**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
        10-K**





x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
      the fiscal year ended December 31, 2007**


OR





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




**For
      the transition period from
      _____________________to______________________**





Commission
      File Number: 000-51572











**PokerTek,
                Inc.**


*(Exact
      name of registrant as specified in its charter)*


**North
                Carolina**
            
            **61-1455265**(State
                or other jurisdictionof
                incorporation or organization)
            
            (I.R.S.
                EmployerIdentification
                No.)




**1150
                Crews Road, Suite F, Matthews, North Carolina
                28105**(Address
                of principal executive offices) (Zip
                Code)




**(704)
      849-0860**


(Registrant’s
                telephone number, including area
                code)





**Securities
      registered pursuant to Section 12(b) of the Act:**


Title
                of each class
            
            Name
                of each exchange on which registeredCommon
                Stock, no par value
            
            The
                NASDAQ Stock Market LLC





**Securities
      registered pursuant to Section 12(g) of the Act:** None





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes
o No
x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes
o No
x





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





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o





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


oLarge accelerated filer
              
              oAccelerated
                fileroNon-accelerated filer (do not check if a smaller reporting
                company)
              
              xSmaller reporting company





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





The
      aggregate market value of the common equity held by non-affiliates of the
      registrant as of June 30, 2007 was $59,064,416 based upon the last reported
      sale
      price on the NASDAQ Global Market on June 29, 2007.





On
      March
      26, 2008, there were 10,934,464 outstanding shares of the registrant’s common
      stock.





**DOCUMENTS
      INCORPORATED BY REFERENCE**




Certain
      portions of our Proxy Statement for the 2008 Annual Meeting of Shareholders
      have
      been incorporated by reference into Part III of this Annual Report on Form
      10-K.







**TABLE
      OF CONTENTS**




**Page**Cautionary
                Note Regarding Forward-Looking Statements
            
            ii**PART
                I**Item 1.
            
            Business
            
            1Item
                1A.
            
            Risk
                Factors
            
            8Item
                1B.
            
            Unresolved
                Staff Comments
            
            13Item
                2.
            
            Properties
            
            13Item
                3.
            
            Legal
                Proceedings
            
            14Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            14**PART
                II**Item
                5.
            
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            
            15Item
                6.
            
            Selected
                Financial Data
            
            16Item
                7.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            16Item 7A.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            24Item
                8.
            
            Financial
                Statements and Supplementary Data
            
            24Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            24Item
                9A (T).
            
            Controls
                and Procedures
            
            24Item
                9B.
            
            Other
                Information
            
            26**PART
                III**Item
                10.
            
            Directors,
                Executive Officers and Corporate Governance
            
            27Item
                11.
            
            Executive
                Compensation
            
            27Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            27Item
                13.
            
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            27Item 14.
            
            Principal
                Accounting Fees and Services
            
            27**PART
                IV**Item
                15.
            
            Exhibits,
                Financial Statement Schedules
            
            28Signatures
            
            29Exhibit
                Index




(i)


**Cautionary
      Note Regarding Forward-Looking Statements**





This
      annual report on Form 10-K contains forward-looking statements within the
      meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange
      Act”), as amended. These forward-looking statements are made under the
      provisions of The Private Securities Litigation Reform Act of 1995. In some
      cases, words such as “may,” “will,” “could,” “would,” “should,” “expect,”
“intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,”
“potential,” “continue,” “ongoing” or other comparable words identify
      forward-looking statements. Our actual results, performance or experience may
      differ materially from those expressed or implied by forward-looking statements
      as a result of many factors, including our critical accounting policies and
      risks and uncertainties related, but not limited to: overall industry
      environment, customer acceptance of our products, delay in the introduction
      of
      new products, further approvals of regulatory authorities, adverse court
      rulings, production and/or quality control problems, the denial, suspension
      or
      revocation of permits or licenses by regulatory or governmental authorities,
      termination or non-renewal of customer contracts, competitive pressures and
      general economic conditions and our financial condition. These and other risks
      and uncertainties are described in more detail under the caption “Risk Factors”
in Item 1A of Part I of this annual report on Form 10-K and other reports that
      we file with the Securities and Exchange Commission. As a result of these risks
      and uncertainties, the results or events indicated by these forward-looking
      statements may not occur. We caution you not to place undue reliance on any
      forward-looking statement.





Forward-looking
      statements speak only as of the date they are made and should not be relied
      upon
      as representing our views as of any subsequent date. We undertake no obligation
      to update or revise such statements to reflect new circumstances or
      unanticipated events as they occur, except as required by applicable laws,
      and
      you are urged to review and consider disclosures that we make in the reports
      that we file with the Securities and Exchange Commission that discuss other
      factors germane to our business.




(ii)


**PART
      I**




**Item
      1.**  **Business.**





PokerTek,
      Inc. is engaged in the development, manufacture and marketing of electronic
      poker-related products for use in the gaming and amusement markets.





We
      currently have two product lines, PokerPro® gaming products and Heads-Up
      ChallengeTM amusement products. The PokerPro system is an electronic poker table
      that provides a fully-automated poker-room environment to tribal casinos,
      commercial casinos, cruise ships and card clubs. The Heads-Up Challenge World
      Series of Poker® edition is an innovative heads-up amusement device that enables
      two players to compete against each other in a game of Texas Hold’em poker for
      entertainment purposes in non-gambling venues such as bars and
      restaurants.





During
      2007, we made several announcements related to significant customer
      installations, including our announcement of the world’s largest automated poker
      room - running exclusively on PokerTek poker tables - at Four Winds Casino
      Resort and the installation of PokerPro tables in the Galaxy StarWorld Hotel
      and
      Casino in Macau, the world’s largest gaming market. We also formally unveiled
      the Heads-Up Challenge amusement product at the World Series of Poker in Las
      Vegas.





As
      of
      December 31, 2007 we had 13 gaming customers at 66 sites in the United States,
      Canada, Macau, Panama, Germany, Australia, South Africa and several major cruise
      lines. We work with and support customers in the United States, Canada and
      cruise line markets, while Aristocrat International Pty. Limited (“Aristocrat”),
      our international distributor and a significant shareholder, works with and
      provides support to customers in the remaining markets.




**PokerPro
      Gaming Products**





***Overview.*** Poker
      is
      one of several card games in which two or more players strategically bet against
      each other. Many casinos and card clubs operate poker rooms that typically
      consist of tables at which up to 10 players play any of several types of poker
      against the other players at the table. A dealer employed by the casino or
      card
      club is responsible for dealing cards, calculating bets, distributing payouts
      and collecting the amount the casino or card club charges as a service fee.
      Unlike most other games played at a casino, where the casino may win the full
      amount of a player’s bet, the casino or card club’s revenue from the poker room
      is limited to a service fee, typically a small amount taken from each pot (the
      “rake”) or a fixed amount charged at a regular interval. Accordingly, poker
      typically generates lower relative profits for the casino operator than slot
      machines and other table games. Our gaming products seek to improve the
      profitability of poker by enhancing the operator’s revenue opportunities while
      decreasing their startup and operating costs.





The
      PokerPro system is an automated poker table with electronic components that
      allows players to play against one another in a game of poker using electronic
      cards and chips. We originally introduced a 10-seated table which has the look
      of a traditional poker table, and in November 2006 introduced a 2-seated
      version. Each player position has a touch screen monitor to view their cards,
      chips and other game information. The players use their touch screen monitor
      to
      input game decisions such as betting, checking and folding. In the center of
      the
      table is an LCD video screen which displays information such as chips bet by
      each player, total pot or pots and community cards dealt. Electronic cards
      are
      dealt to the players by a central server, which is physically separate from
      the
      table.





In
      addition to the table, the PokerPro system comes with a Cashless Wagering System
      (“CWS”), which creates and maintains player accounts and transacts cash-in and
      cash-out functions. A player who wants to play on the PokerPro system must
      first
      establish an account in the CWS and receive an account card. If a table position
      is open and available, the player can insert the account card into the PokerPro
      table and begin playing. If the tables are full, the player can use an automated
      kiosk to get on a waiting list for the game they want to play. There is a
      waiting list display which indicates where a player is in the queue and when
      a
      position becomes available, directs the player to the appropriate table.





The
      PokerPro system also has administrative tools which are designed to allow casino
      management to stop, start and monitor the poker games in progress. They allow
      management to change the type of poker being played, the betting limits and
      the
      number of players required to start a poker game. The administrative tools
      are
      also designed to track statistics about game play and specific players, such
      as
      the number of games being played per hour and the average pot size of each
      game.




1





The
      PokerPro system currently allows players to play limit and no-limit Texas
      Hold’em in both ring/cash games, single table and multi-table tournaments. We
      have successfully tested Omaha, the next most popular variety of casino poker,
      and we are in the process of designing further improvements to the PokerPro
      system to allow other varieties of poker to be played. Poker games offered
      by
      the PokerPro system are designed to be played in accordance with the same rules
      that apply to any live poker game, including any applicable pot and wager
      limitations.





***Market
      Opportunities.*** The
      game
      of poker has been steadily increasing in popularity. We believe we have an
      innovative product from both the casino and the player perspective and our
      goal
      is to capture a significant share of this growing market. The table below
      presents the number of poker tables in our target markets worldwide (source
      is
      the Casino City Press, December 2007). Each market presents varying degrees
      of
      opportunity and operates under different regulatory guidelines.


**2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**Commercial
                  Casinos
              
              
              2,381
              
              
              2,354
              
              
              1,722
              
              
              868
              
              
              840Tribal
                  Casinos
              
              
              2,086
              
              
              1,989
              
              
              1,755
              
              
              1,046
              
              
              909Card
                  Clubs
              
              
              1,351
              
              
              1,352
              
              
              1,198
              
              
              1,028
              
              
              890Cruise
                  ships
              
              
              168
              
              
              159
              
              
              -
              
              
              -
              
              
              -Other
              
              
              766
              
              
              544
              
              
              341
              
              
              269
              
              
              230Total
                  Domestic Market
              
              
              6,752
              
              
              6,398
              
              
              5,016
              
              
              3,211
              
              
              2,869Total
                  International Market
              
              
              2,645
              
              
              2,619
              
              
              2,006
              
              
              1,670
              
              
              1,302Total
                  Global Market
              
              
              9,397
              
              
              9,017
              
              
              7,022
              
              
              4,881
              
              
              4,171Domestic
                  Annual Growth
              
              
              5.5
              %
              
              27.6
              %
              
              56.2
              %
              
              11.9
              %International
                  Annual Growth
              
              
              1.0
              %
              
              30.6
              %
              
              20.1
              %
              
              28.3
              %





*Commercial
      Casinos* .
      North
      American commercial casinos have experienced significant growth in poker tables
      over the past five years. This segment of the market represents a significant
      market opportunity for us. The American Gaming Association (“AGA”) reported that
      there were 455 commercial casinos operating in 11 states that offered legalized
      gaming in 2005. Of the 11 states, Nevada and New Jersey were the largest
      commercial casino markets in North America in terms of gross gaming revenue
      with
      268 casinos and 12 casinos, respectively.





As
      of
      December 31, 2007 we have North American regulatory approval to operate in
      commercial casinos in 3 of those 11 states, - Arkansas, Michigan and
      Mississippi. We also have regulatory approval to operate in British Columbia,
      Québec and West Virginia; and in early 2008, received approvals for field trials
      in Iowa and Indiana. We have also submitted applications seeking approval for
      the PokerPro system to the appropriate regulatory bodies in several other
      jurisdictions, including Louisiana, Nevada and New Jersey. The commercial casino
      market is highly regulated and approval from the date of initial application
      for
      commercial casinos can be up to 24 months or longer.





*Tribal
      Casinos.* According
      to the National Indian Gaming Commission, in 2006, tribal gaming was offered
      by
      226 out of 562 federally recognized tribes conducting gaming at about 419 sites
      in 28 states.





Initially
      we launched the PokerPro system in tribal casinos, as the regulatory
      requirements for manufacturing and distributing gaming machines to tribal
      casinos were the least burdensome. As of December 31, 2007, we had 42 poker
      tables installed in tribal casinos in Michigan, California and
      Connecticut.





