**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 March 31, 2008**                                                  |
|   |       |                                                                                                    |
|   |       | **OR**                                                                                                  |
|   |       |                                                                                                    |
| **o**  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from            to            .**

 

**Commissionfile number: 001-32161**

 

**ElixirGaming Technologies, Inc.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

(Address ofprincipal executive offices, including zip code)

 

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

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratedfiler, or a smaller reporting company. See definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

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

 

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

 

As of May 9,2008, 114,956,667 shares of common stock of Elixir Gaming Technologies, Inc.were outstanding.

 

 

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**TABLE OFCONTENTS**

 
| ** **                                    | ** ** | ** **   | ** ** | ** **                                                                                      | ** ** | **PAGE** |
|-----------------------------------------------|------------|--------------|------------|-------------------------------------------------------------------------------------------------|------------|----------|
| **PART I  – FINANCIAL INFORMATION** |
|                                          |       |         |       |                                                                                            |       |     |
| ** **                                    | ** ** | **Item  1.** | ** ** | **FINANCIAL  STATEMENTS**                                                                       |       |     |
|                                          |       |         |       |                                                                                            |       |     |
|                                          |       |         |       | Consolidated Balance  Sheets                                                                    |       | 1        |
|                                          |       |         |       |                                                                                            |       |     |
|                                          |       |         |       | Consolidated Statements of  Operations                                                          |       | 2        |
|                                          |       |         |       |                                                                                            |       |     |
|                                          |       |         |       | Consolidated Statements of  Cash Flows                                                          |       | 3        |
|                                          |       |         |       |                                                                                            |       |     |
|                                          |       |         |       | Notes to  Consolidated Financial Statements                                                     |       | 4        |
|                                          |       |         |       |                                                                                            |       |     |
| ** **                                    | ** ** | **Item 2.**  | ** ** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |       | 15       |
|                                          |       |         |       |                                                                                            |       |     |
|                                          |       |         |       | Overview                                                                                        |       | 16       |
|                                          |       |         |       |                                                                                            |       |     |
|                                          |       |         |       | Results of  Operations                                                                          |       | 16       |
|                                          |       |         |       |                                                                                            |       |     |
|                                          |       |         |       | Liquidity and  Capital Resources                                                                |       | 20       |
|                                          |       |         |       |                                                                                            |       |     |
|                                          |       |         |       | Critical  Accounting Policies and Estimates                                                     |       | 21       |
|                                          |       |         |       |                                                                                            |       |     |
| ** **                                    | ** ** | **Item 3.**  | ** ** | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                 |       | 24       |
|                                          |       |         |       |                                                                                            |       |     |
| ** **                                    | ** ** | **Item 4.**  | ** ** | **CONTROLS AND  PROCEDURES**                                                                    |       | 24       |
|                                          |       |         |       |                                                                                            |       |     |
| **PART II – OTHER  INFORMATION**    |
|                                          |       |         |       |                                                                                            |       |     |
| ** **                                    | ** ** | **Item 1A.** | ** ** | **RISK FACTORS**                                                                                |       | 26       |
|                                          |       |         |       |                                                                                            |       |     |
| ** **                                    | ** ** | **Item 6.**  | ** ** | **EXHIBITS**                                                                                    |       | 30       |

 

i

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# **PART I – FINANCIALINFORMATION**

# ** **

**Item 1.FINANCIAL STATEMENTS**

 

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

### **CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                              | ** ** | **March 31, 2008** | ** **  | **December 31, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                              | ** ** | **(Unaudited)**              | ** **  | ** **                      | ** ** |
| **ASSETS**                                                                                                              | ** ** | ** **                   | ** **  | ** **                      | ** ** |
| Current assets:                                                                                                         |       |                         |        |                            |       |
| Cash and cash equivalents                                                                                               |       | $                            | 46,665,711  |                            | $          | 68,286,820 |   |
| Current portion of accounts receivable, trade, net  of allowance for uncollectibles of $201,361 and $176,666            |       | 2,811,402                    |        | 1,689,909                       |       |
| Other receivables, net of allowance for  uncollectibles of $49,211 and $0                                               |       | 311,678                      |        | 298,940                         |       |
| Inventories                                                                                                             |       | 1,423,273                    |        | 1,686,670                       |       |
| Prepaid expenses and other current assets                                                                               |       | 626,218                      |        | 975,549                         |       |
|                                                                                                                    |       | 51,838,282                   |        | 72,937,888                      |       |
|                                                                                                                    |       |                         |        |                            |       |
| Accounts receivable, trade, net of current portion                                                                      |       | —                       |        | 60,421                          |       |
| Gaming machines and systems, net of accumulated  depreciation of $1,842,102 and $569,926                                |       | 42,667,472                   |        | 39,193,962                      |       |
| Property and equipment, net of accumulated  depreciation of $3,301,611 and $3,039,933                                   |       | 4,243,732                    |        | 3,934,532                       |       |
| Intangible assets, net of accumulated amortization  of $1,854,697 and $1,689,096                                        |       | 5,320,718                    |        | 5,486,321                       |       |
| Goodwill                                                                                                                |       | 84,210                       |        | 84,210                          |       |
| Prepaid commissions                                                                                                     |       | 1,394,271                    |        | 1,398,800                       |       |
| Deposits and other assets                                                                                               |       | 991,419                      |        | 617,894                         |       |
|                                                                                                                    |       | $                            | 106,540,104 |                            | $          | 123,714,028 |   |
|                                                                                                                    |       |                         |        |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                           |       |                         |        |                            |       |
| Current liabilities:                                                                                                    |       |                         |        |                            |       |
| Accounts payable                                                                                                        |       | $                            | 1,594,064   |                            | $          | 1,798,459 |   |
| Amount due to related party, current portion                                                                            |       | 10,040,732                   |        | 29,601,448                      |       |
| Accrued expenses                                                                                                        |       | 3,064,516                    |        | 5,248,458                       |       |
| Short-term debt                                                                                                         |       | 177,868                      |        | 31,893                          |       |
| Capital lease obligations, current portion                                                                              |       | 273,585                      |        | 480,663                         |       |
| Customer deposits                                                                                                       |       | 248,082                      |        | 197,019                         |       |
|                                                                                                                    |       | 15,398,847                   |        | 37,357,940                      |       |
|                                                                                                                    |       |                         |        |                            |       |
| Capital lease obligations, net of current portion                                                                       |       | 888,222                      |        | 916,444                         |       |
| Amount due to related party, net of current portion                                                                     |       | 8,421,119                    |        | —                          |       |
| Other liabilities                                                                                                       |       | 159,285                      |        | 99,966                          |       |
| Deferred tax liability                                                                                                  |       | 1,073,533                    |        | 1,051,745                       |       |
|                                                                                                                    |       | 25,941,006                   |        | 39,426,095                      |       |
| Stockholders’ equity:                                                                                              |       |                         |        |                            |       |
| Common stock, $001 par value, 300,000,000 shares  authorized; 114,946,671 and 114,914,934 shares issued and outstanding |       | 114,947                      |        | 114,916                         |       |
| Additional paid-in-capital                                                                                              |       | 413,182,765                  |        | 411,323,072                     |       |
| Accumulated other comprehensive income                                                                                  |       | 159,349                      |        | 406,358                         |       |
| Accumulated deficit                                                                                                     |       | (332,857,963                 | )           | (327,556,413                    | )          |
|                                                                                                                    |       | 80,599,098                   |        | 84,287,933                      |       |
|                                                                                                                    |       | $                            | 106,540,104 |                            | $          | 123,714,028 |   |

 

See accompanying notes to consolidated financial statements.

 

1

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

### **Consolidated Statements ofOperations**

**(Unaudited)**

** **
| ** **                                 | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                              | ** ** | **2007** | ** ** |
| Revenues:                                  |       |                                                  |       |   |   |
| Gaming machine participation               |       | $                                                     | 518,617    |   | $ | — |   |
| Table game products                        |       | 680,030                                               |       | 1,956,023 |   |
| Non-gaming products                        |       | 1,732,876                                             |       | 1,430,877 |   |
|                                       |       | 2,931,523                                             |       | 3,386,900 |   |
|                                       |       |                                                  |       |   |   |
| Operating costs and expenses:              |       |                                                  |       |   |   |
| Cost of gaming machine participation       |       | 1,388,201                                             |       | — |   |
| Cost of table game products                |       | 651,204                                               |       | 1,487,063 |   |
| Cost of non-gaming products                |       | 1,532,485                                             |       | 1,594,197 |   |
| Selling, general and administrative        |       | 5,141,588                                             |       | 2,937,375 |   |
| Research and development                   |       | 323,721                                               |       | 262,758 |   |
| Depreciation and amortization              |       | 231,120                                               |       | 331,676 |   |
| Restructuring charges                      |       | 165,570                                               |       | — |   |
|                                       |       | 9,433,889                                             |       | 6,613,069 |   |
| Loss from operations                       |       | (6,502,366                                            | )          | (3,226,169 | ) |
|                                       |       |                                                  |       |   |   |
| Other income (expense):                    |       |                                                  |       |   |   |
| Interest expense and finance fees          |       | (54,287                                               | )          | (671,111 | ) |
| Interest income                            |       | 366,751                                               |       | 13,872 |   |
| Foreign currency gains                     |       | 839,966                                               |       | — |   |
| Other                                      |       | 80,527                                                |       | 487,447 |   |
|                                       |       | 1,232,957                                             |       | (169,792 | ) |
|                                       |       |                                                  |       |   |   |
| Income tax expense                         |       | (32,141                                               | )          | — |   |
|                                       |       |                                                  |       |   |   |
| Net loss                                   |       | $                                                     | (5,301,550 | ) | $ | (3,395,961 | ) |
|                                       |       |                                                  |       |   |   |
| Basic and diluted loss per share           |       | $                                                     | (0.05      | ) | $ | (0.10 | ) |
|                                       |       |                                                  |       |   |   |
| Weighted average common shares outstanding |       | 114,923,562                                           |       | 32,359,950 |   |

 

See accompanying notes to consolidated financial statements.

