |
| Product  development expense         |       | 372                                                 |       | 75                                                |       | 456 |   | 129 |   |
| Depreciation and  amortization       |       | 229                                                 |       | 255                                               |       | 458 |   | 565 |   |
| Restructuring  charges               |       | 210                                                 |       | 89                                                |       | 247 |   | 588 |   |
|                                 |       | $                                                   | 2,573      |                                              | $          | 2,494 |   | $ | 4,638 |   | 6,155 |   |

 

**Selling,General and Administrative Expenses**

 

Selling, general and administrativeexpenses decreased approximately $315,000 to approximately $1.5 million for thethree-month period ended June 30, 2010 compared to approximately $1.8million in the same period in the prior year period due to our cost reductioninitiatives.  Salaries and wages expensedeclined approximately $303,000 as a result of headcount reductions.  Rent and other expenses decreasedapproximately $98,000 due to concerted efforts to reduce office expenses to thebare minimum. However, legal expense and external consultancy and accountingfees increased approximately $86,000 primarily due to higher legal fees andpayment of our insurance deductible associated with current litigation matters.

 

Selling, general andadministrative expenses decreased approximately $1.5 million to approximately$2.9 million for the six-month period ended June 30, 2010 compared toapproximately $4.4 million in the same period in the prior year due to our costreduction initiatives.  Salaries andwages expense declined approximately $797,000 as a result of headcountreductions.  Rent and office expensesdecreased approximately $187,000 due to closure of the U.S. and China offices.Travel, marketing and other expenses decreased approximately $506,000 due toconcerted efforts to reduce office expenses to the bare minimum.

 

Basedon our cost reduction plans and our current scale of operations, we anticipaterecurring selling, general, and administrative expenses can be maintained inthe approximate range of $1.5 million to $1.8 million per quarter.

 

**Stock-BasedCompensation Expense**

 

Stock-based compensationexpense increased approximately $2,000 to approximately $246,000 for thethree-month period ended June 30, 2010 compared to approximately$244,000  in the same period in the prioryear primarily due to the departure of certain employees in 2009, net of anincrease due to the issuance of new stock compensation granted during  the same period.

 

Stock-based compensationexpense increased approximately $94,000 to approximately $540,000 for the six-monthperiod ended June 30, 2010 compared to approximately $446,000 in the sameperiod in the prior year due to the issuance of new stock compensation grantedto senior management during the three-month period ended March 31, 2010.

 

**ProductDevelopment Expenses**

 

Productdevelopment expenses increased approximately $297,000 to approximately $372,000for the three-month period ended June 30, 2010 compared to approximately$75,000 in the same period in the prior year primarily as a result ofadditional costs incurred associated with the development of new plaques forthe table game business.

 

Product development expensesincreased approximately $327,000 to approximately $456,000 for the six-monthperiod ended June 30, 2010 compared to approximately $129,000 for the sameperiod in the prior year for the same reason as described above.

 

Asa result of the completed sale to Shuffle Master of our portfolio of automatedcard verification machines and electronic card shuffling systems in April 2009,all related intellectual property and certain inventory of such productspursuant to the Purchase and Settlement Agreement were written off.

 

Itis anticipated that future product development will focus on potential gamingand/or non-gaming product enhancements.

 

**Depreciationand Amortization Expenses**

 

Depreciation andamortization expenses decreased approximately $26,000 to approximately $229,000for the three-month period ended June 30, 2010 compared to approximately$255,000 in the same period in the prior year. The decrease was a result of the closure of our U.S. office and ourChina table game product manufacturing facility.

 

Depreciation andamortization expenses decreased approximately $107,000 to approximately$458,000 for the six-month period ended June 30, 2010 compared toapproximately $565,000 in the same period in the prior year for the same reasonsdescribed above.

 

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**RestructuringCharges**

 

During the three-monthperiod ended June 30, 2010, we incurred restructuring charges ofapproximately $210,000 for severance wages and benefits related to thetermination of employees. During the three-month period ended June 30, 2009,we incurred restructuring charges of approximately $89,000 for facilityoperating leases that we vacated.