*Card
      Clubs* .
      Several
      states, such as California, Washington, North Dakota, Minnesota and Montana,
      have card clubs that specialize in poker. California and Washington are the
      two
      largest card club markets in terms of revenue. According to Casino City Press
      (December 2007), California is the largest card club market in the United
      States, with 66 card clubs operating approximately 1,096 tables. In Washington,
      there are 72 card clubs operating approximately 255 tables.





As
      of
      December 31, 2007, we had 7 poker tables located in card clubs in
      California.





*Cruise
      Ships* .
      As of
      December 2007, per the Casino City Press, there are approximately 200
      ocean-going cruise ships in the world, of which 169 had casinos.




2





We
      have
      entered into agreements with Carnival Corporation and Royal Caribbean, and
      successfully completed installations on 100% of the Carnival Cruise Lines fleet
      during 2007.





*International
      Casinos.* We
      believe that the international market represents a significant opportunity,
      particularly in Australia, the Far East and Europe.





O n
      January
      20, 2006, we entered into an international distribution rights agreement with
      Aristocrat. Aristocrat is a wholly owned subsidiary and affiliate of Aristocrat
      Leisure Limited, a leading
      global provider of gaming solutions that focuses primarily on video slot
      machines, progressive systems and casino management systems (and a significant
      shareholder of the Company, owning 16.53% of our common stock at December 31,
      2007). The distribution agreement provides Aristocrat with the sole and
      exclusive right to globally ( excluding
      the United States and Canada) distribute, market, enter into license agreements and, under certain
      circumstances, manufacture the PokerPro
      system.





***Competition.*** The
      overall market for gaming devices is mature and characterized by numerous
      competitors that develop and license proprietary table games. We are aware
      of
      three other companies offering automated poker products and additional
      competitive forces could join the market. Potential competitors include
      established manufacturers of gaming devices that may have widespread brand
      recognition and substantially greater resources and marketing capabilities
      than
      we have. In addition, they may have some of the regulatory approvals required
      to
      market and sell automated poker tables in our target markets.





We
      also
      compete with gaming supply companies and with other gaming and entertainment
      products for space on the customers’ floor, as well as for the customers’
capital spending. Some of the larger gaming supply companies with whom we
      compete are International Game Technology, Progressive Gaming International,
      Shuffle Master, Inc. and WMS Industries, Inc.





In
      addition, we compete with internet poker websites and other forms of internet
      gaming.





***Product
      Supply.*** We
      purchase all parts, including hardware components, table game felts, signs
      and
      accessories for the PokerPro system from third-party suppliers. We assemble
      the
      PokerPro system from such component parts at our facility in Matthews, North
      Carolina.





We
      believe that our facilities have sufficient capacity to meet demand and that
      our
      sources of supply are adequate. However, we currently obtain the touch screen
      monitors for the PokerPro system from a single manufacturer. While changing
      manufacturers for this component is not impossible, doing so would require
      significant time and effort on the part of our management team, which would
      divert their attention from other revenue generating activities. In addition,
      the supply of the liquid crystal display for the PokerPro system has been
      subject to significant backlogs from time to time due to spikes in demand.
      Furthermore, we compete with other companies for the production capacity of
      third-party manufacturers and suppliers for these displays and for other
      components.





***Distribution
      Method.*** We
      distribute our gaming products to North American casinos and cruise ships using
      our internal sales force. Our account managers are assigned a geographic sales
      territory and continue to be closely involved with our customers following
      the
      deployment of tables to provide advice and manage the overall customer
      relationship. Aristocrat distributes our gaming products outside of North
      America.




**Heads-Up
      Challenge Amusement Products**





***Overview.*** Heads-Up
      Challenge is a two-player automated amusement device used in restaurants, bars
      and similar venues. We first introduced Heads-Up Challenge in July 2007 at
      the
      World Series of Poker in Las Vegas, and launched it with our network of
      distributors and operators in the fourth quarter of 2007.





Players
      can play no-limit Texas Hold’em heads-up tournaments and compete against one
      another for bragging rights. Single game or tournament mode, up to 8 players,
      can be played with traditional poker action and realistic movements and sounds.





We
      may
      develop and market other games on the Heads-Up Challenge platform in the future,
      although we can provide no assurance that additional games will be
      successful.


3


***Market
      Opportunities.*** The
      market for Heads-Up Challenge includes restaurants, bars and other amusement
      venues. There are an estimated 225,000 restaurants and bars worldwide and
      opportunities for other outlets, such as in homes.





***Competition.*** The
      overall market for coin-in amusement game devices is mature and characterized
      by
      numerous competitors. We compete with other popular and more established games,
      such as Golden Tee and Big Buck Hunter, for a share of the operators’ capital
      spending. We also compete with other games and activities for floor space in
      the
      bar or restaurant.





***Product
      Supply.*** We
      purchase our Heads-Up Challenge tables from our contract manufacturer located
      in
      Taipei, Taiwan. The units are essentially complete and ready for sale when
      delivered. Our master distributors in the United States, Australia and the
      United Kingdom load software, install bill and coin validators and other minor
      steps to complete the table once received.





We
      believe that our contract manufacturer has ample capacity to meet demand and
      that sources of supply are adequate. However, because our supply chain crosses
      the ocean and we rely on a third party, our ability to meet demand is dependent
      on our ability to provide accurate production forecasts and manage longer
      logistical lead times.





***Distribution
      Method.*** We
      distribute our amusement products through a network of independent distributors.
      These distributors are generally given exclusive rights to sell the product
      within a specified geographic territory (though typically we retain the right
      to
      make direct sales where applicable). Within that territory, the distributor
      would typically sell the product to an operator who would place the product
      in a
      restaurant, bar or other venue and be responsible for the operation and
      maintenance of the unit.





As
      of
      December 31, 2007 we have signed arrangements with 14 distributors for the
      United States, Canada, the United Kingdom and the United States Military.
      Aristocrat distributes our amusement product in Australia and New
      Zealand.





We
      also
      sell units directly to consumers for home use and may establish direct
      relationships with larger corporate customers.




**Gaming
      Regulations and Licensing**





***Regulatory
      Overview.*** Generally,
      the manufacture, sale and use of gambling devices is subject to extensive
      federal, state, local and tribal regulation. In order to sell and distribute
      the
      PokerPro system to our target markets, we must comply with the applicable
      regulations of each jurisdiction in which we operate.





We
      normally expect regulatory approval in most jurisdictions to take up to 24
      months or longer. Because the PokerPro system represents a relatively new and
      innovative technology, it is impossible for us to accurately determine how
      long
      it will take to obtain required approvals or licenses in any particular
      jurisdiction. Further, the laws and regulations of the jurisdictions in which
      we
      intend to operate are subject to amendment and reinterpretation from time to
      time, and therefore it is possible that even if the PokerPro system is approved
      at one time, its use may be restricted, conditioned or prohibited in the
      future.





Some
      states prohibit playing poker or gambling in any form. We do not intend to
      sell
      or distribute the PokerPro system in these states or to Native American tribes
      located in these states unless such sales or distribution is specifically
      authorized by the tribal-state compact, a legally binding agreement between
      states and tribes.




The
      following is a brief description of the material regulations that apply to
      us in
      the jurisdictions in which we are located or intend to market and sell the
      PokerPro system.





***Federal
      Regulation.*** Gaming
      devices are governed by the Federal Gambling Devices Act of 1962 (the “Johnson
      Act”). The Johnson Act generally prohibits the transportation of a gambling
      device from one state to another unless the receiving state has legalized the
      use of the gambling device. The Johnson Act also requires registration for
      manufacturers of gaming devices.





***Commercial
      Casinos.*** States
      that allow some form of casino-style gambling usually have extensive regulatory
      requirements that must be met before the PokerPro system can be marketed to
      commercial casinos located in these states. Generally, each state’s respective
      gaming commission requires that a license or finding of suitability be issued
      with respect to PokerTek as an entity, the PokerPro system, or both. Among
      those
      states that require regulatory approval for both PokerTek and the PokerPro
      system, some states consider such approval simultaneously, while others, such
      as
      Nevada, require that we obtain company approval before considering approval
      for
      the PokerPro system itself. Some states also require that gaming products be
      placed in the market on a trial basis before receiving final approvals. Some
      states require the licenses and findings of suitability to be renewed on a
      regular basis. State commissions can deny our applications for licenses and
      findings of suitability for any cause.




4





If
      a
      state requires that we obtain company approval in addition to the product
      approval required for the PokerPro system, we are required to submit detailed
      financial and operating reports and furnish other information. Our officers,
      directors, certain key employees and any person having a material relationship
      with us may have to qualify with the state commission and obtain a finding
      of
      suitability. Our beneficial owners, especially beneficial owners of more than
      5%
      of our outstanding common stock, may also be required to obtain a finding of
      suitability.





***Tribal
      Casinos.*** Gaming
      on
      tribal lands is governed by the Indian Regulatory Gaming Act of 1988 (the
“IGRA”), the National Indian Gaming Commission (the “NIGC”), specific tribal
      ordinances and regulations and, in some instances, agreements between Native
      American tribes and their respective states, referred to under the IGRA as
      a
      tribal-state compact.





The
      IGRA
      provides a statutory basis for Native American tribes to operate certain gaming
      activities, depending on how a particular game is classified and whether the
      laws of the state where the Native American tribe is located allow or prohibit
      the particular game. The gaming classifications are: Class I, Class II and
      Class
      III.




·
            Class
                I gaming include traditional Native American social and ceremonial
                games
                and are regulated only by the tribes.





·
            Class
                II gaming includes bingo and certain card games such as poker, so
                long as
                the card game is not prohibited by the laws of the state where the
                tribe
                is located, the card game is played somewhere in the state and the
                playing
                of the card game conforms to any applicable state law.





·
            Class
                III gaming consists of all forms of gaming that are not Class I or
                Class
                II, such as video lottery games, slot machines, most table games
                and
                keno.





We
      must
      also obtain Gaming Laboratories International, Inc. (“GLI”) certifications prior
      to the installation of the PokerPro system in certain tribal casinos. As
      discussed below, these were obtained in October 2006.





Finally,
      we must become approved as a gaming supplier with each tribal
      casino.





***Card
      Clubs.*** States
      that allow poker to be played in card clubs have various regulatory requirements
      that apply to manufacturers of gambling devices similar to commercial casinos.





***Cruise
      Ships.*** The
      cruise ship market is authorized under the Johnson Act, and not subject to
      regulatory oversight; therefore, the PokerPro system is currently under no
      regulatory restrictions aboard cruise ships.





***International
      Casinos.*** Internationally,
      the regulatory environment is complex and varies by jurisdiction. Certain
      foreign countries permit the importation, sale and operation of gaming equipment
      in casino and non-casino environments.





As
      of
      December 31, 2007, Aristocrat is responsible for managing the regulatory process
      and obtaining necessary approvals to sell or operate PokerPro tables in this
      market.





***Regulatory
      Status.*** As
      of
      December 31, 2007, we have regulatory approval of the PokerPro system from
      British Columbia Gaming Policy & Enforcement, Société des Casinos du Québec
      Inc., Arkansas Racing Commission, State of California Gambling Control
      Commission, Connecticut Department of Revenue, Louisiana Department of Public
      Safety and Corrections, Louisiana Department of Public Safety and Corrections
      -
      Indian Gaming Division, Michigan Gaming Control Board, Mississippi Gaming
      Commission, Nevada Gaming Control Board, Washington State Gambling Commission,
      West Virginia Lottery Commission, CA - Berry Creek Rancheria Gaming Commission,
      Cabazon Band of Mission Indians, Tuolumne Me-Wuk Tribal Gaming Agency, Viejas
      Tribal Gaming Commission; CT - Mashantucket Pequot - Connecticut Department
      of
      Revenue, Mohegan Tribe of Indians - Connecticut Department of Revenue; MI -
      Pokagon Band of Potawatomi Indians; NM - Pueblo of Laguna Tribal Gaming
      Regulatory Authority; OK - Choctaw Gaming Commission, Cherokee Nation Gaming
      Commission, Iowa Tribe of Oklahoma Gaming Commission; OR - Confederated Tribes
      Gaming Commission.