 

2

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

 

**Consolidated Statementsof Cash Flows**

**(Unaudited)**

 
| ** **                                                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Cash flows from operating activities:**                                       |       |                                                 |       |   |   |
| Net loss                                                                        |       | $                                                    | (5,301,550 | ) | $ | (3,395,961 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:    |       |                                                 |       |   |   |
| Income tax expense                                                              |       | 32,141                                               |       | — |   |
| Foreign currency gains                                                          |       | (839,966                                             | )          | — |   |
| Depreciation of gaming machines and systems and  property and equipment         |       | 1,456,508                                            |       | 144,228 |   |
| Amortization of intangible assets                                               |       | 165,603                                              |       | 214,666 |   |
| Amortization of deferred interest                                               |       | 20,000                                               |       | 311,186 |   |
| Amortization of prepaid sales commission                                        |       | 4,529                                                |       | — |   |
| Stock-based compensation expense                                                |       | 1,802,321                                            |       | 375,459 |   |
| Loss on disposition of assets                                                   |       | 14,027                                               |       | — |   |
| Write down of inventory                                                         |       | 20,422                                               |       | — |   |
| Changes in operating assets and liabilities:                                    |       |                                                 |       |   |   |
| Accounts receivable                                                             |       | (927,920                                             | )          | (68,536 | ) |
| Inventories                                                                     |       | 242,976                                              |       | (79,751 | ) |
| Prepaid expenses and other current assets                                       |       | 334,330                                              |       | — |   |
| Deposits and other assets                                                       |       | (378,525                                             | )          | 97,336 |   |
| Accounts payable                                                                |       | (327,453                                             | )          | (231,627 | ) |
| Accrued expenses and other current liabilities                                  |       | (2,021,466                                           | )          | 298,551 |   |
| Net cash used in operating activities                                           |       | (5,704,023                                           | )          | (2,334,449 | ) |
|                                                                            |       |                                                 |       |   |   |
| **Cash flows from investing activities:**                                       |       |                                                 |       |   |   |
| Acquisition of property and equipment                                           |       | (203,772                                             | )          | (93,259 | ) |
| Payments of related party payables for purchase of  gaming machines and systems |       | (15,683,516                                          | )          | — |   |
| Sale of property and equipment                                                  |       | 2,129                                                |       | — |   |
| Net cash used in investing activities                                           |       | (15,885,159                                          | )          | (93,259 | ) |
|                                                                            |       |                                                 |       |   |   |
| **Cash flows from financing activities:**                                       |       |                                                 |       |   |   |
| Proceeds from sale of stock, warrants and options                               |       | 57,402                                               |       | 4,484,385 |   |
| Repayment of notes payable and leases                                           |       | (89,329                                              | )          | (396,514 | ) |
| Proceeds from stock subscriptions receivable                                    |       | —                                               |       | 2,650,000 |   |
| Net cash (used in) provided by financing activities                             |       | $                                                    | (31,927    | ) | $ | 6,737,871 |   |
|                                                                            |       |                                                 |       |   |   |
| Increase (decrease) in cash (used in) and cash  equivalents                     |       | (21,621,109                                          | )          | 4,310,163 |   |
| Cash and cash equivalents at beginning of period                                |       | 68,286,820                                           |       | 333,888 |   |
| Cash and cash equivalents at end of period                                      |       | $                                                    | 46,665,711 |   | $ | 4,644,051 |   |
|                                                                            |       |                                                 |       |   |   |
| **Non-cash investing and financing activities:**                                |       |                                                 |       |   |   |
| Gaming machines purchased as related party payables                             |       | $                                                    | 4,912,322  |   | $ | — |   |

 

See accompanying notes to consolidated financial statements.

 

3

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

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

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

 

***Basis of Presentation***

 

Theprincipal business activity of Elixir Gaming Technologies, Inc. and itssubsidiaries (the “Company”) is the owning and leasing of electronic gamingmachines placed in resorts, hotels and other venues throughout Asia and thedeveloping and distributing of products related to the gaming and automotiveindustries. These products include electronic card shuffling devices, RFIDcasino chips and component parts for the automotive industry.

 

The accompanying unaudited consolidated financial statementshave been prepared in accordance with generally accepted accounting principlespursuant to the rules and regulations incorporated in Regulation SKof the Securities and Exchange Commission (“SEC”) and reflect all adjustments,consisting of normal recurring adjustments, which management believes arenecessary to fairly present the financial position, results of operations andcash flows of the Company, for the respective periods presented. The results ofoperations for an interim period are not necessarily indicative of the resultsthat may be expected for any other interim period or the year as a whole. Theaccompanying unaudited consolidated financial statements should be read inconjunction with the consolidated financial statements and notes thereto in theCompany’s Annual Report on Form 10-K for the year ended December 31,2007, filed with the SEC on March 31, 2008.

 

***Use of Estimates***

 

These consolidated financial statements areprepared in conformity with accounting principles generally accepted in theUnited States (U.S.).  Accordingly, the Company is required to makeestimates, judgments and assumptions that it believes are reasonable based onits historical experience, contract terms, observance of known trends in theCompany and the industry as a whole, and information available from otheroutside sources.  These estimates 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 initial estimates.

 

***Cash and Cash Equivalents***

 

All highly liquid debt instruments with anoriginal maturity of three months or less are considered cashequivalents.  The Company places its cash and temporary investments withfinancial institutions.  At March 31, 2008, the Company had depositswith financial institutions in excess of FDIC insured limits by $46.5 million.

 

The Company has restricted cash in the amountof $100,000, in the form of a certificate of deposit as security on alease.  This certificate of deposit has been recorded in deposits andother assets in the accompanying consolidated balance sheets.  Therestriction will be removed in February 2012 upon termination of thelease.

 

4

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***Inventories***

 

Inventories are stated at the lower of cost,determined using the first-in, first-out method, or market.  Cost elementsincluded in work-in-process and finished goods include raw materials, directlabor, and manufacturing overhead.

 

***Consignment Inventory***

 

During the quarter ended March 31, 2008,the Company transferred to our distributor $754,864 of service supplies andparts on consignment, in addition to the $65,908 transferred in 2007, which isrecorded as inventory.  Revenue is not recognized until ownership of theproduct and title passes to the distributor which occurs upon the distributor’suse of the products evidenced by a purchase order or sales to third-partycustomers.

 

***Gaming Machines and Systems***

 

Gaming machines and systems are stated atcost.  The Company depreciates gaming machines and systems over afive-year useful life to a minimal salvage value once placed in service.Depreciation of gaming machines and systems of $1,292,754 and $0 is included incost of sales in the consolidated statement of operations for the three monthsended March 31, 2008 and 2007, respectively.

 

***Property and Equipment***

 

Property and equipment is stated at cost.Depreciation is computed using the straight-line method over the useful livesof the assets currently estimated to be 3-5 years, which, in the case of leaseholdimprovements, is limited to the life of the lease and renewal period so long asrenewal is reasonably assured. Depreciation of property and equipment of$98,236 and $27,218 are included in cost of revenues in the consolidatedstatements of operations for the three months ended March 31, 2008 and2007, respectively.

 

***Goodwill and Intangible Assets***

 

Intangible assets consist of patents,customer relationships and trademarks and goodwill. They are recorded at costand are amortized, except goodwill, on a straight-line basis over the period oftime the asset is expected to contribute directly or indirectly to future cashflows, which range from 10 to 13 years. The straight-line amortizationmethod is utilized because the Company believes there is not a more reliablydeterminable method of reflecting the pattern in which the economic benefits ofthe intangible assets are consumed or otherwise used up.

 

The Company measures and tests goodwill andintangible assets for impairment in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 142, *Goodwill and OtherIntangible Assets*, (“SFAS No. 142”), and SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*(“SFAS No. 144”), at least annually on December 31 or more often ifthere are indicators of impairment.

 

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

 

Accounts receivable are stated at face valueless any allowance for doubtful accounts.  Allowances for doubtfulaccounts are maintained at levels determined by the Company’s management toadequately 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, financialcondition of customers, specific customer collection experience and history ofwrite-offs and collections.

 

5

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***Litigation and OtherContingencies***

 

The Company is involved in various legalmatters, litigation and claims of various types in the ordinary course of itsbusiness operations. The Company has regular litigation reviews, includingupdates from corporate and outside counsel, to assess the need for accountingrecognition or disclosure of these contingencies. The status of significantclaims is summarized in Note 14.

 

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

 

***Revenue Recognition***

 

The Company recognizes revenue when all ofthe following have been satisfied:

 

·                  persuasive evidence of an arrangement exists;

·                  the price to the customer is fixed anddeterminable;

·                  delivery has occurred and any acceptanceterms have been fulfilled;

·                  no significant contractual obligationsremain; and

·                  collection is reasonably assured.

 

*Gaming and Non-Gaming ProductsRevenues*

 

The Company recognizes revenue from the saleof its products to end users upon shipment against customer contracts orpurchase orders. Revenue from shuffler rentals is recorded at the first of eachmonth in accordance with rental contract terms.  The Company completed itstransition to outsourcing all future sales to third-party distributors duringthe fourth quarter 2007 and will no longer record rental revenue on its tablegame products.

 

The Company recognizes revenue from its salesto independent distributors upon shipment to the distributor againstdistributor contracts or purchase orders of our product.  The Companyrecognizes revenue on consignment inventory when ownership of the product andtitle passes to the distributor which occurs upon the distributor’s use of theproduct in its service organization or to an end user.

 

*Participation Revenues*

 

The Company earns recurring revenue byproviding customers with electronic gaming machines and casino managementsystems.  Revenues are recognized on thecontractual terms of the participation agreements between the Company and thevenue owners or operators and are based on the Company’s share of net winnings.The Company’s share of joint costs, if any, is recorded in cost of revenues.

 

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

 

Freight-out and warehousing costs areincluded in cost of product revenues in the accompanying consolidatedstatements of operations.

 

6

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***Advertising Expense***

 

The cost of advertising is charged to expenseas incurred.  The cost of advertising was $36,489 and $13,377 for thethree months ended March 31, 2008 and 2007, respectively.

 

***Stock-Based Compensation***

 

The Company adopted SFAS No. 123R, *Share-Based Payment*(“SFAS No. 123R”), to account forall its stock-based compensation beginning January 1, 2006, and electedthe modified prospective method of transition. Under the fair value recognitionprovisions of SFAS No. 123R, the Company estimates stock-basedcompensation on the determined measurement date, generally the award grantdate, and recognizes expense 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 estimate.Judgment is required in estimating stock price volatility, forfeiture rates,expected dividends, and expected terms that options remain outstanding.Stock-based compensation expense totaled $1,802,321 and $375,459 for the periodended March 31, 2008 and 2007, respectively, and is included in selling,general and administrative expense in the accompanying consolidated statementsof operations.  See Note 10 for additional information regarding theseassumptions.

 

***Research and Development Expenses***

 

Research and development costs are charged toexpense as incurred.  Employee related costs associated with productdevelopment are included in research and development costs.