 

During the six-month periodended June 30, 2010, we incurred restructuring charges of approximately$247,000 for severance wages and benefits related to the termination ofemployees. During the six-month period ended June 30, 2009, we incurredrestructuring charges of approximately $588,000 for severance wages andbenefits related to the termination of employees and the facility operating leasesthat we vacated.  The amount representsthe contractual and other agreements with employees including a formerexecutive, which only includes charges for termination benefits measured at theestimated fair value at the termination date and does not include charges forservices yet to be rendered.

 

**OtherIncome/(Expenses)**

 
| ** **                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(amount in thousands)**   | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest  expense and finance fees    |       | $                                                   | (84        | )                                                 | $          | (112 | ) | $ | (206 | ) | $ | (248 | ) |
| Interest  income                      |       | 25                                                  |       | 26                                                |       | 38 |   | 64 |   |
| Foreign  currency (loss)/gain         |       | (69                                                 | )          | 64                                                |       | (60 | ) | (63 | ) |
| Legal  settlement gain                |       | —                                              |       | 656                                               |       | — |   | 656 |   |
| Gain/(loss)  on disposition of assets |       | 5                                                   |       | (94                                               | )          | 4 |   | (94 | ) |
| Other                                 |       | 61                                                  |       | 70                                                |       | 152 |   | 83 |   |
| Total                                 |       | $                                                   | (62        | )                                                 | $          | 610 |   | $ | (72 | ) | 398 |   |
|                                       |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

**InterestExpense and Finance Fees**

 

Interest expense and financefees decreased approximately $28,000 to approximately $84,000 for thethree-month period ended June 30, 2010 compared to approximately $112,000in the same period in the prior year primarily due to a favorable settlement onaccrued interest expense related to the withholding tax.

 

Interest expense and financefees decreased approximately $42,000 to approximately $206,000 for thesix-month period ended June 30, 2009 compared to approximately $248,000 inthe same period in the prior year primarily due to the same reason describedabove and lower debt levels on the EGT Entertainment note in the six monthsended June 30, 2010 compared to the prior year period.

 

**InterestIncome**

 

Interest income decreasedapproximately $1,000 to approximately $25,000 for the three-month period endedJune 30, 2010 compared to approximately $26,000 in the same period in the prioryear as a result of the decrease in cash and cash equivalents held in overnightmoney market accounts and the general decrease in interest rates.

 

Interest income decreasedapproximately $26,000 to approximately $38,000 for the six-month period endedJune 30, 2010 compared to approximately $64,000 in the same period in theprior year for the same reasons as described above and interest imposed on acustomer’s overdue amount.

 

Cash in bank deposits decreasedby approximately $3.1 million to approximately $6.4 million from June 30,2009 to June 30, 2010 mainly due to payments for our gaming operations atNagaWorld, the deposit to secure land for the casino project in Cambodia,gaming machine purchases and operating expenses.

 

**ForeignCurrency Transactions**

 

Foreign currency lossesincreased by approximately $133,000 to approximately $69,000 for thethree-month period ended June 30, 2010 compared to a gain of approximately$64,000 in the same period in the prior year. The losses for the three-monthperiod ended June 30, 2010 resulted primarily from the appreciating valueof the U.S. dollar denominated payables from our Philippine operations, whosefunctional currency is the Philippine peso.

 

Foreign currency lossesdecreased approximately $3,000 to approximately $60,000 for the six-monthperiod ended June 30, 2010 compared to losses of approximately $63,000 inthe same period in the prior year. The losses for the six-month period endedJune 30, 2010 and 2009 were for the same reason described above.

 

**LegalSettlement Gains**

 

We recorded a settlementgain of approximately $656,000 from the Purton litigation during the three-monthperiod ended June 30, 

 

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2009. On June 17, 2009,we entered into a deed of release with William Purton and other plaintiffs overwhich he had control for the settlement of all legal claims, disputes andproceedings between the parties.

 

**Other**

 

Other income decreasedapproximately $9,000 to approximately $61,000 for the three-month period endedJune 30, 2010 compared to approximately $70,000 in the same period in theprior year due to a  slight decrease ingrants received from the Australian government.