We
      have
      submitted applications seeking the approval of the PokerPro system to the
      Louisiana State Police Gaming Division, New Jersey Casino Control Commission
      and
      the Nevada Gaming Control Board.





In
      early
      2008, we announced temporary approvals from the Iowa Racing and Gaming
      Commission and Indiana Gaming Commission.




5




For
        our
        international markets, as of December, 31, 2007, Aristocrat has regulatory
        approval in Australia, Bulgaria, Germany, Italy, Japan, Macau, Panama,
        Philippines, South Africa and United Kingdom.


We
      have
      received product certifications from GLI and BMM International (“BMM”),
      independent testing laboratories for our PokerPro products. In October 2006,
      the
      PokerPro system received GLI certifications GLI 24 Electronic Table Games
      Systems, GLI 13 On-Line Monitoring and Control Systems and Validation Systems
      in
      Casinos and GLI 16 Cashless Systems in Casino.





Other
      certifications that we have received for our products, including electrical,
      communications and safety certifications, include:




·
            Conformité
                Européenne (“CE”), a mandatory European marking for certain product groups
                to indicate conformity with the essential health and safety requirements
                set out in European Directives;





·
            Federal
                Communications Commission (“FCC”), which regulates radio emissions of
                electronic devices;





·
            The
                RoHS Directive (“ROHS”), which bans the placing on the European Union
                market of new electrical and electronic equipment containing more
                than
                agreed levels of certain hazardous materials;
                and





·
            Underwriters
                Laboratories, Inc. (“UL”), a product safety compliance testing
                laboratory.




**Corporate
      History**





The
      Company was founded on August 22, 2003, by Gehrig H. “Lou” White, James T.
      Crawford and Arthur Lee Lomax. It was initially organized as a North Carolina
      corporation named National Card Club Corporation. During the period from March
      19, 2004 through July 27, 2004, National Card Club Corporation owned a majority
      interest in an affiliated limited liability company called PokerTek, LLC. On
      July 27, 2004, PokerTek, LLC merged with and into National Card Club Corporation
      and each member of PokerTek, LLC received six shares of common stock for each
      unit of limited liability membership interest in PokerTek, LLC held by such
      member. The units of limited liability membership interest held immediately
      before the merger were cancelled. Simultaneous with this merger, the name was
      changed to PokerTek, Inc.





We
      completed our initial public offering on October 13, 2005 by selling 2.25
      million shares of common stock at $11.00 per share, including the underwriter’s
      partial exercise of the over-allotment option. Our common stock was approved
      for
      trading on the NASDAQ National Market (now the NASDAQ Global Market) and began
      trading on October 14, 2005.




**Available
      Information**





The
      Company is subject to the informational requirements of the Exchange Act. The
      Company therefore is required to file periodic reports, proxy and information
      statements and other information with the Securities and Exchange Commission
      (“SEC”). Such reports may be obtained by visiting the Public Reference Room of
      the SEC at 100 F Street, N.E., Washington, DC 20549, or by calling the SEC
      at
      1-800-SEC-0330. In addition, the SEC maintains an internet site ( www.sec.gov )
      that
      contains reports, proxy and information statements and other information
      regarding issuers that file electronically.





The
      Company also maintains an internet site ( www.pokertek.com )
      where
      interested parties can obtain copies of all reports, proxy and information
      statements and other information that the Company submits to the SEC. The
      information contained on, or that can be accessed through, our website is not
      incorporated by reference into this annual report. We have included our website
      address as a factual reference and do not intend it as an active link to our
      website.





Our
      corporate office is located at 1150 Crews Road, Suite F, Matthews, North
      Carolina 28105.




**Research
      and Development**





Our
      research and development efforts have been focused on the development of both
      the PokerPro system and the Heads-Up Challenge amusement product. Our research
      and development expenses were $4,281,998, $3,949,223 and $2,287,795 during
      the
      fiscal years ended December 31, 2007, December 31, 2006 and December 31, 2005,
      respectively. We continue to develop improvements to the PokerPro system,
      including designing other varieties of poker to be played and adding other
      functions that are currently unavailable in the PokerPro system or in other
      gaming products. We are also developing other related gaming technologies that
      are designed to enhance the functionality of the PokerPro and Heads-Up Challenge
      products.




6




**Intellectual
      Property**




***Trademarks.*** Gehrig
      H.
      "Lou" White, our Vice Chairman of the Board of Directors, and James Crawford,
      our President, jointly filed an application with the U.S. Patent and Trademark
      Office to register the PokerPro trademark. The trademark has been registered
      by
      the U.S. Patent and Trademark Office and an assignment of the trademark to
      PokerTek has been recorded.





***Patents.*** We
      currently have applications for more than 40 patents pending before the U.S.
      Patent and Trademark Office which relate to various aspects of our products.
      Patent applications are costly, can take many years to issue and we can provide
      no assurance that any of these patents will actually be issued. As we continue
      to develop new technology, we expect to file additional patent applications
      with
      respect to such technology. Additionally, we have numerous foreign patent
      application equivalents pending in various non-U.S. jurisdictions.





***Licenses.***


*World
      Poker Tour:* WPT
      Enterprises, Inc. (“WPT”), which operates the World Poker Tour, granted
      PokerTek, LLC (our former affiliate) an exclusive, 10-year, royalty-free,
      non-sublicensable license to use the “World Poker Tour” name and related logo
      and trademark in connection with the lease, sale or distribution in the United
      States of tables featuring automated live poker games and tournaments. We can
      also market and offer certain WPT branded packaged deals to its prospective
      customers. The license was transferred to PokerTek, Inc. upon the merger in
      July
      2004. WPT may terminate the license in the event that we breach any material
      term of the license, we fail to adhere to WPT’s style guide for its logos and
      trademarks or if we become subject to bankruptcy proceedings (voluntary or
      involuntary) that are not dismissed within 30 days.





*World
      Series of Poker:* On
      April
      17, 2007, Harrah’s License Company, LLC (“Harrah’s”) granted PokerTek, Inc. a
      limited, non-exclusive, non-transferable license with limited right of
      sublicense to utilize the “World Series of Poker®” name, related logos and
      trademarks in connection with the design, development, manufacture, marketing,
      advertisement, promotion and lease of our gaming tables worldwide. The license
      term is five years with three two-year options to renew. Harrah’s may terminate
      the license in the event that we become subject to bankruptcy proceedings
      (voluntary or involuntary) that are not dismissed within 30 days.





***Other.*** We
      have
      registered the www.pokertek.com internet domain name.




**Seasonality
      and Business Fluctuations**





Our
      business is not generally subject to seasonality. However, quarterly revenue
      and
      net income may vary significantly based on the timing of regulatory approvals,
      product sales, the introduction of new products and changes in our installed
      base of PokerPro systems.




**Backlog**





The
      nature of our business does not lend itself to maintaining a significant backlog
      of unshipped orders.




**Customer
      Dependence**





As
      of
      December 31, 2007 we have 13 gaming customers. Two of our gaming customers,
      Carnival Corporation and Aristocrat, made up approximately 72% of our total
      revenues. The loss of either of these customers would have a materially adverse
      effect on our business.




**Employees**





As
      of
      December 31, 2007, we had 77 full-time employees. We consider our relationships
      with our employees to be satisfactory. None of our employees are covered by
      a
      collective bargaining agreement.




7


**Item
      1A.**  **Risk
      Factors.**





***We
      have a limited operating history and a history of losses. We may be unable
      to
      generate sufficient net revenue in the future to achieve or sustain
      profitability.***





We
      have
      experienced net losses for each quarterly and annual period since our inception
      in August 2003. To continue our business plan and generate increased revenues,
      we must obtain necessary regulatory approvals in many additional jurisdictions.
      The timing of our revenue generation will be driven in part by our receipt
      of
      such approvals in additional jurisdictions and entry into definitive agreements
      with customers in those jurisdictions. We anticipate that we will continue
      to
      incur losses and cash flow deficits during 2008. For the reasons discussed
      above
      and elsewhere in this report, it is possible that we may not generate
      significant revenues or profits in the foreseeable future or at all. Even if
      we
      achieve profitability, we may not be able to sustain or increase profitability
      on a quarterly or annual basis, and our failure to do so would adversely affect
      our business and the market price of our common stock and may require us to
      raise additional capital, which may not be available on terms acceptable to
      us
      or at all.





***Our
      success depends on the PokerPro system achieving and maintaining widespread
      acceptance by casinos and poker players.***





Our
      success depends to a large extent on broad market acceptance of the PokerPro
      system among casinos and poker players. Even if we demonstrate the effectiveness
      of the PokerPro system and our business model, casinos and poker players may
      still not use the PokerPro system for a number of other reasons, including
      preference for live dealers, mistrust of technology and perceived lack of
      reliability. We believe that increased acceptance of the PokerPro system by
      casinos and poker players will depend on the following factors:




·
            our
                ability to demonstrate the PokerPro system’s economic and other benefits
                to casinos;





·
            players
                becoming comfortable with using the PokerPro system;
                and





·
            the
                reliability of the hardware and software comprising the PokerPro
                system.





***If
      we fail to obtain or maintain gaming licenses and regulatory approvals, we
      will
      be unable to operate our business and license or sell our
      products.***





The
      manufacture and distribution of gaming machines is subject to extensive federal,
      state, local and tribal regulation. Most jurisdictions require licenses, permits
      and other forms of approval for gaming devices. Most, if not all, jurisdictions
      also require licenses, permits and documentation of suitability, including
      evidence of financial stability, for the manufacturers and distributors of
      such
      gaming devices and for their officers, directors, major shareholders and key
      personnel. Our failure to obtain regulatory approval in any jurisdiction will
      prevent us from distributing our product and generating revenue in that
      jurisdiction.





Any
      registrations, licenses, approvals or findings of suitability that we currently
      have or may obtain in the future may be revoked, suspended or conditioned at
      any
      time. The revocation or denial of a license in a particular jurisdiction will
      prevent us from distributing the PokerPro system in that jurisdiction, and
      could
      adversely affect our ability to obtain and/or maintain licenses in other
      jurisdictions.





***Gaming
      authorities in multiple jurisdictions have determined that certain of our
      executive officers, key employees, directors and significant shareholders are
      suitable. The inability of an executive officer, key employee, director or
      significant shareholder to obtain a determination of suitability in a
      jurisdiction may adversely affect the sale or licensing of our gaming products
      in that jurisdiction.***





Gaming
      authorities in some jurisdictions may investigate any individual who has a
      material relationship with us and any of our shareholders to determine whether
      the individual or shareholder is suitable to those gaming authorities. Certain
      of our executive officers, key employees, directors and significant shareholders
      have been found suitable in multiple jurisdictions by various gaming
      authorities. If a gaming authority in any jurisdiction fails to find any of
      our
      executive officers, key employees, directors or significant shareholders
      suitable, we may be prohibited from leasing, licensing or selling our gaming
      products in that jurisdiction.





A
      finding
      of suitability is generally determined based upon numerous facts and
      circumstances surrounding the entity or individual in question and many gaming
      authorities have broad discretion in determining whether a particular entity
      or
      individual is suitable. We are unaware of circumstances that would categorically
      prevent a gaming authority from finding any of our officers, key employees,
      directors or significant shareholders suitable.