 

***Income Taxes***

 

The Company is subject to income taxes in theU.S. (including federal and state) and several foreign jurisdictions in whichit operates. Deferred income tax balances reflect the effects of temporarydifferences between the carrying amounts of assets and liabilities and theirtax basis and are stated at enacted tax rates expected to be in effect whentaxes are actually paid or recovered. SFAS No. 109, *Accountingfor Income Taxes*(“SFAS No. 109”), requires that deferred taxassets be evaluated for future realization and reduced by a valuation allowanceto the extent the Company believes a portion will not be realized. The Companyconsiders many factors when assessing the likelihood of future realization ofits deferred tax assets, including its recent cumulative earnings experienceand expectations of future taxable income by taxing jurisdiction, thecarry-forward periods available to the Company for tax reporting purposes, andother relevant factors.

 

Significant judgment is required inevaluating the Company’s tax positions and determining its provision for incometaxes. During the ordinary course of business, there are many transactions andcalculations for which the ultimate tax determination is uncertain. Effective January 1,2007, the Company adopted the provisions of FIN No. 48, *Accounting**for Uncertainty in IncomeTaxes and Interpretation of FASB Statement No. 109*, whichcontains a two-step approach to recognizing and measuring uncertain taxpositions accounted for in accordance with SFAS No. 109. The first step isto evaluate the tax position for recognition by determining if the weight ofavailable evidence indicates it is more likely than not that the position willbe sustained on audit, including resolution of related appeals or litigationprocesses, if any. The second step is to measure the tax benefit as the largestamount which is more than 50% likely of being realized upon ultimatesettlement. The Company considers many factors when evaluating andestimating its tax positions and tax benefits, which may require periodic****adjustments and which may not accurately anticipate actualoutcomes.

 

7

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We are subject to income tax examination bytax authorities in jurisdictions in which we operate. There are currently noincome tax returns under examination by the Internal Revenue Service or anyother major tax authorities.

 

***Loss Per Share***

 

Basic loss per share is computed by dividingthe reported net loss by the weighted average number of shares of common stockoutstanding during the year. There is no difference in diluted loss per sharefrom basic loss per share as the assumed exercise of common stock equivalentswould have an anti-dilutive effect due to losses.

 

***Foreign Currency Translations andTransactions***

 

The functional currency of the Company’sinternational subsidiaries is the local currency.  For these subsidiaries,the Company translates the assets and liabilities at exchange rates in effectat the balance sheet date and income and expense accounts at average exchangerates during the year.  Resulting currency translation adjustments arerecorded directly to accumulated other comprehensive income within stockholders’equity.  Gains and losses resulting from transactions in non-functionalcurrencies are recorded in operations.

 

**NOTE 2.                SEGMENTS**

 

The Company currently operates in threeoperating segments: (i) table game product operations (ii) gamingmachine participation operations and (iii) non-gaming products operations,consisting primarily of the Dolphin Advanced Technologies Pty Ltd (“Dolphin”)automotive sector. The accounting policies of these segments are consistentwith the Company’s policies for the accompanying consolidated financialstatements.

 

The table below presents information as tothe Company’s revenues and operating loss by segment:

 
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Revenues:                                            |       |                                                 |       |   |   |
| Gaming machine participation operations              |       | 518,617                                              |       | — |   |
| Table game product operations                        |       | $                                                    | 680,030    |   | $ | 1,956,023 |   |
| Non-gaming product operations                        |       | 1,732,876                                            |       | 1,430,877 |   |
| Total revenues                                       |       | $                                                    | 2,931,523  |   | $ | 3,386,900 |   |
|                                                 |       |                                                 |       |   |   |
| Operating loss:                                      |       |                                                 |       |   |   |
| Gaming machine participation operations gross margin |       | (869,584                                             | )          | — |   |
| Table game product operations gross margin           |       | $                                                    | 28,826     |   | $ | 468,960 |   |
| Non-gaming product operations gross margin           |       | 200,391                                              |       | (163,320 | ) |
| Corporate and other operating costs and expenses     |       | (5,861,999                                           | )          | (3,531,809 | ) |
| Total operating loss                                 |       | $                                                    | (6,502,366 | ) | $ | (3,226,169 | ) |
|                                                 |       |                                                 |       |   |   |
| Depreciation and amortization:                       |       |                                                 |       |   |   |
| Gaming machine participation operations              |       | 1,292,754                                            |       | — |   |
| Table game product operations                        |       | $                                                    | 188,364    |   | $ | 273,876 |   |
| Non-gaming product operations                        |       | 71,066                                               |       | 61,482 |   |
| Corporate                                            |       | 69,926                                               |       | 23,536 |   |
| Total depreciation and amortization(1)               |       | $                                                    | 1,622,110  |   | $ | 358,894 |   |

 

----

(1)          Includes $1,390,990 and$27,218 for the three months ended March 31, 2008 and 2007, respectivelythat was reported in cost of sales on the consolidated statements of operations(see Note 1).

 

8

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Geographic segment revenues for the threemonths ended March 31, 2008 and 2007 are as follows:

 
| ** **    | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------|------------|------------------------------------------------------|------------|
| ** **    | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Asia          |       | $                                                    | 618,397    |   | $ | 1,685,605 |   |
| United States |       | 553,456                                              |       | 208,119 |   |
| Australia     |       | 1,756,820                                            |       | 1,430,877 |   |
| Europe        |       | —                                               |       | 40,696 |   |
| Other         |       | 2,850                                                |       | 21,603 |   |
|          |       | $                                                    | 2,931,523  |   | $ | 3,386,900 |   |

 

For the three months ended March 31,2008, in the table game products segment, one customer represented 78% of totaltable game product sales. For the three months ended March 31, 2008,within the non-gaming products segment, one customer represented 43% of totalnon-gaming product sales.

 

**NOTE 3.                INVENTORIES**

 

Inventories consist of the following:

 
| ** **       | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------|------------|------------------------------|------------|---------------------------------|------------|
| Raw materials    |       | $                            | 819,722    |                            | $          | 577,980 |   |
| Work-in-progress |       | 156,934                      |       | 230,449                         |       |
| Finished goods   |       | 446,617                      |       | 878,241                         |       |
|             |       | $                            | 1,423,273  |                            | $          | 1,686,670 |   |

 

Included in the inventory balance isinventory on consignment totaling $820,773 and $65,908 as of March 31,2008 and December 31, 2007, respectively.

 

**NOTE 4.                PREPAID EXPENSES AND OTHER CURRENT ASSETS**

 

Prepaid expenses and other current assetsconsist of the following:

 
| ** **                               | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Prepaid taxes                            |       | $                            | 484,711    |                            | $          | 701,527 |   |
| Prepaid service and licensing agreements |       | 50,630                       |       | 71,879                          |       |
| Prepayment of suppliers                  |       | 27,910                       |       | 26,860                          |       |
| Other                                    |       | 62,967                       |       | 175,283                         |       |
|                                     |       | $                            | 626,218    |                            | $          | 975,549 |   |

 

9

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**NOTE 5.                RECEIVABLES**

 

Accounts receivable consists of thefollowing:

 
| ** **                            | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Trade accounts                        |       | $                            | 3,012,763  |                            | $          | 1,926,996 |   |
| Other                                 |       | 360,889                      |       | 298,940                         |       |
|                                  |       | 3,373,652                    |       | 2,225,936                       |       |
| Less: allowance for doubtful accounts |       | (250,572                     | )          | (176,666                        | )          |
| Net                                   |       | $                            | 3,123,080  |                            | $          | 2,049,270 |   |
| Non-current portion                   |       | $                            | —     |                            | $          | 60,421 |   |

 

**NOTE 6.                PROPERTY AND EQUIPMENT**

 

Property and equipment consists of thefollowing:

 
| ** **                                     | ** ** | **Useful Life  (years)** | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Equipment rented by customers                  |       | 3 - 5                         |       | $                            | 76,223     |                            | $          | 85,011 |   |
| Equipment and vehicles, furniture and fixtures |       | 3 - 5                         |       | 6,892,007                    |       | 6,329,146                       |       |
| Leasehold improvements                         |       | 5                             |       | 577,113                      |       | 560,308                         |       |
|                                           |       |                          |       | 7,545,343                    |       | 6,974,465                       |       |
| Less accumulated  depreciation                 |       |                          |       | (3,301,611                   | )          | (3,039,933                      | )          |
|                                           |       |                          |       | $                            | 4,243,732  |                            | $          | 3,934,532 |   |

 

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

 

**NOTE 7.                GOODWILL AND INTANGIBLE ASSETS**

 

In accordance with SFAS No. 142 and SFASNo. 144, the Company reviews goodwill and intangibles for impairment on anannual basis (December 31) or more frequently if events or circumstancesindicate that the carrying value may not be recoverable.  No circumstances indicate any impairment isnecessary during the three months ended March 31, 2008.

 

All of the Company’s definite-life intangibleassets are subject to amortization. Definite-life intangible assetsconsist of the following:

 
| ** **                            | ** ** | **Useful Life  (years)** | ** ** | **March 31, 2008** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Patents                               |       | 10                            |       | 4,986,314                    |       | 4,986,314                       |       |
| Less:  accumulated  amortization |       |                          |       | (1,277,558                   | )          | (1,147,900                      | )          |
|                                  |       |                          |       |                         |       |                            |       |
| Customer relationships                |       | 10-13                         |       | 1,684,103                    |       | 1,684,103                       |       |
| Less:  accumulated  amortization |       |                          |       | (506,107                     | )          | (478,712                        | )          |
|                                  |       |                          |       |                         |       |                            |       |
| Trademarks                            |       | 10-13                         |       | 505,000                      |       | 505,000                         |       |
| Less:  accumulated  amortization |       |                          |       | (71,034                      | )          | (62,484                         | )          |
|                                  |       |                          |       | $                            | 5,320,718  |                            | $          | 5,486,321 |   |
|                                       |            |                               |            |                              |            |                                 |            |  |  |

 

10

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**NOTE 8.                ACCRUED EXPENSES**

** **

Accrued expenses consist of the following:

 
| ** **                        | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Payroll and related costs         |       | $                            | 653,667    |                            | $          | 1,832,175 |   |
| Restructuring and severance costs |       | —                       |       | 1,290,837                       |       |
| Legal, accounting and tax         |       | 256,350                      |       | 419,516                         |       |
| Litigation                        |       | 1,335,455                    |       | 1,318,994                       |       |
| Other                             |       | 819,044                      |       | 386,936                         |       |
| Total                             |       | $                            | 3,064,516  |                            | $          | 5,248,458 |   |

 

Included in accrued liabilities at March 31,2008 is $1.3 million for potential charges in relation to a lawsuit with theformer owner of Dolphin (see Note 14).