 

Other income increasedapproximately $69,000 to approximately $152,000 for the six-month period endedJune 30, 2009 compared to approximately $83,000 in the same period in theprior year primarily due to an increase in grants received from the Australiangovernment.

 

**Income TaxProvisions**

 

Effective tax rates for thethree-month period and six-month period ended June 30, 2010 and 2009 wereapproximately (16.7)%, (18.5)%, (16.6)% and (3.9)% respectively.  We will continue to review the tax losses andincome generated in the future by our foreign subsidiaries to minimize taxationimplications/costs.

 
| ** **                 | ** ** | **Three Months Ended**** ****June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------|------------|---------------------------------------------------|------------|-----------------------------------------|------------|
| **(amount in  thousands)** | ** ** | **2010**                                          | ** ** | **2009**                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Income  tax provisions     |       | $                                                 | 220        |                                    | $          | 296 |   | $ | 455 |   | $ | 299 |   |
|                            |            |                                                   |            |                                         |            |  |  |  |  |  |  |  |  |

 

**Discontinued Operations**

** **

We recorded a net profitfrom discontinued operations of approximately $1.8 million during the three-monthperiod ended June 30, 2009 related to the sale of our portfolio of automatedcard verification machines and electronic card shuffling systems, all relatedintellectual property, and certain inventories of such products to ShuffleMaster. The sale was completed in April 2009. All historical revenues andexpenses from these assets sold to Shuffle Master were reclassified asdiscontinued operations. There was no net profit or loss from discontinuedoperations during the three-month period ended June 30, 2010.

 

We recorded a net profitfrom discontinued operations of approximately $1.5 million during the six-monthperiod ended June 30, 2009 primarily related to the sale of our portfolio ofautomated card verification machines and electronic card shuffling systems asdiscussed above. There was no net profit or loss from discontinued operationsduring the six-month period ended June 30, 2010.

 

**FINANCIALCONDITION**

 

**Liquidity and Capital Resources**

 

OnApril 21, 2008, we entered into a Trade Credit Facility Agreement (the “FacilityAgreement”) with Elixir International. Upon entering into the Agreement, weimmediately issued the first note pursuant to the terms of the FacilityAgreement in the then principal amount of $15,000,000 (the “Initial Advance”). The Initial Advance extinguished a then trade payable of an equivalent amountto Elixir International with respect to gaming machines previously acquired.The advances under the Facility Agreement are subject to demand by ElixirInternational for immediate payment only if there is either an event of defaultor a change of control defined in the Facility Agreement.

 

Pursuantto an amendment to the Facility Agreement dated November 6, 2008 betweenthe parties, Elixir International surrendered the note of Initial Advance tothe Company in exchange for the issuance of a new promissory note (the “FirstAmended Note”) for the then outstanding principal amount of $12.1 million withthe following new repayment terms: (i)  the outstanding principal amountand the interest accrued thereon shall be repaid in 24 equal monthlyinstallments reset from January 1, 2009; (ii) interest shall beaccrued on the outstanding principal at the rate of five percent (5.0%) per annum starting from January 1, 2009; and no monthly repayments underthe new note were required for the months of October, November andDecember 2008.

 

Webegan paying our monthly installments of approximately $530,000 under the FirstAmended Note on January 1, 2009 and paid or settled six installments duringthe six-month period ended June 30, 2009.  As at June 30, 2009,the then unpaid principal balance under the First Amended Note wasapproximately $9.2 million (the “Outstanding Principal”). On July 24,2009, for the purpose of improving our financial flexibility to enable us tocapitalize on potential growth and investment opportunities such as expansionof slot machine placements and operations in new venues, at our request, ElixirInternational entered into an Amendment No. 2 to the Trade Credit FacilityAgreement and Related Note with us (the “Second Amendment”).  Pursuant tothe Second Amendment, Elixir International agreed to restructure the paymentschedule of the Outstanding Principal and we issued to Elixir International anew note (the “Second Amended Note”) to replace the First Amended Note. Underthe revised payment schedule of the Second Amended Note, we  are relieved from making any actualrepayments of principal or interest under the Facility Agreement untilJuly 1, 2010 although interest at the rate of 5% continues to accrue onthe Outstanding Principal balance. The repayment of the Outstanding Principalbalance and interest accrued thereon would be repaid in 18 equal monthlyinstallments commencing on July 1, 2010.