8




Gehrig
      H.
“Lou” White, our Vice Chairman of the Board of Directors and beneficial owner of
      19.48% of our common stock, has disclosed in applications for the determination
      of suitability filed with gaming authorities that the IRS has recently completed
      an examination of his 2000 and 2001 federal individual income tax returns.
      The
      IRS previously issued an examination report showing a proposed income tax
      deficiency for Mr. White’s 2000 federal income tax return of $410,215 (plus
      additional interest and penalties attributable to that underpayment of tax)
      based on a disallowance of certain deductions for charitable contributions
      that
      Mr. White made to a foundation he established and mortgage interest that Mr.
      White paid to Legacy Capital, LLC, an affiliate of Merrill Scott. Merrill Scott
      is an investment advisor that was placed under receivership in 2002 by the
      SEC
      for violations of a variety of federal securities laws in connection with fraud
      and misappropriations of client funds by the firm through a scheme in which
      it
      obtained funds from its clients seeking above-market returns and other benefits.
      Mr. White is currently appealing the IRS’s proposed income tax deficiency. The
      IRS examination of Mr. White’s 2001 federal tax return resulted in the issuance
      of a notice of deficiency for additional income tax in the amount of $75,445
      (plus additional interest and penalties attributable to that underpayment of
      tax). In his original 2001 federal tax return, Mr. White claimed deductions
      relating to a partnership investment he made after receiving advice from a
      law
      firm. The law firm subsequently informed Mr. White that the IRS had challenged
      the tax treatment of the investment structure and that he should file an amended
      return. Mr. White then filed an amended federal income tax return for 2001
      eliminating the deductions relating to the partnership investment. He also
      paid
      the federal income taxes resulting from the elimination of such deductions.
      The
      IRS notice of deficiency assessed additional income taxes as the result of
      disallowing deductions for tax advice in connection with the partnership
      investment transaction and an accuracy penalty in connection with the losses
      claimed with respect to that investment. These amounts have been paid, which
      completes the audit process for Mr. White’s 2001 return. Due to the broad
      discretionary powers of gaming authorities, it is unknown what effect the IRS
      examinations of Mr. White’s federal income tax returns may have on Mr. White’s
      applications for a determination of suitability.





If
      any of
      our executive officers, certain key employees, directors or significant
      shareholders is not found suitable in a jurisdiction requiring a finding of
      suitability, we would be prevented from leasing, licensing or selling our gaming
      products in that jurisdiction as long as the individual or entity in question
      remained an officer, key employee, director or a significant shareholder. Such
      an occurrence would likely delay introduction of our gaming products into such
      jurisdiction or
      prevent us from introducing our gaming products in such jurisdiction altogether.
      Depending on how material such jurisdiction is to our plan of operations,
      failure to obtain such findings of suitability could have a material adverse
      effect on our results of operations. In addition, a finding that one of our
      executive officers, certain key employees, directors or significant shareholders
      is not suitable in any jurisdiction may hinder our ability to obtain necessary
      regulatory approvals in other jurisdictions. Conversely, however, a finding
      of
      suitability by one or more gaming authorities does not ensure that similar
      suitability determinations will be obtained from any other gaming
      authorities.





Although
      we have the ability to terminate the employment of an executive officer or
      key
      employee in the event that such executive officer or key employee fails to
      be
      found suitable, such termination would disrupt the management of our company,
      may trigger severance provisions under certain employment agreements and would
      likely have an adverse effect on our business and results of operations. In
      addition, the removal of a director under the provisions of our Amended and
      Restated Bylaws requires action on the part of our shareholders at a
      shareholders’ meeting. Our Amended and Restated Articles of Incorporation
      provide that we may redeem at fair market value any or all shares of our capital
      stock held by any person or entity whose status as a shareholder, in the opinion
      of our Board of Directors, jeopardizes the approval, continued existence, or
      renewal of any federal, state, local or tribal license we hold. However, we
      may
      not have the funds available for such a redemption, especially if the
      shareholder in question holds a significant amount of our common stock. We
      have
      not determined what action we would take in such event. We will also be
      prevented from effecting such a redemption if it would violate North Carolina
      law.





***If
      the Johnson Act is found to apply to the PokerPro system, the Department of
      Justice may institute criminal and/or civil proceedings against us.***





Gaming
      devices are regulated at the federal level by the Johnson Act. The Johnson
      Act
      broadly defines an illegal gambling device as any machine or mechanical device
      designed and manufactured primarily for use in connection with gambling and
      that, when operated, delivers money or other property to a player as the result
      of the application of an element of chance. We believe the Johnson Act does
      not
      apply to the use of the PokerPro system by tribal casinos because several courts
      have held that electronic aids to permitted Class II gaming devices under the
      IGRA are not prohibited by the Johnson Act. However, there is no guarantee
      that
      our belief is correct. These decisions have focused on the use by tribal casinos
      of electronic aids to bingo. We are not aware of any court or regulatory body
      that has considered how the Johnson Act applies to the PokerPro system or any
      other form of electronic poker table. The Department of Justice, the primary
      law
      enforcement entity responsible for enforcing the Johnson Act, has traditionally
      taken a broad view as to what constitutes a gambling device prohibited by the
      Johnson Act. It is possible that the Department of Justice may institute
      criminal and/or civil proceedings against us and that a court may rule that
      the
      Johnson Act prohibits the use of the PokerPro system by tribal casinos unless
      the tribe and state have entered into an appropriate tribal-state compact.
      Any
      such proceedings could interfere with our ability to obtain necessary regulatory
      approvals.




9





***We
      could face substantial competition, which could reduce our market share and
      negatively impact our net revenue.***





There
      are
      a number of companies that offer poker-related entertainment or manufacture
      and
      distribute automated gaming machines. Most of these companies have greater
      financial resources than we have. The primary barriers to entry are the
      establishment of relationships with the owners and operators of casinos and
      card
      clubs, the receipt of necessary regulatory approvals and the development of
      the
      technology necessary to create an automated poker table. It is likely that
      our
      potential competitors will include manufacturers of gaming devices that have
      already established such relationships and that have received some, if not
      all,
      of the regulatory approvals that would be required to market and sell automated
      poker tables in our target markets. In addition, most of these companies have
      greater financial resources than we have. Therefore, the barriers to entry
      discussed above may not pose a significant obstacle for such manufacturers
      if
      they sought to compete with us.





***Our
      business would suffer if demand for gaming in general, or poker in particular,
      decreases.***





We
      derive
      substantially all of our revenues from the leasing, licensing and sale of the
      PokerPro system and from providing related maintenance and support services.
      Although the popularity of poker in particular and gaming in general has
      recently been growing in the United States and abroad, gaming has historically
      experienced backlash from various constituencies and communities. Public tastes
      are unpredictable and subject to change and may be affected by changes in the
      country’s political and social climate. A change in public
      tastes or a backlash among certain constituencies or in certain communities
      could result in reduced popularity of poker or increased regulation of the
      gaming industry, either of which could significantly reduce demand for the
      PokerPro system.





Moreover,
      the market for the PokerPro system is limited; according to Casino City Press,
      as of December 2007, there were approximately 6,752 poker tables operating
      in
      the United States and Canada and 2,645 outside the United States and Canada.
      Although we believe that this represents a significant opportunity for the
      PokerPro system, the number of venues in which the PokerPro system can be placed
      is finite, as the number of jurisdictions in which gaming is legal is
      limited.





***If
      we fail to protect our intellectual property rights, competitors may be able
      to
      use our technology, which could weaken our competitive position, reduce our
      net
      revenue and increase our costs.***





Our
      long-term success will depend to a large degree on our ability to protect the
      proprietary technology that we have developed or may develop or acquire in
      the
      future. We currently have applications for more than 40 patents pending before
      the U.S. Patent and Trademark Office that relate to various aspects of the
      PokerPro system. Patent applications can take many years to issue and we can
      provide no assurance that any of these patents will be issued. If we are denied
      any or all of these patents, we may not be able to successfully prevent our
      competitors from imitating the PokerPro system or using some or all of the
      processes that are the subject of such patent applications. Such imitation
      may
      lead to increased competition within the finite market for the PokerPro system.
      Even if our pending patents are issued, our intellectual property rights may
      not
      be sufficiently comprehensive to prevent our competitors from developing similar
      competitive products and technologies. Although we intend to aggressively pursue
      anyone we reasonably believe is infringing upon our intellectual property
      rights, initiating and maintaining suits against third parties that may infringe
      upon our intellectual property rights will require substantial financial
      resources. We may not have the financial resources to bring such suits and
      if we
      do bring such suits, we may not prevail. Regardless of our success in any such
      actions, we could incur significant expenses in connection with such
      suits.





***Third
      party claims of infringement against us could adversely affect our ability
      to
      market our products and require us to redesign our products or seek licenses
      from third parties.***





We
      are
      susceptible to intellectual property lawsuits that could cause us to incur
      substantial costs, pay substantial damages or prohibit us from distributing
      the
      PokerPro system. On March 17, 2008, we were served with a complaint from
      Lightning Gaming, Inc. and Lightning Poker, Inc. which alleges that we infringed
      United States Patent No. 7,306,516, owned by Lightning Poker, Inc. Whether
      a
      product infringes a patent involves complex legal and factual issues, the
      determination of which is often uncertain. In addition, because patent
      applications can take many years to issue, there may be applications now pending
      of which we are unaware, which later may result in issued patents that our
      products may infringe. If the PokerPro system infringes a valid patent, we
      could
      be prevented from distributing the PokerPro system unless and until we can
      obtain a license or redesign it to avoid infringement. A license may not be
      available or may require us to pay substantial royalties. We also may not be
      successful in any attempt to redesign the PokerPro system to avoid any
      infringement. Infringement and other intellectual property claims, with or
      without merit, can be expensive and time-consuming to litigate, and we may
      not
      have the financial and human resources to defend ourselves against any
      infringement suits that may be brought against us.




10





***Defects
      in, and fraudulent manipulation of, the PokerPro system could reduce our
      revenue, increase our costs, burden our engineering and marketing resources,
      involve us in litigation and adversely affect our gaming
      licenses.***





Our
      success will depend on our ability to avoid, detect and correct software and
      hardware defects and prevent fraudulent manipulation of the PokerPro system.
      The
      PokerPro system is subject to rigorous internal testing,
      and additional testing by regulators in certain gaming jurisdictions. We may
      not
      be able to maintain products that are free from defects or manipulation and
      that
      continue to satisfy these tests. Although we have taken steps to prevent defects
      and manipulations, the PokerPro system could suffer such defects and
      manipulation after it has been widely distributed.





Although
      we do not believe it is likely, it is possible that an individual could breach
      the security systems of a casino or card club, gain access to the server on
      which the PokerPro system operates and fraudulently manipulate its operations.
      The occurrence of such fraudulent manipulation or of defects or malfunctions
      could result in financial losses for our customers and the subsequent
      termination of agreements, cancellation of orders, product returns and diversion
      of our resources. Even if our customers do not suffer financial losses, casinos
      and card clubs may replace the PokerPro system if it does not perform according
      to expectations. Any of these occurrences could also result in the loss of
      or
      delay in market acceptance of the PokerPro system and loss of licenses and
      sales.





In
      addition, the occurrence of defects in, or fraudulent manipulation of, the
      PokerPro system and its associated software may give rise to claims for lost
      revenues and related litigation by our customers and may subject us to
      investigation or other disciplinary action by regulatory authorities that could
      include suspension or revocation of our regulatory approvals.





***If
      the network infrastructure of certain of the casinos in which the PokerPro
      system is or will be installed proves unreliable, market acceptance of the
      PokerPro system would be materially and adversely
      affected.*** ******





We
      have
      entered into agreements with customers that operate casinos and card clubs
      in
      more than one location. In such cases, our agreement with such customer provides
      that such customer will be responsible for providing, at its expense, a
      dedicated high-speed connection between the tables comprising the PokerPro
      system in the various locations operated by the customer to a remote central
      server supporting such tables. Failures or disruptions of a customer’s dedicated
      high-speed connection that result in the stoppage of play or in reduced
      performance of the PokerPro system could reduce players’ gaming experience,
      adversely affect the casinos’ or card clubs’ satisfaction with automated gaming
      devices in general and delay or prevent market acceptance of the PokerPro
      system.





***The
      use of the PokerPro system could result in product liability claims that could
      be expensive and that could damage our reputation and harm our
      business.***





Our
      business exposes us to the risk of product liability claims. Subject to
      contractual limitations, we will face financial exposure to product liability
      claims if the PokerPro system fails to work properly and causes monetary damage
      to either poker players or casinos and card clubs. In addition, defects in
      the
      design or manufacture of the PokerPro system might require us to recall each
      PokerPro system that has been licensed. Although we maintain product liability
      insurance, the coverage limits of policies available to us may not be adequate
      to cover future claims. If a successful claim brought against us is in excess
      or
      outside of our insurance coverage, we may be forced to divert resources from
      the
      development of the PokerPro system, the pursuit of regulatory approvals and
      other working capital needs in order to satisfy such claims.