 

**NOTE 9.                NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS**

** **

Notes payable and capital lease obligationsconsist of the following:

 
| ** **                                                                                                       | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Short-term line of credit at an Australian bank at  interest between 13.83% and 13.98%                           |       | $                            | 177,868    |                            | $          | 31,893 |   |
| Capital lease obligation to an Australian bank at  interest between 7.22% and 13.54% collateralized by equipment |       | 1,037,245                    |       | 1,051,713                       |       |
| Capital lease obligations for furniture and  equipment at 10.0% interest                                         |       | 124,562                      |       | 345,394                         |       |
|                                                                                                             |       | 1,339,675                    |       | 1,429,000                       |       |
| Less current portion                                                                                             |       | (451,453                     | )          | (512,556                        | )          |
| Long-term portion                                                                                                |       | $                            | 888,222    |                            | $          | 916,444 |   |

 

**NOTE 10.              STOCK-BASED COMPENSATION**

** **

**Options**

** **

The Company has two stock options plans: theAmended and Restated 1999 Stock Option Plan and the Amended and Restated 1999Directors’ Stock Option Plan (the “Stock Option Plans”), through which15,000,000 shares and 300,000 shares are authorized, respectively. As of March 31,2008, there were options for the purchase of 14,424,421 shares of common stockissued and outstanding under the two plans.

 

A summary of the Stock Option Plans as of March 31,2008, and changes during the three months ended, is presented below:

 
| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding as of December 31, 2007 |       | 8,218,369                  |       | $                                          | 2.56       |                                                                     | 3.92       |                            | $          | 14,311,016 |   |
| Granted                                  |       | 6,243,539                  |       | 4.96                                       |       |                                                                     |       |                            |       |
| Exercised                                |       | (36,737                    | )          | 1.74                                       |       |                                                                     |       |                            |       |
| Forfeited or expired                     |       | (750                       | )          | 3.90                                       |       |                                                                     |       |                            |       |
| Outstanding as of March 31, 2008    |       | 14,424,421                 |       | $                                          | 3.60       |                                                                     | 5.20       |                            | $          | 811,031 |   |
| Exercisable as of March 31, 2008    |       | 3,180,882                  |       | $                                          | 2.04       |                                                                     | 2.95       |                            | $          | 811,031 |   |

 

11

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**Warrants**

** **

A summary of the status of the Company’swarrants outstanding at March 31, 2008 and changes during the three monthsthen ended is presented in the table below:

 
| ** **                             | ** ** | **Warrants** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Contractual Life  (in years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------|------------|--------------|------------|----------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------|------------|
| Warrants, as of December 31, 2007 |       | 79,761,375   |       | $                                      | 2.51       |                                                          | 4.76       |                                | $          | 142,505,069 |   |
| Granted                                |       | —       |       | —                                 |       |                                                          |       |                                |       |
| Exercised                              |       | —       |       | —                                 |       |                                                          |       |                                |       |
| Cancelled                              |       | —       |       | —                                 |       |                                                          |       |                                |       |
| Warrants, as of March 31, 2008    |       | 79,761,375   |       | 2.51                                   |       | 4.76                                                          |       | (45,731,776                         | )          |
| Exercisable as of March 31, 2008  |       | 13,761,375   |       | $                                      | 1.86       |                                                          | 3.60       |                                | $          | 1,128,224 |   |

 

**Recognition and Measurement**

** **

The fair value of each stock-based award toemployees and non-employee directors is estimated on the measurement date,which generally is the grant date, using the Black-Scholes-Mertonoption-pricing model. Option valuation models require the input of highlysubjective assumptions, and changes in assumptions used can materially affectthe fair value estimates. The Company estimates the expected life of the awardby taking into consideration the vesting period, contractual term, historicalexercise data, expected volatility, blackout periods and other relevantfactors. Volatility is estimated by evaluating the Company’s historicalvolatility data. The risk-free interest rate at the date of grant is based on U.S.Treasury constant maturity rates for a period approximating the expected lifeof the award. The Company historically has not paid dividends, nor does itexpect to pay dividends in the foreseeable future; therefore, the expecteddividend rate is zero.

 

The following table summarizes the range ofassumptions utilized in the Black-Scholes-Merton option-pricing model for thevaluation of stock options and warrants granted during the three months ended March 31,2008 and 2007:

 
| ** **                 | ** ** | **March 31,** | ** ** |
|----------------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2008**           | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **Low**            | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** |
| Range of values: | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected volatility        |       | 60.00              | %          | 60.00 | % | 83.30 | % | 83.75 | % |
| Expected dividends         |       | —             |       | — |   | — |   | — |   |
| Expected term (in years)   |       | 3.13               |       | 10.00 |   | 3.01 |   | 3.73 |   |
| Risk free rate             |       | 2.72               | %          | 3.72 | % | 4.71 | % | 4.75 | % |

 

The Company recognizes stock-basedcompensation expense for all service-based awards with graded vesting scheduleson a straight-line basis over the requisite service period for the entireaward. Initial accruals of compensation expense are based on the estimatednumber of shares for which requisite service is expected to be rendered.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 awards with service conditions and gradedvesting that were granted prior to the adoption of SFAS No. 123R, theCompany estimates the requisite service period and the number of sharesexpected to vest, and recognizes compensation expense for each tranche on astraight-line basis over the estimated requisite service period.

 

12

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**NOTE 11.              RELATED PARTY TRANSACTIONS**

** **

During the three months ended March 31,2008, the Company purchased $4.9 million of electronic gaming machines, casinomanagement systems and other peripherals from Elixir International, a relatedparty, at cost plus fifteen percent (15%).  At March 31, 2008 and December 31,2007, the Company had accounts payable of $18.5 million and $29.6 million,respectively, due to Elixir International for purchases of electronic gamingmachines, casino management systems and other peripherals.  The payableshave cash terms of fifty percent (50%) due upon placement of the electronicgaming machines and the balance 45 days thereafter with no required interestpayments.  In addition, at March 31, 2008, the Company had future purchasecommitments with Elixir International totalling $8,514,928.  These have not been recorded as of thebalance sheet date.  For the three monthsended March 31, 2008 and 2007, the Company recorded sales of table gameproducts of $69,356 and $0, respectively, to Elixir International.

 

Subsequent to quarter end, the Companyentered into a trade credit facility agreement with Elixir International (seeNote 16).

 

**NOTE 12.              INCOME TAXES**

** **

Our reported income tax rate for the threemonths ended March 31, 2008 was 0.61% as compared to 0.0% for the threemonths ended March 31, 2007.  Thereported income tax rate for the three months ended March 31, 2008 washigher than the prior year period due to tax expense recorded in foreignjurisdictions that the Company commenced operations during 2008 and ourgeographic income mix.

 

**NOTE 13.              RESTRUCTURING CHARGES**

** **

During the three months ended March 31,2008, the Company moved its corporate offices and ceased use of awarehouse.   In accordance with SFAS No. 146,*Accounting for Cost Associated with Exit orDisposal Activities*, the Company incurred restructuring charges of$165,570 for operating leases the Company ceased use of during the three monthsended March 31, 2008.  The liabilitywas calculated based upon the remaining lease rentals, reduced by a combinationof actual sublease rentals and estimated sublease rentals and recorded at fairvalue.

 

**NOTE 14.              COMMITMENTS AND CONTINGENCIES**

** **

**Legal Matters**

** **

The Company is a party to certain claims,legal actions, and complaints, including a patent infringement action betweenthe Company and one of its main competitors and the sales tax dispute discussedbelow. The Company cannot estimate the probable loss, if any, or predict thelikely outcome of any such matters and accordingly, no accrual has been madefor them.

 

On October 5, 2004, Shuffle Master fileda patent infringement action in the United States District Court, District ofNevada (Case No. CV-S-04-1373-JCM-LRL) claiming that the use, importationand offering for sale of our PokerOne shuffler infringed Shuffle Master’sUnited States Patent, No. 6,655,684. The Company responded by denyingShuffle Master’s claim of patent infringement. On April 27, 2007, theCompany filed a motion for summary judgment and on February 1, 2008, theDistrict Court granted the Company’s motion for summary judgment on all patentinfringement claims.  On February 15, 2008, the Company delivered ademand to Shuffle Master for $3.0 million in damages for the wrongfulinjunction it obtained in 2004.  TheCompany also filed a motion in District Court to recover its attorneys’ fees inthe litigation.  The Company intends to vigorously pursue collection ofthe $3.0 million bond and its attorneys’ fees from Shuffle Master, however,there can be no assurances the Company will be successful in doing so.

 

13

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On October 5, 2007, William Purton filedan action against the Company in the Supreme Court of Victoria at Melbourne,Australia claiming he is owed monies under the July 2006 Share SaleAgreement by which the Company acquired Dolphin.  In addition, Mr. Purtonis claiming he is owed money for an independent contractor agreement that heclaims he was offered.  The Company has filed a counterclaim.  Thematter is proceeding toward trial and the Company will vigorously defend itsposition.

 

**Sales Tax Audit**

** **

In February 2004, the State of Nevadainitiated a sales/use tax audit of the Company’s equipment lessors. As of thedate of this filing, the State of Nevada has not made a determination if therehas been a shortfall in the payment of the sales/use tax. If the State ofNevada determines that the sales of the products to the equipment lessors isthe level at which sales/use tax should have been collected, liability of theleasing companies could be passed on to the Company and may not be recoverable.The outcome could range from a refund of $144,000 to a potential liability withinterest and penalties of up to $500,000. However, no probable loss, if any canbe estimated.  Accordingly, no accrual has been made for any possiblelosses in connection with this matter.

 

**Dolphin Advanced Technologies**

** **

During the three months ended March 31,2008, the Company entered into a non-binding letter of intent for the possiblesale of Dolphin Advanced Technologies Pty Ltd. (“Dolphin”).  The transaction is subject to each party’sdue diligence review of the other and the parties’ negoiation and execution ofa definitive purchase agreement.  As ofthe date of this report, the Company is unable to determine if the transactionwill be completed.

 

**NOTE 15.              LOSS PER SHARE**

** **

Basic loss per share is computed by dividingthe reported net loss for the period by the weighted average number of commonshares outstanding during the period.  Loss per share is unchanged on adiluted basis since the assumed exercise of common stock equivalents would havean anti-dilutive effect.

 

**NOTE 16.              SUBSEQUENT EVENTS**

** **

On April 21, 2008, the Company enteredinto a Trade Credit Facility Agreement (the “Facility Agreement”) with ElixirInternational Limited (“Elixir International”), a wholly-owned subsidiaryof Elixir Group.  Pursuant to theFacility Agreement, Elixir International may, from time to time at its option,provide trade credits to the Company for its purchase of electronic gamingmachines from Elixir International in exchange for the Company’s issuance ofunsecured notes to Elixir International bearing interest at a fixed rate ofeight percent (8.0%) per annum.  Title ofany gaming machines offered in exchange for the notes passes to the Company uponissuance of the notes.