 

On April 20, 2010, in relationto the disposal of Elixir International by our principal shareholder, EGTEntertainment, Elixir International assigned and transferred all its rights andobligations under the Facility Agreement and the note to EGT Entertainment. Thesaid assignment and transfer does not have any impact on the note terms or therepayment obligations of the Company save and 

 

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except that when the repayment scheduleresumes, the monthly repayment of principal and interest under the note will bemade to or at the direction of EGT Entertainment instead of ElixirInternational.

 

OnMay 25, 2010, the Company entered into the Amendment No.3 to the Facility Agreement with EGT Entertainment (the “ThirdAmendment”), pursuant to which we issued another new note (the “Third AmendedNote) to replace the Second Amended Note. Under the payment schedule of the Third Amended Note, the OutstandingPrincipal Balance and the interest accrued thereon were further restructured inthe following manner: (a)   the total interest accrued on theOutstanding Principal Balance during the period from July 1, 2009 toJune 30, 2010 in the amount of approximately $0.5 million to be paid bythe Company in a lump sum payment on July 1, 2010; (b)   on thefirst day of each calendar month during the period from August 1, 2010 toJune 1, 2011, the Company will pay interest in arrears on the OutstandingPrincipal Balance at the same rate of 5% per annum for the preceding month; and(c)  the Company will repay the Outstanding Principal Balance and interestaccrued thereon at the rate mentioned above in 18 equal monthly installmentscommencing on July 1, 2011. Pursuant to the terms of the Third Amendment,the Company has paid a total of $458,000 on July 1, 2010 to EGTEntertainment.

 

Asof June 30, 2010, we had total cash and cash equivalents of approximately$6.4 million and a working capital balance of approximately $8.5 million. Ourworking capital during the three months ended June 30, 2010 was positivelyimpacted by the cash received from our operations at NagaWorld and by therepayment deferral of principal and interest on the Trade Credit Facility.Working capital during the three months ended June 30, 2010 was negativelyimpacted by a deposit of approximately $850,000 toward the purchase of land inCambodia for development of our new casino project and the purchase of gamingmachines for our expansion at NagaWorld under the December 30, 2009 and May 25,2010 contracts. Our cash position during the three months ended June 30,2010 was impacted by the above mentioned factors that impacted working capitalas well as the payment of a commitment fee of $1.0 million to NagaWorld underthe contract dated May 25, 2010.

 

Duringthe third quarter of 2010 to date, working capital has been impacted by thepayment of $910,000 in July 2010 to complete the purchase of the land forthe Cambodia casino project, but has been offset by strong cash flow from ouroperations at NagaWorld.

 

Duringthe remainder of 2010, as part of our incremental growth strategy for ourgaming operations, we intend to incur initial planning and construction costsfor the development of our own casinos.  Inaddition, we expect to purchase gaming machines to supplement existinginventory and source future targeted deployment plans.  Given our current and projected future cashflow generation capability from our operations at NagaWorld (including therecoupment of commitment fees paid and our share of net wins from our machinesinstalled at NagaWorld), the state of the previously-owned gaming machinemarket, and our strong relationships with gaming equipment manufacturers, weanticipate funding our 2010 growth plans and gaming machine purchases for ourexisting project pipeline from cash on hand and expected net cash flow fromoperations.  Based on our existing growth plans, we anticipate capitalexpenditures will be approximately $4 to $6 million for the remainder of 2010.