***We
      recently experienced changes in our senior management team. The loss of key
      personnel or the inability of replacements to quickly and successfully perform
      in their new roles could adversely affect our
      business.***




We
      recently promoted Christopher J.C. Halligan to Chief Executive Officer in
      September 2007 and hired Mark D. Roberson as our Chief Financial Officer in
      October 2007.  Our success depends to a significant extent on the effective
      transition of our Chief Executive Officer and Chief Financial Officer.
      Moreover ,
      all of
      our existing personnel, including our executive officers, are employed on an
      “at-will” basis. If we lose or terminate the services of one or more of our
      current executives or key employees or if one or more of our current or former
      executives or key employees joins a competitor or otherwise competes with us,
      it
      could impair our business and our ability to successfully implement our business
      plan. Additionally, if we are unable to timely hire qualified replacements
      for
      our executive and other key positions, our ability to execute our business
      plan
      would be harmed. Even if we can timely hire qualified replacements, we would
      expect to experience operational disruptions and inefficiencies during any
      transition.




11




***Our
      management team’s limited experience in this market could increase costs, hamper
      our marketing strategies and delay our expansion.***





The
      limited experience of our management team in the gaming industry and the market
      for automated game technology could result in increased operating and capital
      costs, difficulties in executing our operating and marketing strategies and
      delays in our expansion strategy. We may not successfully address any or all
      of
      the risks posed by this limited experience, and our failure to do so could
      seriously harm our business and operating results.





***If
      we fail to manage our expected growth, our business and operating results could
      be harmed.***





We
      have
      experienced, and expect to continue to experience, rapid growth placing
      significant demands on our operational and financial infrastructure. If we
      do
      not effectively manage our growth, our ability to develop and market the
      PokerPro system and the Heads-Up Challenge products could suffer, which could
      negatively affect our operating results.





***Our
      success will depend on the reliability and performance of third-party
      distributors, manufacturers and suppliers.***





We
      currently obtain the touch screen monitors for the PokerPro system from a single
      supplier. While changing suppliers for this component is not impossible, doing
      so would require significant time and effort on the part of our management
      team
      and may cause us to miss revenue-generating opportunities until we are able
      to
      obtain touch screen monitors from a new supplier. In addition, the supply of
      the
      liquid crystal display for the PokerPro system is uncertain and subject to
      significant backlogs from time to time due to spikes in general demand for
      such
      displays. We compete with other companies for the production capacity of
      third-party suppliers for these displays and for other components. Certain of these
      competing companies have substantially greater financial and other resources
      than we have and thus we may be at a competitive disadvantage in seeking to
      procure production capacity. Our inability to contract with third-party
      manufacturers and suppliers to provide a sufficient supply of our products
      on
      acceptable terms and on a timely basis could negatively impact our relationships
      with existing customers and cause us to lose revenue-generating opportunities
      with potential customers.





We
      also
      currently rely on Aristocrat, a third-party distributor, to obtain regulatory
      approvals, market and distribute our PokerPro system outside of the United
      States and Canada. If Aristocrat is unsuccessful in marketing and distributing
      our product, we may miss revenue-generating opportunities that might have been
      recognized by another third-party distributor.





We
      also
      rely on Aristocrat and our other distributors to market and distribute our
      Heads-Up Challenge product. If our distributors are unsuccessful in marketing
      and distributing our product, we may miss revenue-generating opportunities
      that
      might otherwise have been recognized.





***Our
      failure to obtain any necessary additional financing would have a material
      adverse effect on our business.***





In
      order
      to execute our business plan, we may need to seek additional equity or debt
      financing. We may not be able to obtain such additional equity or debt financing
      when we need it or at all. Even if such financing is available, it may not
      be
      available on terms that are favorable to us or in sufficient amounts to satisfy
      our requirements. If we require, but are unable to obtain, sufficient additional
      financing in the future we may be unable to further protect our intellectual
      property sufficiently, meet customer demand for PokerPro systems or withstand
      adverse operating results. More importantly, if we are unable to raise further
      financing when required, our continued operations may have to be scaled down
      or
      even terminated and our ability to generate revenues would be negatively
      affected.





***Enforcement
      of remedies or contracts against Native American tribes could be
      difficult.***





Contracts
      with Native American tribes are subject to sovereign immunity and tribal
      jurisdiction. If a dispute arises with respect to any of those agreements,
      it
      could be difficult for us to protect our rights. Native American tribes
      generally enjoy sovereign immunity from suit similar to that enjoyed by
      individual states and the United States. In order to sue a Native American
      tribe
      (or an agency or instrumentality of a Native American tribe), the tribe must
      have effectively waived its sovereign immunity with respect to the matter in
      dispute. Moreover, even if a Native American tribe were to waive sovereign
      immunity, such waiver may not be valid and in the absence of an effective waiver
      of sovereign immunity by a Native American tribe, we could be precluded from
      judicially enforcing any rights or remedies against that tribe.




12


***Our
      business is closely tied to the casino industry and factors that negatively
      impact the casino industry may also negatively affect our ability to generate
      revenues.***





Casinos
      and other gaming operators represent a significant portion of our customers.
      Therefore, factors that may negatively impact the casino industry may also
      negatively impact our future revenues. If casinos experience reduced patronage,
      revenues may be reduced as our games may not perform well and may be taken
      off
      of the casino floor altogether. The level of casino patronage, and therefore
      our
      revenues, are affected by a number of factors beyond our control, including:




·
            general
                economic conditions;





·
            levels
                of disposable income of casino
                patrons;





·
            downturn
                or loss in popularity of the gaming industry in general, and table
                and
                slot games in particular;





·
            the
                relative popularity of entertainment alternatives to casino
                gaming;





·
            the
                growth and number of legalized gaming
                jurisdictions;





·
            local
                conditions in key gaming markets, including seasonal and weather-related
                factors;





·
            increased
                transportation costs;





·
            acts
                of terrorism and anti-terrorism
                efforts;





·
            changes
                or proposed changes to tax
                laws;





·
            increases
                in gaming taxes or fees;





·
            legal
                and regulatory issues affecting the development, operation and licensing
                of casinos;





·
            the
                availability and cost of capital to construct, expand or renovate
                new and
                existing casinos;





·
            the
                level of new casino construction and renovation schedules of existing
                casinos; and





·
            competitive
                conditions in the gaming industry and in particular gaming markets,
                including the effect of such conditions on the pricing of our games
                and
                products.





These
      factors significantly impact the demand for our products and
      technologies.





***We
      are launching a new product.***





The
      introduction of the Heads-Up Challenge product exposes us to a new market where
      we have limited experience. This exposes us to all the risks that accompany
      a
      new consumer product, including the product may fail to gain market acceptance,
      we may experience difficulties managing the supply chain from Taiwan or the
      distributors on whom we rely to distribute the product may not perform at a
      satisfactory level.





***We
      may be adversely impacted by economic factors beyond our control and may not
      be
      able to obtain liquid access to our investment portfolio.***





As
      of
      December 31, 2007, we had $6.0 million ($3.9 million as of March 31, 2008)
      of principal invested in auction rate securities, representing interests in
      collateralized debt obligations supported by pools of student loans backed
      by
      The Federal Family Education Loan Program. Auction
      rate securities are variable rate debt instruments whose interest rates are
      reset through a dutch auction process at regular intervals, typically every
      28 days. During February and March 2008, the remaining $3.9 million in
      auction rate securities we held failed to sell at auction due to an insufficient
      number of bidders. If
      uncertainties in these markets continue, or these markets deteriorate further,
      we may be unable to liquidate these funds on a timely basis, or may incur an
      impairment, which could negatively affect our financial condition, cash flow
      and
      reported earnings *.*




**Item
      1B.**  **Unresolved
      Staff Comments.**




None.




**Item
      2.**  **Properties.**





We
      currently lease our corporate office and manufacturing facility. This facility
      is approximately 21,600 square feet and is located in Matthews, North Carolina.
      Our leased space is in good order and condition, and is adequate to satisfy
      our
      current needs. This facility is leased from an
      entity
      owned and controlled by our President and our Vice Chairman of the Board of
      Directors (see Note 10 - “Related Party Transactions”).





We
      also
      lease a small storage facility in Matthews, North Carolina.




13




**Item
      3.**  **Legal
      Proceedings.**




**Tellis**





On
      February 5, 2007, Tellis Software, Inc. (“Tellis”) filed a Complaint against
      PokerTek and Gehrig H. “Lou” White, our Vice Chairman of the Board of Directors
      and former Chief Executive Officer, in the United States District Court for
      the
      Southern District of Texas. The Complaint alleged that PokerTek breached a
      Software Development Agreement, that PokerTek and Mr. White committed fraud
      in
      connection with the Software Development Agreement and that PokerTek had been
      unjustly enriched and/or that Tellis was entitled to a *quantum
      merit* recovery. As to all counts, Tellis sought damages equivalent to a 2% equity
      interest in PokerTek and bonuses of up to $730,000, plus attorneys’ fees, costs,
      and interest. For the fraud count, Tellis also sought unspecified exemplary
      damages.





In
      December 2007, the parties settled the lawsuit, which was withdrawn with
      prejudice.





**Lightning
      PokerTM**





On
      August
      2, 2006, we were served with a complaint filed on July 25, 2006, in the United
      States District Court for the Eastern District of Pennsylvania, by Pokermatic,
      Incorporated, d/b/a Lightning Poker. The complaint alleged antitrust violations,
      unfair competition, civil conspiracy, trade slander, tortious interference,
      defamation, and sought a declaration of non-infringement of our design patent.
      The complaint sought treble damages, attorneys' fees, and declaratory and
      injunctive relief.




On
      August
      17, 2006, we asked the United States District Court in Philadelphia,
      Pennsylvania to dismiss the case or transfer venue and to award our costs and
      attorneys’ fees. On September 27, 2006, the judge granted the Company’s request
      regarding improper venue and ordered the case  transferred
      to the United States District Court for the Western District of North
      Carolina.  The
      case
      arrived in  United
      States District Court for the Western District of North Carolina on or about
      November 8, 2006.





On
      November 16, 2006, Pokermatic dismissed the case without prejudice.





On
      March
      17, 2008, we were served with a complaint filed on March 6, 2008, in the United
      States District Court for the District of New Jersey by Lightning Gaming, Inc.
      and Lightning Poker, Inc. The complaint alleges that PokerTek infringes United
      States Patent No. 7,306,516, owned by Lightning Poker, Inc. The complaint is
      seeking unspecified monetary damages from PokerTek as well as a permanent
      injunction enjoining PokerTek from infringing the patent or unfairly competing
      with the plaintiffs. PokerTek believes that either its products do not violate
      the patent that forms the basis of the lawsuit, that the patent is invalid,
      or
      both.




**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders.**





None.




14


**PART
      II**





**Item
                5.**
            **Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity
                Securities.**





**Stock
      Listing**





Our
      common stock is traded on the NASDAQ Global Market under the symbol PTEK. The
      table below shows the high and low sales prices for our common stock for the
      periods indicated, as reported by the NASDAQ Global Market.


**Market
                    Prices of Common Stoc****k****2007**
                
                **2006****Quarter
                    ended**
                
                **High**
                
                **Low**
                
                **High**
                
                **Low**March
                    31
                
                $
                11.00
                
                $
                8.10
                
                $
                14.68
                
                $
                8.52June
                    30
                
                
                13.75
                
                
                8.81
                
                
                15.95
                
                
                9.25September
                    30
                
                
                12.97
                
                
                9.30
                
                
                13.28
                
                
                8.11December
                    31
                
                
                10.15
                
                
                5.86
                
                
                15.26
                
                
                8.05





As
      of
      March 26, 2008, there were approximately 1,400 holders of record of our common
      stock.




**Transfer
      Agent**





Our
      transfer agent is American Stock Transfer & Trust Company, located at 59
      Maiden Lane, Plaza Level, New York, New York 10038, (800) 937-5449.