 

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

 

The Company is obligated to repay theprincipal, plus any accrued interest thereon, of the Initial Advance in 24equal monthly installments after the date of issue.  However, the Initial Advance is subject todemand by Elixir International for immediate payment of any outstanding sumsowed to Elixir International if there is either an event of default or a changeof control defined in the Facility Agreement. Any further notes, if issued, will be subject to demand by ElixirInternational for immediate payment of any outstanding sums owed to ElixirInternational at anytime and at the sole discretion of Elixir International.

 

14

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The Facility Agreement does not include acommitment on the part of Elixir International and all further borrowings bythe Company are subject to the approval of Elixir International at its solediscretion.  There can be no assurance ofany further amount of credit obtainable by the Company under the FacilityAgreement.

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

** **

***CAUTIONARY STATEMENT***

*** ***

You should read the following discussion andanalysis in conjunction with our unaudited consolidated financial statementsand the related notes thereto contained elsewhere in this report. Theinformation contained in this quarterly report on Form 10-Q is not acomplete description of our business or the risks associated with an investmentin our common stock. We urge you to carefully review and consider the variousdisclosures made by us in this report and in our other reports filed with theSecurities and Exchange Commission, or SEC, including our annual report on Form 10-Kfor the year ended December 31, 2007, filed with the SEC on March 31,2008 and subsequent reports on Form 8-K, which discuss our business ingreater detail.

 

In this report we make, and from time to timewe otherwise make, written and oral statements regarding our business andprospects, such as projections of future performance, statements of management’splans and objectives, forecasts of market trends, and other matters that areforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.Statements containing the words or phrases “will likely result,” “are expectedto,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,”“anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” orsimilar expressions identify forward-looking statements, which may appear indocuments, reports, filings with the Securities and Exchange Commission, newsreleases, written or oral presentations made by officers or otherrepresentatives made by us to analysts, stockholders, investors, newsorganizations and others, and discussions with management and other of ourrepresentatives. For such statements, we claim the protection of the safe harborfor forward-looking statements contained in the Private Securities LitigationReform Act of 1995.

 

Our future results, including results relatedto forward-looking statements, involve a number of risks and uncertainties. Noassurance can be given that the results reflected in any forward-lookingstatements will be achieved. Any forward-looking statement speaks only as ofthe date on which such statement is made. Our forward-looking statements arebased upon assumptions that are sometimes based upon estimates, data,communications and other information from suppliers, government agencies andother sources that may be subject to revision. Except as required by law, we donot undertake any obligation to update or keep current either (i) anyforward-looking statement to reflect events or circumstances arising after thedate of such statement, or (ii) the important factors that could cause ourfuture results to differ materially from historical results or trends, resultsanticipated or planned by us, or which are reflected from time to time in anyforward-looking statement.

 

In addition to other mattersidentified or described by us from time to time in filings with the SEC, thereare several important factors that could cause our future results to differmaterially from historical results or trends, results anticipated or planned byus, or results that are reflected from time to time in any forward-lookingstatement. Some of these important factors, but not necessarily all importantfactors, include those matters included in the section “Risk Factors” furtherbelow. Please also refer to the section “Risk Factors” in our annual report on Form 10-Kfor the year ended December 31, 2007 filed with the SEC on March 31,2008.

 

15

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

 

**Overview**

** **

Our operations currentlyconsist of three segments:

 

·                  Gaming machineparticipation, which focuses on our ownership of electronic gaming machines andgaming management systems placed in hotels and other venues throughout Asia ona revenue sharing basis;

 

·                  Table game products, whichfocuses on the design, manufacture and distribution of table game products,including traditional and RFID casino chips, automated shuffling devices, cardscanners and chip washers; and

 

·                  Non-gaming products, whichfocuses on the design, manufacture and sale of component parts primarily forthe automotive industry.

 

In September 2007, wecommenced our gaming machine participation operations pursuant to a SecuritiesPurchase and Product Participation Agreement (“Participation Agreement”) dated June 12,2007 between us and Elixir Group Limited. Since then our primary business focus has been on the ownership andleasing of electronic gaming machines (‘gaming machines”) and gaming managementsystems (“systems”) placed with venue owners on a revenue share basis acrossseveral countries in Asia where we or our affiliates have established astrategic presence.  Revenue from our electronic gaming machineparticipation operations comprised 18% of our total revenues for the threemonths ended March 31, 2008.

 

Our principal shareholder, Elixir GroupLimited (“Elixir Group”), a wholly-owned subsidiary of Melco InternationalDevelopment Limited, is our strategic partner in the electronic gaming machinebusiness.  Through its wholly-owned subsidiary, Elixir InternationalLimited, Elixir Group identifies and secures on our behalf venues for theplacement of electronic gaming machines and casino management systems, whichtrack game performance and provides statistics on each installed electronicgaming machine owned and leased by us.  We contract with the venue owner oroperator for the placement of the electronic gaming machines on a revenuesharing basis. Elixir Group assists the venue owner or operator with thelicensing and regulatory process, the physical design of the gaming floor andthe construction and installation of electronic gaming machines andsystems.  Elixir Group targets venues with no existing gaming operationsand offers a turn-key solution whereby a gaming floor is delivered in a fullyoperational state to the venue owner.  Elixir Group acquires and installsthe gaming machines, casino management systems and other gaming peripherals andupon completion of the set-up of the gaming floor, sells us the gaming machinesand systems and peripherals at its cost plus fifteen percent (15%).

 

**Results of Operations – For the Three Months Ended March 31, 2008and 2007:**

** **

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

 

16

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| ** **                          | ** ** | ** **                                           | ** ** | **Increase (Decrease)** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** | **Dollar**                   | ** ** | **%** | ** ** |
| ** **                          | ** ** | **2008**                                             | ** ** | **2007**                     | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Total:                              |       |                                                 |       |                         |       |   |   |   |   |
| Revenues                            |       | $                                                    | 2,931,523  |                         | $          | 3,386,900 |   | $ | (455,377 | ) | (13 | )% |
| Gross margin (loss)                 |       | $                                                    | (640,367   | )                            | $          | 305,640 |   | $ | (946,007 | ) | (310 | )% |
| Gross margin percentage             |       | (22                                                  | )%         | 9                            | %          | (31 | )% | (342 | )% |
| Operating loss                      |       | $                                                    | (6,502,366 | )                            | $          | (3,226,169 | ) | $ | (3,276,197 | ) | (102 | )% |
| Net loss                            |       | $                                                    | (5,301,550 | )                            | $          | (3,395,961 | ) | $ | (1,905,589 | ) | (56 | )% |
|                                |       |                                                 |       |                         |       |   |   |   |   |
| Basic and diluted loss per share    |       | $                                                    | (0.05      | )                            | $          | (0.10 | ) | $ | 0.05 |   | 50 | % |
| Weighted average shares outstanding |       | 114,923,562                                          |       | 32,359,950                   |       |   |   |   |   |
|                                |       |                                                 |       |                         |       |   |   |   |   |
| Gaming machine participation:       |       |                                                 |       |                         |       |   |   |   |   |
| Revenues                            |       | $                                                    | 518,617    |                         | $          | — |   | $ | 518,617 |   | 100 | % |
| Gross loss                          |       | $                                                    | (869,584   | )                            | $          | — |   | $ | (869,584 | ) | 100 | % |
| Gross margin percentage             |       | (168                                                 | )%         | —                       | %          | (168 | )% | 100 | % |
|                                |       |                                                 |       |                         |       |   |   |   |   |
| Table game products:                |       |                                                 |       |                         |       |   |   |   |   |
| Revenues                            |       | $                                                    | 680,030    |                         | $          | 1,956,023 |   | $ | (1,275,993 | ) | (65 | )% |
| Gross margin                        |       | $                                                    | 28,826     |                         | $          | 468,960 |   | $ | (440,134 | ) | (94 | )% |
| Gross margin percentage             |       | 4                                                    | %          | 24                           | %          | 34 | % | 144 | % |
|                                |       |                                                 |       |                         |       |   |   |   |   |
| Units sold:                         |       |                                                 |       |                         |       |   |   |   |   |
| Shufflers                           |       | 103                                                  |       | 10                           |       | 93 |   | 930 | % |
| DeckCheckers                        |       | —                                               |       | 6                            |       | (6 | ) | (100 | )% |
| ChipWashers                         |       | 1                                                    |       | 1                            |       | — |   | — |   |
| RFID chips                          |       | 53,400                                               |       | 677,000                      |       | 623,600 |   | (92 | )% |
|                                |       |                                                 |       |                         |       |   |   |   |   |
| Non-gaming products:                |       |                                                 |       |                         |       |   |   |   |   |
| Revenues                            |       | $                                                    | 1,732,876  |                         | $          | 1,430,877 |   | $ | 301,999 |   | 21 | % |
| Gross margin (loss)                 |       | $                                                    | 200,391    |                         | $          | (163,320 | ) | $ | 363,711 |   | (223 | )% |
| Gross margin percentage             |       | 12                                                   | %          | (11                          | )%         | 120 | % | (1,055 | )% |

 

Total revenues for the threemonths ended March 31, 2008 decreased from the corresponding period in theprior year due to a decrease in table game product sales as a result of reducedsales of RFID chips.  Sales of RFID chipsduring the three months ended March 31, 2007 were a result of new propertyopenings in Macau.  This decrease waspartly offset by increases in gaming machine participation revenue as a resultof the introduction of this segment in the third quarter of fiscal 2007.  Additionally, revenue from non-gamingproducts improved as a result of an increased order from our majorcustomer.  In the prior year our majorcustomer did not meet its internal targets, which had adverse effect on ourproduction and sales of non-gaming products.

 

Gross margin has decreasedprimarily as a result of our gaming machine participation operations.  As this business is in its infancy,depreciation on this line of business, which is recorded in costs of revenues,is higher than revenue earned.

 

Operating loss and loss pershare for the three months ended March 31, 2008 were impacted by ournegative gross margin and increased selling, general and administrativeexpenses, which increased due to increased management compensation.

 

17

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**Gaming Machine Participation**

 

In September 2007, we began our electronic gaming machineparticipation operations in Asia as part of our primary focus on placing gamingmachines on a revenue share basis. As of May 13, 2008 we had placed gamingmachines in 13 venues in the Philippines and Cambodia, in which 1,517 machineswere in service and generating revenue. The number of venues in Cambodia thatare in operation has fluctuated over the last several weeks with three venuestemporarily closed for various reasons, including the implementation of furtheroptimization strategies, which are expected to be operational later in thecurrent quarter. However, there can be no assurance that any or all of thesevenues will reopen.