 

Weanticipate our available working capital, along with cash expected to begenerated from operations, will allow us to meet our working capital needs tosupport ongoing future operations over the next 12 months, based on:

 

·                  our extensive costcutting measures, which involve, among other initiatives, the significantreductions in professional fees, traveling and entertainment expenses and basedon our current quarterly run-rate, should provide us with annualized selling,general and administrative cash expenses of approximately $6.0 to $7.2 million,a decline of 32% to 18% compared to 2009 levels;

 

·                  our ability tocollect on a daily basis 100% of the win per unit from NagaWorld for theadditional 200 gaming machine seats under our contract datedDecember 30, 2009 and the additional 30 gaming machine seats under ourcontract dated May 25, 2010 until September 2010 when we expect thatthe total combined remaining commitment fees as of June 30, 2010 of $2.1million plus our 25% share of the win per day on these 230 machine seats willbe recouped; and

 

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

 

However,if our assumptions set fort above prove to be inaccurate should we endeavor tocommit to any future large projects to expand our gaming operations we mayrequire additional funding at such time. In this case, we will look into the options for raising additional fundsthrough various financing sources, including the procurement of commercial debtfinancing and/or vendor financing and/or the sale of debt or equitysecurities.  However, there can be no guarantees that such funds will be availableon commercially reasonable terms, if at all. If such financing is not availableon satisfactory terms, we may be unable to expand or continue our business asdesired and operating results may be adversely affected.  Any debtfinancing will increase expenses and must be repaid regardless of operatingresults and may involve restrictions limiting our operating flexibility and anyequity financing will be dilutive to our present stockholders.

 

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**Cash Flows Summary**

 
| ** **                             | ** ** | **Six Months Ended June 30,** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|------------|------------|
| **(amounts in thousands)**   | ** ** | **2010**                                          | ** ** | **2009**   | ** ** | **Increase (Decrease)** | ** ** |
| Cash provided by/ (used in):           |       |                                              |       |       |       |   |   |
| Operations                             |       | $                                                 | 4,896      |       | $          | (3,935 | ) | $ | 8,831 |   |
| Investing                              |       | (2,563                                            | )          | 1,890      |       | (4,453 | ) |
| Financing                              |       | (112                                              | )          | (3,072     | )          | 2,960 |   |
| Effect of exchange rate change in cash |       | (47                                               | )          | 128        |       | (175 | ) |
|                                   |       | $                                                 | 2,174      |       | $          | (4,989 | ) | $ | 7,163 |   |

 

**Operations**

 

Cashprovided by operations was approximately $4.9  million for the six-month period ended June 30, 2010 as compared with cashused in operations of approximately $3.9 million in the same period in theprior year. The increase in cash provided by operations was primarily due to asignificant reduction in operating losses before depreciation and amortizationas a result of the increase in game participation revenue (including therecoupment or commitment fees) as well as improvement in net working capitaland a reduction in operating expenses.

 

**Investing**

 

Cashused in investing activities was approximately $2.6 million for the six-monthperiod ended June 30, 2010 compared to approximately $1.9 million providedby investing activities in the same period in the prior year.   The increase in cash used in investing activitieswas a result of the purchase of land for the Cambodia casino project andelectronic gaming machines for our expansion at NagaWorld under the contractsdated December 30, 2009 and May 25, 2010.   During the six-month period ended June 30,2009, cash was positively impacted as a result of the sale of assets to ShuffleMaster.

 

**Financing**

 

Cashused in financing activities decreased as a result of the deferral of therepayment of principal and interest on the Trade Credit Facility untilJuly 2010.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Ourconsolidated financial statements were prepared in conformity with accountingprinciples generally accepted in the United States. Accordingly, we arerequired to make estimates incorporating judgments and assumptions we believeare reasonable based on our historical experience, contract terms, observanceof known trends in our Company and the industry as a whole, as well asinformation available from other outside sources. Our estimates affect amountsrecorded in the financial statements and actual results may differ from initialestimates.

 

Weconsider the following accounting estimates to be the most critical to fullyunderstanding and evaluating our reported financial results. They require us tomake subjective or complex judgments about matters that are inherentlyuncertain or variable. Senior management have discussed the development,selection and disclosure of the following accounting estimates, particularlythose considered most sensitive to changes from external factors, with theaudit committee of our board of directors.