**Dividends**





To
      date
      no cash dividends have been paid with respect to our common stock and the
      current policy of the Board of Directors is to retain any earnings to provide
      for the growth of the Company. The payment of cash dividends in the future,
      if
      any, will depend on factors such as earnings levels, capital requirements,
      our
      overall financial condition and any other factors deemed relevant by our Board
      of Directors.




15


**Item
      6.**  **Selected
      Financial Data.**





The
      following selected financial data has been derived from audited financial
      statements for the years ended December 31, 2007, 2006, 2005, 2004 and the
      period from August 22, 2003 (date of inception) to December 31, 2003. The
      selected financial data set forth below should be read together with Item 7
      -
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations”, as well as Item 8 - “Financial Statements and Supplementary Data”
and the related notes to those consolidated financial statements appearing
      elsewhere in this report.




**POKERTEK,
        INC.**
 **ITEM
        6 - SELECTED FINANCIAL DATA**


**Date
                  of****Year
                  Ended December 31,**
              
              **inception
                  to****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **Dec.
                  31, 2003****(in
                  thousands , except  per share amounts)****Statement
                  of operations data:**Operating
                  revenues
              
              $
              4,005
              
              $
              1,980
              
              $
              314
              
              $
              -
              
              $
              -Costs
                  of product sales
              
              
              1,338
              
              
              1,128
              
              
              39
              
              
              -
              
              
              -Selling,
                  general and administrative
              
              
              9,746
              
              
              6,080
              
              
              1,759
              
              
              455
              
              
              -Research
                  and development
              
              
              4,282
              
              
              3,949
              
              
              2,288
              
              
              477
              
              
              65Depreciation
              
              
              2,053
              
              
              710
              
              
              120
              
              
              -
              
              
              -Operating
                  loss
              
              
              (13,414
              )
              
              (9,887
              )
              
              (3,892
              )
              
              (932
              )
              
              (65
              )Interest
                  income, net
              
              
              565
              
              
              741
              
              
              190
              
              
              6
              
              
              -Net
                  loss
              
              $
              (12,849
              )
              $
              (9,146
              )
              $
              (3,702
              )
              $
              (926
              )
              $
              (65
              )**Loss
                  per common share - basic and diluted:**Net
                  loss per common share - basic and diluted (1)
              
              $
              (1.23
              )
              $
              (0.97
              )
              $
              (0.49
              )
              $
              (0.16
              )
              $
              (0.01
              )Weighted
                  average common shares outstanding - basic and diluted
                  (1)
              
              
              10,463
              
              
              9,471
              
              
              7,517
              
              
              5,744
              
              
              4,725**Balance
                  sheet data (at end of period):**Current
                  assets
              
              $
              11,122
              
              $
              11,731
              
              $
              21,441
              
              $
              1,354
              
              $
              20Total
                  assets
              
              
              17,096
              
              
              15,123
              
              
              22,703
              
              
              1,422
              
              
              20Current
                  liabilities
              
              
              2,429
              
              
              1,003
              
              
              214
              
              
              15
              
              
              4Shareholders'
                  equity
              
              
              14,667
              
              
              14,120
              
              
              22,489
              
              
              1,082
              
              
              (65
              )Working
                  capital
              
              
              8,693
              
              
              10,728
              
              
              21,227
              
              
              1,339
              
              
              16





*(1)*
            *We
                were initially organized in August 2003 as a North Carolina corporation
                named National Card Club Corporation. From March 19, 2004 through
                July 27,
                2004, we owned a majority interest in an affiliated limited liability
                company called PokerTek, LLC. On July 27, 2004, PokerTek, LLC merged
                with
                and into National Card Club Corporation and we changed our name to
                PokerTek, Inc. Pursuant to this merger, the equity interests in PokerTek,
                LLC that we owned were cancelled and all other equity interests in
                PokerTek, LLC were converted into common stock in PokerTek, Inc.,
                as
                described elsewhere in this Annual Report on Form 10-K. The net loss
                per
                common share gives retroactive effect to the merger for the periods
                presented. As of December 31, 2007, 2006, 2005 and 2004, there were
                options to purchase an aggregate of 2,034,825, 1,600,650, 1,053,650
                and
                471,500 shares, respectively. The options outstanding have no dilutive
                effect on net loss per common
                share.*





**Item
                7.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations.**





**Forward-Looking
      Statements**





This
      Annual Report on Form 10-K contains forward-looking statements within the
      meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
      Forward-looking statements sometimes include the words “may,” “will,”
“estimate,” “intend,” “continue,” “expect,” or “anticipate,” and other similar
      words. Statements expressing expectations regarding our future (including
      pending gaming and patent approvals) and projections relating to products,
      sales, revenues and earnings are typical of such statements.





All
      forward-looking statements are subject to the risks and uncertainties inherent
      in predicting the future. Our actual results may differ materially from those
      projected, stated or implied in these forward-looking statements as a result
      of
      many factors, including, but not limited to, overall industry environment,
      customer acceptance of our products, delay in the introduction of new products,
      the further approvals of regulatory authorities, adverse court rulings,
      production and/or quality control problems, the denial, suspension or revocation
      of permits or licenses by governmental authorities, competitive pressures and
      general economic conditions and our financial condition.




16




Forward-looking
        statements speak only as of the date they are made. We undertake no obligation
        to update or revise such statements to reflect new circumstances or
        unanticipated events as they occur, and you are urged to review and consider
        disclosures that we make in this and other reports that discuss factors germane
        to our business.




**Overview**





PokerTek,
      Inc. is engaged in the development, manufacture and marketing of electronic
      poker-related products for use in the gaming and amusement markets.





We
      currently have two product lines, PokerPro gaming products and Heads-Up
      Challenge amusement products. The PokerPro system is an electronic poker table
      that provides a fully-automated poker-room environment to tribal casinos,
      commercial casinos, cruise ships and card clubs. The Heads-Up Challenge World
      Series of Poker edition is an innovative heads-up amusement device that enables
      two players to compete against each other in a game of Texas Hold’em poker for
      entertainment purposes in non-gambling venues such as bars and
      restaurants.





During
      2007, we experienced significant growth. Our deployed PokerPro
      tables worldwide increased 166% to 189 at December 31, 2007 from 71 as of
      December 31, 2006. As of December 31, 2007 we had 10 fully automated land-based
      poker rooms running exclusively on PokerPro tables. We also successfully
      installed PokerPro tables on 100% of the Carnival Cruise Lines fleet, launched
      the Heads-Up Challenge amusement product at the World Series of Poker in Las
      Vegas and deployed tables in a number of foreign countries including Macau,
      Panama and Germany.




**Results
      of Operations for the Year Ended December 31, 2007 Compared to the Year Ended
      December 31, 2006**





***Revenues.*** Revenues
      increased by $2,024,774 (102.3%) to $4,004,691 for the year ended December
      31,
      2007 as compared to $1,979,917 for the year ended December 31, 2006. License
      and
      service fees increased by $1,670,722 (202.8%) to $2,494,708 for the year ended
      December 31, 2007 as compared to $823,986 the year ended December 31, 2006.
      The
      increase in license and service fees was primarily due to an increase in the
      number of PokerPro systems deployed under product licensing agreements. Product
      sales fees increased by $354,052 (30.6%) to $1,509,983 for the year ended
      December 31, 2007 as compared to $1,155,931 for the year ended December 31,
      2006. Product sales consist primarily of PokerPro systems sold to Aristocrat
      for
      deployment in international casinos. Product sales also include $185,399 in
      revenues attributable to the launch of the Heads-Up Challenge product line,
      which did not exist during the 2006 period.





***Selling,
      General and Administrative Expenses.*** Selling,
      general and administrative expenses (“SG&A”) increased by $3,665,938 (60.3%)
      to $9,745,521 for the year ended December 31, 2007 as compared to $6,079,583
      for
      the year ended December 31, 2006. This increase was primarily the result of
      an
      increase of $1,308,051 related to the addition of personnel and infrastructure
      to support our growth strategy, an increase of $861,307 for legal and
      professional fees related to our regulatory and intellectual property efforts,
      $263,087 for legal fees and settlement fees related to the Tellis lawsuit,
      an
      increase in travel expenses of $346,121, an increase in licenses and permits
      of
      $144,580 and an increase in non-cash stock option expense of $123,451. During
      2007, we established our North American sales team to market our products
      directly to casinos in North America. We also invested in intellectual property,
      with over 40 patent applications in process in the United States and abroad.
      These investments and others caused our SG&A to increase over the prior
      period, but also enabled us to more effectively grow market share while
      protecting our proprietary technology.





***Research
      and Development Expenses.*** **** Research
      and development expenses (“R&D”) increased by $332,775 (8.4%) to $4,281,998
      for the year ended December 31, 2007 as compared to $3,949,223 for the year
      ended December 31, 2006. The increase was primarily the result of R&D
      activity related to developing the new heads-up product. We also continued
      to
      invest resources on further enhancements to the PokerPro system, including
      new
      games and other features to enhance the marketability and functionality of
      the
      product.





***Depreciation*** **.** Depreciation
      increased by $1,343,752 (189.4%) for the year ended December 31, 2007 to
      $2,053,345 from $709,593 for the year ended December 31, 2006. The depreciation
      primarily relates to the increased number of PokerPro systems put in service
      during 2007 and late 2006.




17




***Net
        Interest Income*** **.** Net
        interest income decreased by $176,161 (23.8%) for the year ended December
        31,
        2007 to $564,600 from $740,761 for the year ended December 31, 2005 primarily
        due to a lower average invested balance. The interest income principally
        relates
        to the interest earned from our cash and investments.




**Results
      of Operations for the Year Ended December 31, 2006 Compared to the Year Ended
      December 31, 2005**





***Revenues.*** ** Revenues
      increased by $1,665,569 to $1,979,917 for the year ended December 31, 2006 as
      compared to $314,348 for the year ended December 31, 2005. This increase was
      due
      to our receipt of licensing fees from tribal casinos and cruise lines relating
      to the PokerPro systems, as well as equipment sales of the PokerPro
      system to
      Aristocrat, for their placement with their international customers, including
      demonstration units for use internally and with licensing bodies.





***Selling,
      General and Administrative Expenses.*** ** Selling,
      general and administrative expenses increased by $4,320,466 to $6,079,583 for
      the year ended December 31, 2006 as compared to $1,759,117 for the year ended
      December 31, 2005. This increase was primarily the result of an increase of
      $1,473,941 related to the addition of personnel and infrastructure to support
      our growth strategy; an increase of $129,225 of non-cash stock option expense
      calculated using the Black-Scholes option pricing model; an increase of $661,600
      of accounting, legal and professional fees; an increase of $199,842 related
      to
      insurance; an increase of $396,237 related to advertising and marketing the
      PokerPro system; and an increase of $504,315 related to expenses for sales
      efforts and to regulatory bodies.





***Research
      and Development Expenses.*** Research
      and development expenses increased by $1,661,428 to $3,949,223 for the year
      ended December 31, 2006 as compared to $2,287,795 for the year ended December
      31, 2005. The increase was primarily the result of a significant rise in R&D
      activity related to developing the new heads-up product. The increase was also
      a
      result of further enhancements to the original PokerPro system, including an
      increase of $753,797 related to the addition of personnel and infrastructure
      to
      support our growth strategy and an increase of $403,967 of non-cash stock option
      expense calculated using the Black-Scholes option pricing model.





***Depreciation*** **.** Depreciation increased by $589,810 for the year ended December 31, 2006 to
      $709,593 from $119,783 for the year ended December 31, 2005. The depreciation
      primarily relates to the PokerPro systems put in service during 2006 and
      2005.





***Net
      Interest Income*** **.** Net
      interest income increased by $550,452 for the year ended December 31, 2006
      to
      $740,761 from $190,309 for the year ended December 31, 2005. The interest income
      primarily relates to the interest earned from our cash and investment, which
      had
      a larger balance due to our initial public offering during the fourth quarter
      of
      2005.