 

We are currently undertaking a strategic review of the venues in whichwe have placed or are contracted to place gaming machines and we may seekto withdraw or withhold machines from those venues that are no longer consideredto be strategically desirable. Further, we are in active negotiations tostrengthen our contractual rights to monitor gaming machine performance andprocedures at numerous venues in Cambodia and Vietnam and we may seek toremove machines from those venues where the gaming venue license holder doesnot accept our business relationship parameters. We anticipate thatthese contractual negotiations will be completed by June 30, 2008.While it is our goal to resolve these issues in a manner that preserves andstrengthens each operating venue, there can be no assurance that we willcontinue our participation operations at all of these venues and some portfolioadjustments are more likely than not.

 

**Table Game Products**

** **

Table game products revenuedecreased primarily as a result of decreases in RFID chip revenue offset byincreases in Shuffler revenue.  RFID chiprevenue decreased $1,442,000 to $95,500 for the three months ended March 31,2008 compared to $1,537,600 in the corresponding period of the prior year dueto a decrease in large chip orders for new casino openings.  Shuffler revenue increased by approximately$465,400 to $508,500 for the three months ended March 31, 2008 compared to$43,200 in the corresponding period in the prior year. The increase inshuffler revenue is a result of the prior year roll out of our new line ofshufflers at low introductory or replacement prices and higher returns ofproduct during the three months ended March 31, 2007.

 

Our gross margin on tablegame products decreased in the three months ended March 31, 2008 over thecorresponding period of the prior year due to the increased sales through ourdistributor model.  In the fourth quarterof 2007, the Company completed the distribution of table game product sales toour distributor.  The sales price to ourdistributor is lower than to an end user, resulting in decreased margins.

 

**Non-Gaming Products**

** **

Non-gaming products revenue,which consists of automotive tooling and parts, increased in the three monthsended March 31, 2008 by $302,000 to $1,732,900 compared to $1,430,900 inthe corresponding period of the prior year.  The increase is related toincreased sales to our largest customer as they have increased their forecastfor the year.

 

Gross margins improved by$363,700 due to a change in certain material used in production resulting inreduced costs for one of our product lines. Additionally, with increased volume, we have achieved further improvementsin our production efficiencies.

 

18

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**Operating Expenses**

** **

The following is a scheduleshowing expenses on a consolidated basis:

 
| ** **                          | ** ** | ** **                                           | ** ** | **Increase (Decrease)** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** | **Dollar**                   | ** ** | **%** | ** ** |
| ** **                          | ** ** | **2008**                                             | ** ** | **2007**                     | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Selling, general and administrative |       | $                                                    | 3,339,267  |                         | $          | 2,561,916 |   | $ | 777,351 |   | 30 | % |
| Stock-based compensation expense    |       | 1,802,321                                            |       | 375,459                      |       | 1,426,862 |   | 380 | % |
| Research and development            |       | 323,721                                              |       | 262,758                      |       | 60,963 |   | 23 | % |
| Depreciation and amortization       |       | 231,120                                              |       | 331,676                      |       | (100,556 | ) | (30 | )% |
| Restructuring charges               |       | 165,570                                              |       | —                       |       | 165,570 |   | 100 | % |
|                                |       | $                                                    | 5,861,999  |                         | $          | 3,531,809 |   | $ | 2,330,190 |   | 66 | % |

 

**Selling, General andAdministrative Expense**

** **

During three months ended March 31,2008, selling, general and administrative expenses increased $777,350 which isprimarily due to increased salaries and wages expense of $452,700 as a resultof an expanded senior management team. Additionally, travel expense increased by $83,900 due to the expansionof international office locations, insurance costs increased by $41,800 as aresult of increases in coverage of property and equipment and increased cost ofDirectors and Officers insurance, bad debt expense increased by $135,800 due tothe pulling of gaming licenses in U.S. jurisdictions and investor relationsexpense increased by $87,600 due to increased filings.

 

**Stock-Based Compensation Expense**

** **

Stock-based compensationexpensed increased by $1,427,000 to $1,802,000 for the three months ended March 31,2008, compared to $375,500 in the corresponding period of the prior year due toadditional stock option grants issued to executive management and otheremployees.

 

**Research and Development Expenses**

** **

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

 

**Depreciation and AmortizationExpenses**

** **

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

 

**Restructuring Charge**

** **

During the first quarter ended March 31, 2008, we moved ourcorporate offices and ceased use of a warehouse.  In accordance with Statement of AccountingStandards (“SFAS”) No. 146, *Accounting for CostAssociated with Exit or Disposal Activities*, the Company incurredrestructuring charges of $165,600 for operating leases the Companyceased use of during the three months ended March 31, 2008.  The liability was calculated based upon theremaining lease rentals, reduced by a combination of actual sublease rentalsand estimated sublease rentals and recorded at fair value.

 

19

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**Other Income (Expenses):**

 
| ** **                                            | ** ** | ** **                                           | ** ** | **Increase/(Decrease)** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **Three Months Ended March 31,** | ** ** | **Dollar**              | ** ** | **%** | ** ** |
| ** **                                            | ** ** | **2008**                                             | ** ** | **2007**                | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Interest expense and finance fees |       | $                                                    | (54,287    | )                       | $          | (671,111 | ) | $ | 616,824 |   | (92 | )% |
| Interest income                                       |       | 366,751                                              |       | 13,872                  |       | 352,879 |   | 2,544 | % |
| Foreign currency gains                                |       | 839,966                                              |       | —                  |       | 839,966 |   | 100 | % |
| Patent sale and other                                 |       | 80,527                                               |       | 487,447                 |       | (406,920 | ) | (83 | )% |
|                                                  |       | $                                                    | 1,232,957  |                    | $          | (169,792 | ) | $ | 1,402,749 |   | 826 | % |

 

**Interest Expense and Finance Fees**

** **

The decrease in interestexpense and finance fees was due to the lower average principal balance onnotes payable in the three months ended March 31, 2008 versus thecorresponding period in the prior year as a result of the pay-off of $11.0million in long-term debt in November 2007.

 

**Interest Income**

** **

Interest income increased asa result of the increase in our cash and cash equivalents held in overnightmoney market accounts.  Cash in bankincreased by $42.0 million to $46.7 million from March 31, 2007 to March 31,2008.

 

**Foreign Currency Transactions**

** **

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

 

**Patent Sale and Other**

** **

In the three months ended March 31,2007, we recorded a $0.5 million gain on the sale of our intellectual propertyrelated to our previously discontinued Secure Drop product line.

 

In the three months ended March 31,2008, we recorded $0.09 million income related to a grant from the AustralianFederal Government.

 

**FINANCIAL CONDITION**

** **

**Liquidityand Capital Resources**

** **

As of March 31, 2008,we had total cash and cash equivalents of $46.7 million and working capital of$36.4 million.  The working capital included$10.0 million of related party trade payables, the current portion of $18.5 milliondue to Elixir International.  The total$18.5 million due to Elixir International includes $15.0 million drawn on atrade credit facility agreement.

 

On April 21, 2008, weentered into a Trade Credit Facility Agreement (the “Facility Agreement”) withElixir International.  Pursuant to the FacilityAgreement, Elixir International may, from time to time at its option, providetrade credits to us for our purchase of electronic gaming machines from ElixirInternational in exchange for our issuance of unsecured notes to ElixirInternational bearing interest at a fixed rate of eight percent (8.0%) perannum.  Title of any gaming machinesoffered in exchange for the notes passes to the Company upon issuance of thenotes.

 

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

 

We are obligated to repaythe principal, plus any accrued interest thereon, of the Initial Advance in 24equal monthly installments after the date of issue.  However, the Initial Advance is subject todemand by Elixir International for immediate payment of any outstanding sumsowed to Elixir International if there is either an event of default or a changeof control defined in the Facility Agreement. Any further notes, if issued, will be subject to demand by ElixirInternational for immediate payment of any outstanding sums owed to ElixirInternational at anytime and at the sole discretion of Elixir International.

 

The Facility Agreement doesnot include a commitment on the part of Elixir International and all furtherborrowings by us are subject to the approval of Elixir International at itssole discretion.  There can be no assuranceof any further amount of credit obtainable by the Company under the FacilityAgreement.

 

We believe all current obligationscan be satisfied with cash on hand and cash expected to be generated formoperations during fiscal 2008.

 

Our working capital needsfor the foreseeable future will be driven primarily by our purchase of gamingmachines and systems leased by us on a revenue sharing basis throughoutAsia.  We believe in order to fund ourprojected placements of gaming machines we will need to raise further financingof at least $40.0 million of capital over the next 12 months.  We believe we could potentially obtain financingfrom Elixir International under the Facility Agreement for the purchase of someof these gaming machines and casino management systems.  We will consider raising additional fundsthrough various financing sources, including the sale of our equity and debtsecurities and the procurement of commercial debt financing. However, there 

 

20

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can be no guarantees thatsuch funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable toexpand or continue our business as desired and operating results may beadversely affected. Any debt financing will increase expenses and must berepaid regardless of operating results and may involve restrictions limitingour operating flexibility. If we issue equity securities to raise additionalfunds, the following results may occur:

 

·                  the percentage ownership of our existingstockholders will be reduced;

·                  our stockholders may experience additionaldilution in net book value per share; or

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

 

**Cash Flows Summary**

** **
| ** **                  | ** ** | **Three Months Ended March 31,** | ** **  | ** ** | ** ** |
|-----------------------------|------------|------------------------------------------------------|-------------|------------|------------|
| ** **                  | ** ** | **2008**                                             | ** **  | **2007**   | ** ** | **Increase(Decrease)** | ** ** |
| Cash provided by (used in): |       |                                                 |        |       |       |   |   |
| Operations                  |       | $                                                    | (5,704,023  | )          | $          | (2,334,449 | ) | $ | (3,369,574 | ) |
| Investing                   |       | (15,885,159                                          | )           | (93,259    | )          | (15,791,900 | ) |
| Financing                   |       | (31,927                                              | )           | 6,737,871  |       | (6,769,798 | ) |
|                        |       | $                                                    | (21,621,109 | )          | $          | 4,310,163 |   | $ | (25,931,272 | ) |

 

**Operations**

** **

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

 

**Investing**

** **

Cash used in investingactivities increased as a result of payments made on the purchase of gamingmachines and systems from Elixir International.  Gaming machines andsystems in the amount of $39.2 million were purchased in fiscal 2007 andpayments of $15.7 million were made in the three months ended March 31,2008.