 

**Intangible Assets, including Goodwill**

 

Intangibleassets consist of patents, customer relationships, trademarks and goodwill.They are recorded at cost and are amortized, except for goodwill, on thestraight-line basis over the period of time the asset is expected to contributedirectly or indirectly to future cash flows, which range from ten tothirteen years. The straight-line amortization method is utilized becausewe believe there is not a more reliably determinable method of reflecting thepattern in which the economic benefits of the intangible assets are consumed orotherwise used up.

 

Weapply ASC 350, *Intangibles-Goodwill and Other* and ASC 360, *Property, Plant and Equipment*.  Under ASC 350,goodwill is no longer amortized but is subject to periodic impairment tests.Other intangible assets with finite lives, such as patents, customerrelationships and trademarks will continue to be amortized over their usefullives.

 

**Inventory**

 

Thedetermination of obsolete or excess inventory requires us to estimate thefuture demand for our products within specific time horizons, generally oneyear or less. If we experience a significant unexpected decrease in demand forour products or a higher 

 

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occurrenceof inventory obsolescence because of changes in technology or customerrequirements, we could be required to increase our inventory provisions.

 

**Gaming Machines and Systems**

 

Gamingmachines and systems are stated at cost.  We depreciate new gamingmachines and systems over a five-year useful life and depreciate refurbishedgaming machines over a three-year useful life once placed in service. Trends in market demand and technological obsolescence may require us to reviewand evaluate the recoverability of our investment, as well as the estimateduseful lives used to depreciate these assets.

 

**Property and Equipment**

 

Weare required to estimate salvage values and useful lives for our property andequipment.  Trends in market demand and technological obsolescence mayrequire us to record impairment charges in accordance with the provisions ofASC 360.

 

**Revenue Recognition**

 

Werecognize revenue when all of the following have been satisfied:

 

·                  persuasiveevidence of an arrangement exists;

 

·                  the price tothe customer is fixed and determinable;

 

·                  delivery hasoccurred and any acceptance terms have been fulfilled;

 

·                  no significantcontractual obligations remain; and

 

·                  collection isreasonably assured.

 

*Gaming Machine Participation Revenues*

 

Weearn recurring revenue by providing customers with electronic gaming machinesand casino management systems which track game performance and providestatistics on installed electronic gaming machines owned by us and leased tovenue owners.  Revenues are recognized on the contractual terms of theparticipation agreements between ourselves and the venue owners and are basedon our share of net winnings.

 

Commitmentfees paid to the venue operator where the agreement stipulates that the feeswill be recovered from the daily net win sharing are capitalized as assets. Asrequired by ASC 605-50, *Customer Paymentsand Incentives*, the cash consideration received for the portion ofnet winnings relating to the commitment fees is amortized as a reduction ofrevenue if the expected benefit from commitment fees cannot be separatelyidentified or reasonably estimated. We had prepaid commitment fees ofapproximately $2.1 million and $4.8 million as of June 30, 2010 and December 31,2009, respectively.

 

Commitmentfees paid to the venue operators relating to contract amendments are alsocapitalized as assets and amortized as a reduction of revenue fees over theterm of the amended contracts. We had contract amendment fees of approximately$1.3 million and $688,000 as of June 30, 2010 and December 31, 2009,respectively.

 

*Gaming and Non-Gaming Product Revenues*

 

Werecognize revenue from the sale of our products to end users upon shipmentsagainst customer contracts or purchase orders.

 

Werecognize revenue from our sales to independent distributors upon shipments tothe distributors against distributor contracts or purchase orders for ourproducts.  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.

 

**Stock-Based Compensation**

 

Weapply ASC 718, *Compensation-StockCompensation*, to account for stock-based compensation. Under thefair value recognition provisions of ASC 718, for stock-based compensationaccrued to employees and non-employee directors, we recognize stock-basedcompensation expense for all service-based awards with graded vesting scheduleson the straight-line basis over the requisite service 

 