**Results
      of Operations for the Year Ended December 31, 2005 Compared to the Year Ended
      December 31, 2004**





***Revenues.*** Revenues
      increased by $314,348 to $314,348 for the year ended December 31, 2005 from
      zero
      for the year ended December 31, 2004. This increase was due to our receipt
      of
      licensing fees from tribal casinos relating to the PokerPro systems and
      equipment sales of the PokerPro
      system for use
      in demonstrations to licensing bodies and potential customers.





***Selling,
      General and Administrative Expenses.*** ** Selling,
      general and administrative expenses increased by $1,304,128 to $1,759,117 for
      the year ended December 31, 2005 as compared to $454,989 for the year ended
      December 31, 2004. This increase was primarily the result of an increase of
      $393,763 related to the addition of personnel and infrastructure to support
      our
      growth strategy; an increase of $268,941 of non-cash stock option expense
      calculated using the Black-Scholes option pricing model; an increase of $147,796
      of legal and professional fees related to being a public company; an increase
      of
      $88,248 related to insurance; an increase of $76,539 related to advertising
      and
      marketing the PokerPro system; and an increase of $217,193 related to expenses
      for sales efforts and to regulatory bodies.





***Research
      and Development Expenses.*** Research
      and development expenses increased by $1,811,212 to $2,287,795 for the year
      ended December 31, 2005 as compared to $476,583 for the year ended December
      31,
      2004. The increase was the result of a significant increase in R&D activity
      related to the PokerPro system, including an increase of $1,523,416 related
      to
      the addition of personnel and infrastructure to support our growth
      strategy.




***Depreciation*** **.** Depreciation increased by $119,477 for the year ended December 31, 2005 to
        $119,783 from $306 for the year ended December 31, 2004. The depreciation
        primarily relates to the PokerPro systems put in service during
        2005.




18




***Net
      Interest Income*** **.** Net
      interest income increased by $184,268 for the year ended December 31, 2005
      to
      $190,309 from $6,041 for the year ended December 31, 2004. The interest income
      relates to the interest earned from the cash and cash equivalents, which had
      a
      larger balance due to the proceeds received from our initial public offering
      during the fourth quarter of 2005.




**Liquidity
      and Capital Resources**





We
      have
      incurred net operating losses since inception and operating expenses may
      continue to exceed revenues through 2008 as we continue to invest in growing
      our
      installed base of PokerPro systems and commencing sales of the amusement
      product. We have typically funded our operating costs, research and development
      activities, working capital investments and capital expenditures associated
      with
      our growth strategy with proceeds from the issuances of our common stock.





On
      April
      23, 2007, we entered into a Securities Purchase Agreement, in which we issued
      and sold an aggregate of 1,444,444 shares of our common stock in a private
      placement to certain investors for a purchase price of $9.00 per share. The
      private placement, which was completed on April 26, 2007, resulted in gross
      proceeds of approximately $13.0 million and net proceeds of approximately $12.5
      million after fees and expenses associated with the private placement, including
      a cash placement agent fee.





We
      completed our initial public offering on October 13, 2005 by selling 2.25
      million shares of common stock at $11.00 per share, including the partial
      exercise of the underwriter’s over-allotment option. Our common stock was
      approved for trading on the NASDAQ National Market (now the NASDAQ Global
      Market) and began trading on October 14, 2005. The initial closing of the
      offering occurred on October 19, 2005 and we received proceeds of approximately
      $19.6 million, net of offering expenses and underwriting discounts. On November
      29, 2005, the underwriter exercised its over-allotment option, resulting in
      the
      receipt of additional net proceeds of approximately $2.2 million.


**Years
                  Ended December 31,****2007**
              
              **2006**
              
              **Change**Net
                  cash used in operating activities
              
              $
              (14,394,111
              )
              $
              (10,161,012
              )
              $
              (4,233,099
              )Net
                  cash provided by investing activities
              
              
              1,246,404
              
              
              6,677,285
              
              
              (5,430,881
              )Net
                  cash provided by (used in) financing activities
              
              
              12,574,186
              
              
              (36,672
              )
              
              12,610,858Net
                  increase (decrease) in cash and cash equivalents
              
              
              (573,521
              )
              
              (3,520,399
              )
              
              2,946,878Cash
                  and cash equivalents, beginning of year
              
              
              1,803,501
              
              
              5,323,900Cash
                  and cash equivalents, end of year
              
              $
              1,229,980
              
              $
              1,803,501





For
      the
      year ended December 31, 2007, net cash used in operating activities was
      $14,394,111, as compared to $10,161,012 for the year ended December 31, 2006,
      an
      increase of $4,233,099 (41.7%). The increase in cash used in operating
      activities was primarily due to the net operating losses experienced during
      the
      period and working capital to fund the growth in the number of PokerPro systems
      deployed in the field under licensing arrangements.





Net
      cash
      provided by investing activities decreased $5,430,881 (81.3%) to $1,246,404
      for
      the year ended December 31, 2007 from $6,677,285 for the year ended December
      31,
      2006. Cash provided by investing activities is primarily a function of
      investments and redemptions of our auction rate securities portfolio, and to
      a
      smaller degree, capital expenditures for assets used in our
      operations.





Net
      cash
      provided by financing activities was $12,574,186 for the year ended December
      31,
      2007, compared to cash used in financing activities of $36,672 during the year
      ended December 31, 2006. This increase was primarily due to the cash proceeds
      received from the private placement in April 2007.




19




At
      December 31, 2007, we had $6.0 million ($3.9 million as of March 31, 2008)
      of principal invested in auction rate securities. The auction rate securities
      held by us are securities with long-term nominal maturities for which the
      interest rates historically have been reset through a dutch auction each month.
      The monthly auctions historically have provided a liquid market for these
      securities. Our investments in auction rate securities represent interests
      in
      collateralized debt obligations supported by pools of student loans. Consistent
      with our investment policy, the auction rate securities investments held by
      us
      all have AAA/Aaa credit ratings and are backed by The Federal Family Education
      Loan Program. With the liquidity issues experienced in global credit and capital
      markets, the auction rate securities held by us have experienced failed auctions
      as the amount of securities submitted for sale has exceeded the amount of
      purchase orders during early 2008. If uncertainties in these credit and capital
      markets continue, the market for auction rate securities could deteriorate
      further, which could negatively affect our financial condition, cash flows
      and
      reported earnings.





Historically,
      given the liquidity created by the auctions, auction rate securities were
      presented as current assets. However, given the recently failed auctions
      subsequent to December 31, 2007, our auction rate securities have become
      illiquid until there is a successful auction or a secondary market develops.
      Based on our review of the collateral and available market prices, we do not
      consider these investments to be impaired as of December 31, 2007. We will
      continue to update our evaluation in future periods.





Subsequent
      to the end of the year ended December 31, 2007, we entered into two lending
      arrangements to provide additional liquidity to fund our operations.





On
      March
      19, 2008, we received $1.0 million from UBS Financial Services bearing interest
      payable monthly at 30-day LIBOR plus 0.25%. This extension of credit is
      collateralized by our portfolio of $3.9 million of auction rate securities
      held
      at UBS.





On
      March
      24, 2008, we entered into a loan agreement with Lyle A. Berman, James T.
      Crawford III, Arthur Lee Lomax and Gehrig White. Messrs. Crawford, Lomax and
      White are the founders of the Company. Each of the lenders are also members
      of
      our board of directors, with Mr. Berman serving as Chairman and Mr. White
      serving as Vice Chairman. Upon closing, the lenders loaned the Company $2.0
      million and the Company issued the lenders a promissory note in the
      principal amount of $2.0 million. The loan bears interest at 13% with all unpaid
      principal and interest payable on March 24, 2010. The Company intends to pay
      interest on a monthly basis. The principle loan may be repaid prior to
      maturity without penalty. The loan contains no restrictive covenants and is
      collateralized by a security interest in the Company’s PokerPro
      systems deployed in North America and on cruise ships as of December 31, 2007.





Our
      need
      for cash to fund our operations is determined primarily by four factors: (i)
      the
      pace of growth in our casino business and the related investments we may make
      in
      inventory and PokerPro systems, (ii) the pace of growth in sales of our Heads-Up
      Challenge amusement product, (iii) our ability to generate positive operating
      leverage as we grow and (iv) our ability to manage working capital and negotiate
      favorable payment terms with our customers and vendors. We have the ability
      to
      impact the timing and extent of our cash needs primarily by managing the pace
      of
      growth in both our PokerPro and Heads-Up-Challenge products and managing
      our operating expenses. Our ability to control the cash needs of the business
      is
      not unlimited, however, and any reduction in the pace of investment may also
      impact our ability to grow revenues. Our management intends to maximize revenues
      while carefully monitoring the impact on the Company’s cash needs and cash
      balances. If we are unable to execute our operating plan, manage our working
      capital effectively or are impacted by other events, however, we may need to
      liquidate our auction rate securities, perhaps at a loss, or raise additional
      funds through additional public or private offerings of our securities, a
      sale/leaseback arrangement, a credit facility or other available sources.




20




**Impact
      of Inflation**





To
      date,
      inflation has not had a material effect on our net sales, revenues or income
      from continuing operations.





**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





**Contractual
      Obligations**





The
      table
      below sets forth our known contractual obligations as of December 31, 2007:


**Total**
              
              **Less
                  than**
                **1
                  year**
              
              **1
                  - 3 years**
              
              **3
                  - 5 years**
              
              **More
                  than**
                **5
                  years**Long-term
                  debt obligations
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Operating
                  lease obligations
              
              
              909,623
              
              
              264,486
              
              
              645,137
              
              
              -
              
              
              -Capital
                  lease obligations
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Purchase
                  obligations
              
              
              1,228,806
              
              
              1,228,806
              
              
              -
              
              
              -
              
              
              -Other
                  long-term liab ilities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              2,138,429
              
              $
              1,493,292
              
              $
              645,137
              
              $
              -
              
              $
              -





**Critical
      Accounting Policies**





The
      discussion and analysis of our financial condition and results of operations
      are
      based on our consolidated financial statements, which have been prepared in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these consolidated financial statements require us to make
      certain estimates and judgments that affect the reported amounts of assets,
      liabilities, revenues and expenses and related disclosures. On an ongoing basis,
      we evaluate these estimates. We base our estimates on historical experience
      and
      on various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions.





We
      believe that of our significant accounting policies, which are described in
      Note
      1 - “Nature of Business and Significant Accounting Policies” to our consolidated
      financial statements appearing elsewhere in this report, the following
      accounting policies involve a greater degree of judgment and complexity.
      Accordingly, these are the policies we believe are the most critical to aid
      in
      fully understanding and evaluating our consolidated financial condition and
      results of operations.





***Revenue
      recognition:*** We
      recognize revenue in accordance with Statement of Position No. 97-2 (“SOP
      97-2”), *Software Revenue Recognition* (as
      amended by SOP No. 98-4 and SOP No. 98-9), and Staff Accounting Bulletin No.
      101
      (“SAB 101”), *Revenue
      Recognition in Financial Statements* ,
      as
      updated by SAB 104, *Revenue
      Recognition.* If
      multiple product deliverables are included under a sale or license agreement,
      we
      allocate revenue to each product based upon their respective fair values in
      relation to the total contract value and defer revenue recognition on those
      deliverables where we have not met all requirements of revenue
      recognition.





In
      many
      cases, arrangements include recurring fees based on either a fixed monthly
      fee
      or a pre-determined percentage of the amount the casino or card club charges
      for
      each hand of poker (the “rake”).  In some cases, we may also charge
      separately for installation, training and post contract customer support
      (“PCS”).  Where we are responsible for performing initial installation and
      training, all revenue is deferred until such time as those services have been
      rendered. Following installation, we account for hardware, software license,
      PCS
      and other elements in accordance with SOP 97-2 and consistent with the guidance
      provided by the American Institute of Certified Public Accountants’ Technical
      Practice Aid (TPA) 5100.76, *Fair
      Value in Multiple-Element Arrangements That Include Contingent Usage-Based
      Fees
      and Software Revenue Recognition* (“TPA
      5100.76”).  License and service fees are recognized when persuasive
      evidence of an arrangement exists, services have been rendered, the price is
      fixed and determinable and collectability is reasonably assured. This normally
      occurs on a monthly basis as the amounts contractually due are computed and
      invoiced, PCS is delivered and all other revenue recognition criteria are
      satisfied.