 

**Financing**

** **

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

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

** **

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

 

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

 

21

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**Goodwill and Intangible Assets**

** **

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

 

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

 

**Inventory**

** **

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

 

**Consignment Inventory**

** **

During the three monthsended March 31, 2008, we transferred to our distributor $754,864 ofservice supplies and parts on consignment in addition to the $65,908 shipped in2007, which is recorded as inventory at March 31, 2008.  Revenue isnot recognized, and the inventory remains ours, until ownership of the productand title passes to the distributor which occurs upon the distributor’s use ofthe products or sales to third-party customers.

 

**Gaming Machines and Systems**

** **

Gaming machines and systemsare stated at cost.  We depreciate gaming machines and systems over afive-year useful life to a minimal salvage value once placed in service.

 

**Property and Equipment**

** **

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

 

**Revenue Recognition**

** **

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

 

·                  persuasive evidence of an arrangement exists;

·                  the price to the customer is fixed anddeterminable;

·                  delivery has occurred and any acceptanceterms have been fulfilled;

·                  no significant contractual obligationsremain; and

·                  collection is reasonably assured.

 

22

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*Gaming and Non-Gaming Products Revenues*

* *

We recognize revenue from the sale of our products to end users uponshipment against customer contracts or purchase orders. Revenue from shufflerrentals is recorded at the first of each month in accordance with rentalcontract terms.  We completed our transition to outsourcing all futuresales to third-party distributors during the fourth quarter 2007 and will no longerrecord rental revenue on our table game products.

 

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

 

*Participation Revenues*

* *

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

 

**Stock-Based Compensation**

** **

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

 

**Income Taxes**

** **

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

 

Significant judgment isrequired in evaluating our tax positions and determining our provision forincome taxes. During the ordinary course of business, there are manytransactions and calculations for which the ultimate tax determination isuncertain. Effective January 1, 2007, we adopted the provisions of FIN No. 48,Accounting for Uncertainty in Income Taxes and Interpretation of FASB StatementNo. 109, which contains a two-step approach to recognizing and measuringuncertain tax positions accounted for in accordance with SFAS No. 109. Thefirst step is to evaluate the tax position for recognition by determining ifthe weight of available evidence indicates it is more likely than not that theposition will be sustained on audit, including resolution of related appeals orlitigation processes, if any. The second step 

 

23

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is to measure the taxbenefit as the largest amount which is more than 50% likely of being realizedupon ultimate settlement. We consider many factors when evaluating andestimating our tax positions and tax benefits, which may require periodicadjustments and which may not accurately anticipate actual outcomes.

 

We are subject to income taxexamination by tax authorities in jurisdictions in which we operate. There arecurrently no income tax returns under examination by the Internal RevenueService or any other major tax authorities.

 

*Recently Issued AccountingStandards*

* *

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

 

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

 

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

 

**ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**.

 

Not applicable.

 

## **ITEM 4.          CONTROLSAND PROCEDURES**

## ** **

(a)  *Evaluation of Disclosure Controls andProcedures*.

 

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Our management, with the participation of our chief executive officerand chief financial officer, evaluated the effectiveness of our disclosurecontrols and procedures pursuant to Rule 13a-15 under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). The term “disclosurecontrols and procedures” refers to the controls and procedures of our companythat are designed to ensure that information required to be disclosed by us inthe reports that we file under the Exchange Act is recorded, processed,summarized and reported within the time periods specified by the Securities andExchange Commission’s rules and forms, and that such information isaccumulated and communicated to our management, including our chief executiveofficer and chief financial officer, as appropriate, to allow timely decisionsregarding required disclosures.  In designing and evaluating thedisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives. In addition,the design of disclosure controls and procedures must reflect the fact thatthere are resource constraints and that management is required to apply itsjudgment in evaluating the benefits of possible controls and procedures relativeto their costs.

 

During the first quarter 2008, we became aware that a significantnumber of gaming machines were purchased by us and placed in various gamingvenues throughout Cambodia in the fourth quarter of 2007 without properreporting to personnel within our accounting department.  This representeda break down in the operation of our internal control over fixed assetacquisitions in that purchase orders and shipping documents were not properlyobtained and forwarded to the accounting department to ensure proper financialstatement recordation in a timely manner.  These events represent amaterial weakness in our internal control over financial reporting at December 31,2007, as reported in our 2007 Form 10-K filed with the SEC on March 31,2008.  However, we mitigated the riskassociated with this material weakness by performing a full count of thesefixed assets and verifying through examination of shipping documents andinvoices that these assets were purchased by us and placed in the gaming venuesprior to their relevant balance sheet date.

 

After reporting the material weakness on March 31, 2008, weimplemented new controls and procedures to correct the material weakness,including informing Elixir International that product orders are only valid ifsigned by our chief financial officer and that the only valid form of a productorder is that generated by our accounting department from the Oracle financialreporting system.  However, as thematerial control weakness was identified during the first quarter of 2008, wepurchased electronic gaming machines prior to these changes taking effectwithout financial statement recordation occurring in a timely manner.  The acquisition of these games represents amaterial weakness in our internal control over financial reporting at March 31,2008.  However, we again mitigated therisk associated with this material weakness by performing a full count of thesefixed assets on or around March 31, 2008.  Notwithstanding our subsequentverification that the gaming machines were acquired during their relevantreporting period, based on the foregoing, our management, including, our chiefexecutive officer and chief financial officer, concluded that our disclosurecontrols and procedures were not effective as of March 31, 2008.

 

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

 

In order to address the material weakness described above which wasidentified during the first quarter, we have subsequently implemented newprocedures in respect to acquisition of gaming machines.

 

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# **PART II – OTHER INFORMATION**

# ** **

**ITEM 1A.****              ****RISK FACTORS**

 

***We have a history of significantoperating losses and anticipate continued operating losses for at least thenear term.*** Forthe three months ended March 31, 2008 and 2007, we have incurred netlosses of $5,301,550 and $3,395,961, respectively, and our operations have used$5,704,023 and $2,334,449 of cash, respectively. As of March 31, 2008, wehad an accumulated deficit of $332,857,965. We expect to continue to experiencenegative cash flows from operations until such time as we are able tosubstantially increase revenues and control expenses to levels that will allowus to operate on a positive cash flow basis. While management will endeavor togenerate positive cash flows from our placement of electronic gaming machinesin Asia pursuant to the Participation Agreement, there can be no assurance thatwe will be successful in generating positive cash flows from operations.

 

***The transactions under theParticipation Agreement with Elixir Group represent a material change in ourbusiness model, and that business model has not been proven by us.*** On September 10, 2007, we closed on thetransactions pursuant to the Participation Agreement with Elixir Group. Ourdecision to pursue the transactions under the Participation Agreement, andspecifically our decision to issue the significant equity to Elixir Group basedupon the resulting placement of electronic gaming machines, was based in largepart on certain pro forma financial projections and underlying forecasts andassumptions concerning future events and circumstances, including, but notlimited to, Elixir Group’s ability to source and identify venue owners in thegeneral Asia market with which we might place electronic gaming machines andthe commercial success of those machines, which our management believed to besignificant to our future operations under the Participation Agreement. Someassumptions will invariably not materialize and some unanticipated events andcircumstances occurring subsequently may affect other assumptions. Therefore,the actual results achieved may vary from the pro forma projections consideredby our management, and the variations may be material. No assurance can begiven that our future results of operations under the Participation Agreementwill meet with consumer acceptance or market success.

 

***Our revenues from our gamingmachine participation operations are difficult to predict and may vary from ourprojections because the business model is new and the venues are not operatedby us****.*  In connection with our ParticipationAgreement with Elixir Group, our primary focus now is on the ownership andleasing of gaming machines on a revenue sharing basis across several countriesin Asia.  In association with Elixir Group, we focus on targeting venueowners in underserved gaming markets who have little or no gaming operations orexperience.  Since we participate on a revenue sharing basis with thesevenue owners or operators, our revenue generated from the revenue sharingarrangements will be dependent to a significant degree on the efforts andcapabilities of the venue owners or operators.  Our revenues and resultsof operations from our gaming machine participation may be difficult to predictand may vary depending on the ability of the venue owners or operators tomanage the gaming operations of their venues.  Accordingly, there can beno guarantee that the venue owners or operators will be able to manage thegaming operations successfully or that the gaming venues operated by them willperform at levels consistent with our financial projections and underlyingforecasts and assumptions. Further we have very limited past businessrelationships with the venue owners or operators and assume that the venue ownersor operators are reputable. In the event that any of the venue owners or operatorsare not reputable this would expose us to the risk of being unable to collectthe revenue to which we are entitled under the revenue share arrangement andprotect our gaming machine assets (all of which are not insured). The risk ofcollecting the revenue rightfully due under the revenue share arrangement andprotecting our gaming machine assets is heightened where delays are experiencedby Elixir Group in installing a casino management system once a venue is inoperation.

 

***We will require additional funding in the future to continue to operateour business.***   As of March 31, 2008 we hadworking capital of $36.4 million. We believe in order to fund ourprojected placements of gaming machines we will need to raise further financingof at least $40.0 million of capital over the next 

 

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12 months.  On April 21, 2008, we entered into atrade credit facility agreement with Elixir International.  This agreement provides a formal structurewhere we, from time to time, may borrow on trade credits for the payment ofgaming machines and systems.  However,Elixir International is under no obligation to advance us additional creditunder the trade credit facility agreement and there can be no assurance we willreceive a meaningful amount of credit from Elixir International under theagreement.  We will consider raisingadditional funds through various financing sources, including the sale of ourequity and debt securities and the procurement of commercial debt financing.However, there can be no guarantees that such funds will be available oncommercially reasonable terms, if at all.  If such financing is notavailable on satisfactory terms, we may be unable to expand or continue ourbusiness as desired and operating results may be adversely affected. Any debtfinancing will increase expenses and must be repaid regardless of operatingresults and may involve restrictions limiting our operating flexibility. If weissue equity securities to raise additional funds, the following results mayoccur:

 

·      the percentage ownership of our existingstockholders will be reduced;

·      our stockholders may experience additionaldilution in net book value per share; or

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

 

***Our shareholders will undergosignificant equity dilution pursuant to the transactions completed by theParticipation Agreement****.* According to theterms of the Participation Agreement, Elixir Group has the right to “earn-in”an equity interest in our company based on the achievement of variousperformance milestones in terms of the cumulative number of the electronicgaming machines that are contracted to be placed and actually placed by us withvenue owners sourced and identified by Elixir Group. At the initial closing ofthe transaction under the Participation Agreement, we issued to Elixir Group25,000,000 common shares and warrants, with an exercise price of $2.65 pershare, to purchase up to 88,000,000 additional shares of our commonstock.  Elixir Group is entitled to earn a total of 55,000,000 shares ofour common stock (inclusive of the 25,000,000 shares issued at the initialclosing and the 15,000,000 shares issued on September 13, 2007), and thewarrants will vest and become exercisable subject to achieving certainperformance milestones with respect to the cumulative number of gaming machinesunder contract and gaming machines in operation. Our issuance of equity toElixir Group pursuant to the Participation Agreement will result in significantequity dilution to our shareholders.