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periodfor the entire award.  For restricted stock awards with performanceconditions, the Company evaluates if performance conditions are probable ineach reporting period. The compensation expense of restricted awards isrecognized ratably over the implicit service period if achieving performanceconditions is probable. Initial accruals of compensation expense are based onthe estimated number of shares for which requisite service is expected to berendered.  Estimates are revised if subsequent information indicates thatforfeitures will differ from previous estimates, and the cumulative effect oncompensation costs of a change in the estimated forfeitures is recognized inthe period of the change.  For non-employee awards, we remeasurecompensation costs each period until the service condition is complete andrecognize compensation costs on the straight-line basis over the requisiteservice period.  Option valuation models require the input of highlysubjective assumptions, and changes in the assumptions used can materiallyaffect the fair value estimate. Judgment is required in estimating stock pricevolatility, forfeiture rates, expected dividends, and expected terms thatoptions remain outstanding.  Stock-based compensation expense totaledapproximately $246,000 and $244,000 and $540,000 and $446,000 for the three-monthand six-month periods ended June 30, 2010 and 2009, respectively, and isincluded in selling, general and administrative expense in the accompanyingconsolidated statements of operations.

 

**Income Taxes**

 

Weare subject to income taxes in the U.S. (including federal and state) andseveral foreign jurisdictions in which we operate. Deferred income tax balancesreflect the effects of temporary differences between the carrying amounts ofassets and liabilities and their tax bases and are stated at enacted tax rates expectedto be in effect when taxes are actually paid or recovered. ASC 740, *Income Taxes*, requires that deferred taxassets be evaluated for future realization and reduced by a valuation allowanceto the extent we believe a portion will not be realized. We consider manyfactors when assessing the likelihood of future realization of our deferred taxassets, including our recent cumulative earnings experience and expectations offuture taxable income by taxing jurisdiction, the tax loss carry-forwardperiods available to us for tax reporting purposes, and other relevant factors.

 

Significantjudgment is required in evaluating our tax positions and determining ourprovision for income taxes. During the ordinary course of business, there aremany transactions and calculations for which the ultimate tax determination isuncertain. We applied the provisions of ASC 740, which contains a two-stepapproach to recognizing and measuring uncertain tax positions. The first stepis to evaluate the tax position for recognition by determining if the weight ofavailable evidence indicates it is more likely than not that the position willbe sustained on audit, including resolution of related appeals or litigationprocesses, if any. The second step is to measure the tax benefit as the largestamount which is more than 50% likely of being realized upon ultimatesettlement. We consider many factors when evaluating and estimating ourtax positions and tax benefits, which may require periodic adjustments andwhich may not accurately anticipate actual outcomes.

 

Weare subject to income tax examinations by tax authorities from 2003 through thepresent period in jurisdictions in which we operate. There are currently noincome tax returns under examination by the U.S. Internal Revenue Service orany other major tax authorities.

 

**Recently Issued Accounting Standards**

 

Fora description of accounting changes and recent accounting pronouncements,including the dates of adoption and estimated effects, if any, on ourconsolidated condensed financial statements, see “Note 1: “Description ofBusiness and Significant Accounting Policies” in the Notes to ConsolidatedFinancial Statements of this Form 10-Q.

 

**Off-Balance Sheet Arrangements**

 

Wedo not have any off-balance sheet financing arrangements.

 

**Item 3.            Quantitative and QualitativeDisclosures about Market Risk**

 

Notapplicable.

 

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**Item 4.            Controlsand Procedures**

 

(a)*   Evaluation of Disclosure Controls andProcedures*.

 

Ourmanagement, with the participation of our chief executive officer and chiefaccounting officer, has evaluated the effectiveness of the design and operationof the Company’s disclosure controls and procedures pursuant toRule 13a-15 of the Securities Exchange Act of 1934.  Based on this evaluation, our managementconcluded that our disclosure controls and procedures were effective as ofJune 30, 2010.

 

(b)  *Changes in Internal Control Over FinancialReporting.*

 

Therewere no changes in our internal control over financial reporting that occurredduring the six-month period ended June 30, 2010 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

 

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**PART II — OTHER INFORMATION**

 

Item1A.         Risk Factors

 

Adescription of our risk factors can be found in Item 1A of our Annual Report onForm 10-K for the year ended December 31, 2009. Except as set forthbelow, there were no material changes to those risk factors during the threemonths ended June 30, 2010.

 

***We are a defendant in a litigation matterthat could result in substantial costs and divert management’s attention andresources.***

 

OnMarch 26, 2010, and as amended on May 28, 2010, certain shareholdersof the Company including Prime Mover Capital Partners L.P., Strata Fund L.P.,Strata Fund Q.P. L.P., and Strata Offshore Fund, Ltd (collectively, the “Plaintiffs”)filed in the United States District Court for the Southern District of New Yorka complaint (the “Complaint”) against certain defendants including the Companyand certain other current and former directors and officers of theCompany.  Although the Complaint was filed on March 26, 2010, theCompany was not made aware of it until March 31, 2010, the dateimmediately after the Company’s filing of its Form 10-K for the fiscalyear ended December 31, 2009.

 

TheComplaint alleges claims related to disclosures concerning the Company’selectronic gaming machine participation business (the “Participation Business”),including but not limited to the alleged violations of Sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder, violations of Nevada Revised Statutes Sections 90.580(e) and90.660(3), breach of fiduciary duty, and negligent misrepresentations. The Plaintiffs allege that the Company and certain other defendants made falseand misleading statements about the Participation Business in filings with theSEC, press releases, and other industry and investor conferences and meetingsduring the period from June 13, 2007 and August 13, 2008 and that thePlaintiffs then purchased the securities at the inflated prices and latersuffered economic losses when the price of the Company’s securities decreased.

 

ThePlaintiffs seek unspecified damages, as well as interest, costs and attorneys’fees.

 

Weintend to vigorously defend ourselves against these claims. However, noassurances can be made that we will be successful in our defense of the pendingclaims. If we are not successful in our defense of such claims, we could beforced to, among other things, make significant payments to resolve theseclaims or post significant bonds to pursue appeals, and such payments and/orbonds could have a material adverse effect on our business, financial conditionand results of operations. Further, regardless of the outcome of the foregoingmatters, these litigation matters themselves may result in substantial costsand divert management’s attention and resources, all of which could adverselyaffect our business.

 

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**Item 2.            Unregistered Sales of Equity Securities and Use ofProceeds**

 

Duringthe three months ended June 30, 2010, we granted NIL stock awards.

 

**Item 6.            Exhibits**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                       | ** ** | **Method of Filing**                                                                         |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                            | ** ** | ** **                                                                                             |
| 10.1             |       | Amendment  No. 3 to Trade Credit Facility Agreement and Related Note dated May 25,  2010 between Registrant and EGT Entertainment Holding Limited (formerly known  as Elixir Group Limited) |       | Filed  as an exhibit to Registrant’s Current Report on Form 8-K filed on  May 26 , 2010 |
|             |       |                                                                                                                                                                                                  |       |                                                                                                   |
| 10.2             |       | Machines  Operation and Participation Agreement dated May 25, 2010 between  Registrant, Elixir Gaming Technologies (Hong Kong) Limited (now known as,,,,)  and NagaWorld Limited                 |       | Filed  as an exhibit to Registrant’s Current Report on Form 8-K filed on  May 26, 2010  |
|             |       |                                                                                                                                                                                                  |       |                                                                                                   |
| 10.3             |       | Land  Sale & Purchase Agreement between Dreamworld (Takeo) Investment  Holding Limited and the owner of the Land dated as of May 26, 2010                                               |       | Filed  as an exhibit to Registrant’s Current Report on Form 8-K filed on  May 27, 2010  |
|             |       |                                                                                                                                                                                                  |       |                                                                                                   |
| 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**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| ** ** | ** **            | **ENTERTAINMENT GAMING ASIA INC.** |
|------------|-----------------------|------------------------------------|
|       |                  | (Registrant)                       |
|       |                  |                               |   |
|       |                  |                               |   |
| Date:      | August 13,  2010 | By:                                | /s/  Clarence Chung |
|       |                  |                               | Clarence  Chung |
|       |                  | Its:                               | President  and Chief Executive Officer |
|       |                  |                               |   |
|       |                  |                               |   |
| Date:      | August 13,  2010 | By:                                | /s/  Andy Tsui |
|       |                  |                               | Andy  Tsui |
|       |                  | Its:                               | Chief  Accounting Officer |

 

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