 

In December 2007, Elixir Group sold10 million of the 88 million warrants issued under the ParticipationAgreement to certain accredited investors who immediately exercised the10 million warrants. Pursuant to the Securities Amendment and ExchangeAgreement (“Exchange Agreement”) with Elixir Group dated October 21, 2007,we have agreed to issue shares of our common stock in exchange for Elixir Group’scancellation of the remaining 78 million warrants issued under theParticipation Agreement, at an exchange ratio of one common share for every 2.5outstanding warrants. As of May 10, 2008, we have issued 4.8 millionshares of our common stock in exchange for Elixir Group’s cancellation of 12million of its outstanding vested warrants. We have also agreed to issue up to26.4 million shares of our common stock in exchange for Elixir Group’scancellation of 66 million of its outstanding unvested warrants, subject to thevesting of such warrants.

 

***The accounting treatment for thetransactions under the Participation Agreement will negatively impact ourreportable net results over the life of the gaming machine lease agreementsthat relate to the equity earned by Elixir Group****.* Our issuance of common shares and warrantsto Elixir Group under the Participation Agreement is accounted for under EITF No. 96-18,*Accounting for Equity Instruments that are Issuedto Other than Employees for Acquiring, or in Conjunction with Selling, Goods orServices*, which addresses the accounting for, among other things,the issuance of equity in exchange for services rendered. As electronic gamingmachines are placed with venue owners in satisfaction of the performancemilestones set forth in the Participation Agreement, and Elixir Group earnsequity thereby, we will record contract acquisition fees and additionalpaid-in-capital, in the dollar amounts of shares earned using the 

 

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values of the shares earned based on marketprices as of the dates of placement. Assuming Elixir Group achieves all theremaining performance milestones under the Participation Agreement, earns theremaining 15,000,000 common shares and the 66 million warrants become vestedand immediately exchanged for 26.4 million common shares under the ExchangeAgreement and assuming a $3.00 per share price we would realize approximately$124.2 million in non-cash charges to our statement of operations.  Although this amount is a non-cash charge and would not negatively impact cashflows from operations or EBITDA, the charges will materially negatively impactour reportable net profits/(losses) from operations.

 

***Elixir Group holds a significantinterest in our common stock, giving Elixir Group the power to control our managementand all shareholder actions.*******As a result of thetransactions consummated under the Participation Agreement, our company hasundergone a change in control in which Elixir Group now holds a significantinterest in our company. As of May 10, 2008, Elixir Group owns 45.8million shares of our common stock, representing 39.8% of our issued andoutstanding common shares, and has the right to earn another 15 million commonshares under the Participation Agreement and another 26.4 million shares underthe Exchange Agreement with Elixir Group dated October 21, 2007.Accordingly, Elixir Group effectively controls our management and all mattersrequiring approval by our shareholders, including the ability to control ourboard of directors and effect the approval of mergers and other significantcorporate transactions. This concentration of ownership will make it difficultfor other shareholders to effect substantial changes in our company, and alsowill have the effect of delaying, preventing or expediting, as the case may be,a further change in control of our company.

 

***The interests of Elixir Group mayconflict with the interests of our other shareholders****.* Elixir Group, as our principal shareholder,effectively controls all matters submitted for shareholder approval and hascontrol over our management and affairs. We routinely enter into related partytransactions with Elixir Group and its wholly-owned subsidiary, ElixirInternational Limited, including:

 

·      Our purchase of electronic gaming machinesfrom Elixir Group and/or Elixir International at a price equal to Elixir Group’sand/or Elixir International’s cost plus 15%;

·      Our reimbursement of Elixir Group or ElixirInternational for its costs actually incurred in the set-up of our gamingoperations in amounts equal to Elixir Group’s or Elixir International’sout-of-pocket costs plus 15%; and

·      Our issuance of unsecured notes to Elixir Internationalfor the purchase of electronic gaming machines bearing interest at the rate of8% per annum.

 

We cannot assure you that the interests ofElixir Group will coincide with the interests of our other shareholders.Although our board of directors has created a conflicts and compliancecommittee, made up exclusively of directors independent of Elixir Group, withveto rights over certain transactions between us and Elixir Group, incircumstances involving a conflict of interest between Elixir Group, on the onehand, and our company or the other shareholders, on the other, we can give noassurance that Elixir Group would not exercise its power to control us in amanner that would benefit Elixir Group to the detriment of our othershareholders.

 

***We rely on distributorsexclusively in all our markets for sales of our table games products and ourlimited sales experience in foreign countries could cause us to lose sales.*****All sales of our products are achievedthrough distributor relationships, including our arrangements with Elixir Groupand Suzo Happ Group. We believe the distributors that we have engaged areexperienced and reputable; however, if we are unable to manage theserelationships, our ability to generate revenue and profits in may be adverselyaffected.

 

***Our growth into markets outsidethe United States exposes us to risks inherent in international businessoperations.*******We intend to market ourgaming machine participation business and sell our table game products outsidethe United States. We intend to focus our sales efforts in Asia, but our 

 

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international expansion efforts may not besuccessful. Our international operations expose us to risks and challenges thatwe would otherwise not face if we conducted our business only in the UnitedStates, such as:

 

·      increased cost of enforcing our intellectualproperty rights;

·      heightened price sensitivity from customersin emerging markets;

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

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

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

·      foreign currency fluctuations;

·      laws favoring local competitors;

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

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

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

·      changing regional economic and politicalconditions.

 

***We may be unable to adequatelyprotect our intellectual property rights.*** Our success in businesses other than gamingmachine participation is impacted by maintaining the confidentiality andproprietary nature of our intellectual property rights. Our ability to competemay be damaged, and our revenues may be reduced if we are unable to protect ourintellectual property rights adequately. To protect these rights, we relyprincipally on a combination of:

 

·      contractual arrangements providing fornon-disclosure and prohibitions on use;

·      patents and pending patent applications;

·      trade secret, copyright and trademark laws;and

·      certain built-in technical product features.

 

Patent, trade secret, copyright and trademarklaws provide limited protection. The protections provided by laws governingintellectual property rights do not prevent our competitors from developing,independently, products similar or superior to our products and technologies.In addition, effective protection of copyrights, trade secrets, trademarks, andother proprietary rights may be unavailable or limited in certain foreigncountries. We may be unaware of certain non-publicly available patentapplications, which, if issued as patents, could relate to our services andproducts as currently designed or as we may modify them in the future. Legal orregulatory proceedings to enforce our patents, trademarks or copyrights couldbe costly, time consuming, and could divert the attention of management andtechnical personnel.

 

***It is possible that our productsexcluding our gaming machine participation business will be the subject offuture patent litigation if the products are sold and installed in the UnitedStates and, if commenced, could subject us to continuing litigation costs andrisks.*** To theextent that we introduce new products that incorporate the same or similartechnology, it is possible that a competitor will bring one or more claimsagainst us seeking damages, injunctive or other equitable relief, or both. Wecannot predict the outcome of any present or future litigation that may occur.

 

If our future products incorporatetechnologies that infringe the proprietary rights of third parties and we donot secure licenses from them, we could be liable for substantial damages thatwould cause a material reduction in revenues and impair our prospects forachieving growth and profitability.

 

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In furtherance of the development of ourservices or products, we may need to acquire licenses for intellectual propertyto avoid infringement of third party rights or claims of infringement. Theselicenses may not be available on commercially reasonable terms, if at all.Claims for infringement, if made, could damage our business prospects, ourresults of operations and financial condition, whether or not the claims havemerit, by:

 

·      consuming substantial time and financialresources required to defend against them;

·      diverting the attention of management fromgrowing our business and managing operations;

·      resulting in costly litigation; and

·      disrupting product sales and shipments.

 

If any third party prevails in an actionagainst us for infringement of its proprietary rights, we could be required topay damages and either enter into costly licensing arrangements or redesign ourproducts so as to exclude the infringing technology. As a result, we wouldincur substantial costs and delays in product development, sales and shipments,our revenues may decline substantially and we may not be able to achieve thegrowth required for us to achieve profitability.

 

***Our board of directors may issueblank check preferred stock, which may affect the voting rights of our holdersand could deter or delay an attempt to obtain control of us.*******Our board of directors is authorized, withoutstockholder approval, to issue preferred stock in series and to fix and statethe voting rights and powers, designation, preferences and relative,participating, optional or other special rights of the shares of each suchseries and the qualifications, limitations and restrictions thereof. Preferredstock may rank prior to our common stock with respect to dividends rights,liquidation preferences, or both, and may have full or limited voting rights.Accordingly, issuance of shares of preferred stock could adversely affect thevoting power of holders of our common stock and could have the effect ofdeterring or delaying an attempt to obtain control of us.

 

## **ITEM6.  EXHIBITS**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                              | ** ** | **Method of Filing**                                                                                                 |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|
| 10.1             |       | Trade Credit Facility Agreement dated April 21,  2008 between the registrant and Elixir International Limited.                                                          |       | Incorporated by reference from the registrant’s  annual report on Form 10-K/A filed on April 29, 2008 |
|             |       |                                                                                                                                                                         |       |                                                                                                                 |
| 31.1             |       | Certifications Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                              |       | Filed electronically herewith                                                                                        |
|             |       |                                                                                                                                                                         |       |                                                                                                                 |
| 31.2             |       | Certifications Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                              |       | Filed electronically herewith                                                                                        |
|             |       |                                                                                                                                                                         |       |                                                                                                                 |
| 32.1             |       | Certification of Principal Executive Officer and  Principal Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |       | Filed electronically herewith                                                                                        |

 

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**SIGNATURES**

 

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

 
| ** ** | ** ** | ** **         | **ELIXIR GAMING TECHNOLOGIES, INC.** |
|------------|------------|--------------------|--------------------------------------|
|       |       |               | (Registrant)                         |
|       |       |               |                                 |   |
| Date:      |       | May 14,  2008 | By:                                  |   /s/  Gordon Yuen |
|       |       |               |                                 |   Gordon  Yuen |
|       |       |               | Its:                                 |   President, Chief Executive Officer |
|       |       |               |                                 |   |
|       |       |               |                                 |   |
| Date:      |       | May 14,  2008 | By:                                  |   /s/  David R. Reberger |
|       |       |               |                                 |   David R. Reberger |
|       |       |               | Its:                                 |   Chief Financial Officer |

 

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