21




***Investments
      in Auction Rate Securities (“ARS”):*** We
      account for our auction rate securities in accordance with Statement
      of Financial Accounting Standards No. 115 (“FAS
      115”), *Accounting
      for Certain Investments in Debt and Equity Securities* ,
      and
      classify them as “available for sale.” Investments in available-for-sale
      securities are recorded at fair value, and unrealized gains or losses (that
      are
      deemed to be temporary) are recognized, net of tax, through shareholders’
equity, as a component of other comprehensive income in our consolidated balance
      sheet. We record an impairment charge to earnings when an investment has
      experienced a decline in value that is deemed to be other-than-temporary. As
      of
      December 31, 2007, we revised the classification of investments in auction
      rate
      securities from cash and cash investments to available-for-sale securities
      on
      our consolidated balance sheet. At December 31, 2007, the carrying value of
      auction rate securities approximated fair value.





The
      auction rate securities held by us are securities with long-term nominal
      maturities for which the interest rates have historically been reset through
      a
      dutch auction each month. The monthly auctions historically have provided a
      liquid market for these securities. Our investments in auction rate securities
      represent interests in collateralized debt obligations supported by pools of
      federally-backed student loans. Consistent with our investment policy, the
      auction rate securities investments held by us all have AAA/Aaa credit ratings
      and are backed by The Federal Family Education Loan Program. With the liquidity
      issues experienced in global credit and capital markets, the auction rate
      securities held by us at December 31, 2007 have experienced failed auctions
      as the amount of securities submitted for sale has exceeded the amount of
      purchase orders during early 2008. Based on our review of the collateral and
      available market prices, we do not consider these investments to be impaired
      as
      of December 31, 2007. We will continue to update our evaluation in future
      periods.





***Research
      and development*** **:** Research
      and development costs are charged to expense when incurred and are included
      in
      the consolidated statements of operations, except when certain qualifying
      expenses are capitalized in accordance with Statement of Financial Accounting
      Standards No. 86 (“FAS 86”), *Accounting
      for the Costs of Computer Software to Be Sold, Leased or Otherwise
      Marketed* .
      Capitalization of development costs of software products begins once the
      technological feasibility of the product is established. Capitalization ceases
      when such software is ready for general release, at which time amortization
      of
      the capitalized costs begins. As of December 31, 2007 and 2006, no amounts
      were
      capitalized as technological feasibility is generally established at or near
      the
      time of general release.





***Inventories*** **:** Inventories are stated at the lower of cost or market, where cost is determined
      on a first-in, first-out basis. We include an allocation of direct labor,
      indirect labor and overhead for each PokerPro system. Costs not clearly related
      to the procurement, manufacture or implementation are expensed as incurred.
      Repairs, maintenance and rework are expensed as incurred.





***PokerPro
      systems and property and equipment*** **:** PokerPro
      systems and property and equipment are stated at cost, less accumulated
      depreciation. Depreciation is computed using the straight-line method over
      the
      estimated useful life of the asset. Estimated useful lives are generally three
      years for PokerPro systems and five years for equipment and office furniture.
      Leasehold improvements are amortized over the shorter of the term of the lease
      or the useful life of the improvement. Expenditures for maintenance and repairs
      are expensed as incurred.





***Share-based
      compensation*** **:** Effective January 1, 2006, we adopted Statement of Financial Accounting
      Standards No. 123R (“FAS 123R”), *Share Based Payment* ,
      which
      replaced Statement of Financial Accounting Standards No. 123 (“FAS 123”), *Accounting
      for Stock-Based Compensation* and
      superseded APB Opinion No. 25 (“APB 25”), *Accounting
      for Stock Issued to Employees* .
      Prior
      to this adoption, we accounted for our share-based employee compensation awards
      in accordance with FAS 123.





As
      of the
      adoption of FAS 123R, we began to recognize compensation expense for options
      that vest over time using the straight-line attribution approach. For options
      that vest over time that were issued prior to the adoption of FAS 123R, we
      continue to use the graded attribution approach. Compensation expense is
      recognized net of a forfeiture rate and only for those options expected to
      vest.
      We allocate share-based compensation costs between selling, general and
      administrative and research and development expenses in a manner consistent
      with
      the allocation of cash compensation and other costs.





Under
      FAS
      123R, we value our stock options issued based upon the Black-Scholes option
      pricing model and recognizes the value over the period in which the options
      vest. There are inherent estimates made by management regarding the calculation
      of stock option expense, including volatility, expected life and forfeiture
      rate.




22




For
      performance based options issued to third-parties, compensation expense is
      determined at the measurement date in accordance with the fair value method
      prescribed by the provisions of Emerging Issues Task Force Issue No. 96-18, *Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* ("EITF
      96-18"). Until the measurement date is reached, the total amount of compensation
      expense remains uncertain. Compensation expense is recorded based on the fair
      value of the award at the reporting date and then revalued, or the total
      compensation is recalculated, based on the current fair value at each subsequent
      reporting date.




**Recent
      Accounting Pronouncements**





In
      December 2007, the SEC issued Staff Accounting Bulletin 110 (“SAB 110”), *Valuation
      of Employee Share Option Grants - an Amendment of SAB
      No. 107* .
      SAB 110
      states that the staff will continue to accept, under certain circumstances,
      the
      use of the simplified method for estimating the expected term of plain vanilla
      stock options beyond December 31, 2007. We have evaluated the impact of
      adopting SAB 110 and have determined it will not have a material impact on
      our
      overall results of operations, financial position or cash flows.





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard No. 160 (“FAS 160”), *Noncontrolling
      Interest in Consolidated Financial Statements - an amendment of ARB
      No. 51* .
      FAS 160
      changes reporting standards for noncontrolling interests in a subsidiary. The
      standard is effective for fiscal years beginning on or after December 15,
      2008. We are currently evaluating the impact of FAS 160 and do not expect any
      material impact on our overall results of operations, financial position or
      cash
      flows.





In
      December 2007, the FASB issued Statement of Financial Accounting Standard
      No. 141 (Revised 2007) (“FAS 141R”), *Business
      Combinations* .
      FAS
      141R establishes requirements of how the acquirer should recognize and measure
      identifiable assets acquired, liabilities assumed, and any noncontrolling
      interest in the acquired entity. The statement also clarifies the recognition
      and measurement of goodwill acquired in a business combination and a gain from
      a
      bargain purchase. Additionally, FAS 141R clarifies the required disclosures
      in a
      business combination. The standard is effective for fiscal years beginning
      on or
      after December 15, 2008. We are currently evaluating the impact of FAS 141R
      and do not expect any material impact on our overall results of operations,
      financial position or cash flows.





In
      February 2007, the FASB issued Statement of Financial Accounting Standard
      No. 159, (“FAS 159”) *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment of FASB Statement No. 115* .
      FAS 159
      permits companies to choose to measure certain financial instruments and other
      items at fair value. FAS 159 also establishes presentation and disclosure
      requirements designed to facilitate comparison between entities that choose
      different measurement attributes for similar types of assets and liabilities.
      The standard is effective for fiscal years beginning after November 15,
      2007. We have evaluated the impact of adopting FAS 159 and have determined
      it
      will not have a material impact on our overall results of operations, financial
      position or cash flows.





In
      September 2006, the FASB issued Statement of Financial Accounting Standard
      No. 157 (“FAS 157”), *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value in
      accordance with generally accepted accounting principles and expands disclosures
      about fair value measurements. Although FAS 157 is effective for fiscal years
      beginning after November 15, 2007, the FASB has delayed the effective date
      of FAS 157 to fiscal years beginning after November 15, 2008 for
      nonfinancial assets and nonfinancial liabilities, except with respect to those
      items recognized or disclosed at fair value on an annual or more frequently
      occurring basis. We are currently evaluating the impact of FAS 157 and do not
      expect any material impact on our overall results of operations, financial
      position or cash flows.





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109* .
      We
      adopted FIN 48 on January 1, 2007. FIN 48 clarifies the accounting for
      uncertainty in income taxes recognized in an enterprise’s financial statements
      in accordance with Statement of Financial Accounting Standard No. 109 (“FAS
      109”), *Accounting
      for Income Taxes* and
      prescribes a minimum recognition threshold of more-likely-than-not to be
      sustained upon examination that a tax position must meet before being recognized
      in the financial statements. Under FIN 48, the impact of an uncertain income
      tax
      position on the income tax return must be recognized at the largest amount
      that
      is more-likely-than-not to be sustained upon audit by the relevant taxing
      authority. An uncertain income tax position will not be recognized if it has
      less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition (see Note 7 - “Income
      Taxes”).





23





**Item
      7A.**  **Quantitative
      and Qualitative Disclosures about Market Risk.**





Our
      financial instruments are limited to cash and cash equivalents and auction
      rate
      securities. Our primary investment objective is the preservation of capital
      and
      we do not use derivative instruments for speculative or investment purposes.
      Our
      cash and cash equivalents are not subject to significant interest rate risk
      due
      to the short maturities of these instruments. We believe that our auction rate
      securities portfolio is not subject to interest rate risk due to resetting
      of
      the interest rates each month, and the interest rates have continued to reset
      despite the failed auctions discussed above in Item 7 - “Management’s Discussion
      and Analysis of Financial Condition and Results of Operations”. As of December
      31, 2007, the carrying value of our cash and cash equivalents and auction rate
      securities approximates fair value.





We
      do not
      use derivative financial instruments for speculation or trading
      purposes.





**Item
      8.**  **Financial
      Statements and Supplementary Data.**





The
      information required by this Item is submitted as a separate section of this
      Annual Report commencing on page F-1 attached hereto.





**Item
      9.**  **Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.**





None.





**Item
      9A (T).**  **Controls
      and Procedures.**





**Disclosure
      Controls and Procedures**





The
      Company maintains disclosure controls and procedures (as defined in Rule
      15d-15(e) under the Exchange Act), which are designed to ensure that information
      required to be disclosed by the Company in the reports it files or submits
      under
      the Exchange Act is recorded, processed, summarized and reported within the
      time
      periods specified in the Securities and Exchange Commission’s rules and forms,
      and that such information is accumulated and communicated to the Company’s
      management, including its Chief Executive Officer and Chief Financial Officer,
      as appropriate to allow timely decisions regarding required disclosure.





As
      of
      December 31, 2007, an evaluation of the effectiveness of the Company’s
      disclosure controls and procedures was conducted under the supervision of,
      and
      reviewed by, the Company’s Chief Executive Officer and Chief Financial Officer.
      Based on that evaluation, the Company’s Chief Executive Officer and Chief
      Financial Officer have concluded that the Company’s disclosure controls and
      procedures were effective as of December 31, 2007, in all material respects,
      to
      enable us to record, process, summarize and report in a timely manner the
      information that we are required to disclose in our Exchange Act reports, and
      that such information is accumulated and communicated to our management,
      including our Chief Executive Officer and Chief Financial Officer, as
      appropriate, to allow timely decisions regarding required disclosure.





**Management’s
      Report on Internal Control Over Financial Reporting**





Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting. Our internal control system was designed to provide
      reasonable assurance to the Company’s management and Board of Directors
      regarding the preparation and fair presentation of the Company’s consolidated
      financial statements in accordance with accounting principles generally accepted
      in the United States.





The
      Company’s internal control over financial reporting includes those policies and
      procedures that:




·
            pertain
                to the maintenance of records that, in reasonable detail, accurately
                and
                fairly reflect the transactions and dispositions of the assets of
                the
                Company;





·
            provide
                reasonable assurance that transactions are recorded properly to allow
                for
                the preparation of financial statements in accordance with generally
                accepted accounting principles, and that receipts and expenditures
                of the
                Company are being made only in accordance with authorizations of
                management and directors of the
                Company;




24




·
            provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of the Company’s assets that
                could have a material effect on the financial statements;
                and





·
            provide
                reasonable assurance as to the detection of fraud.





All
      internal controls, no matter how well designed, have inherent limitations.
      Therefore, even those systems determined to be effective can only provide
      reasonable assurance with respect to financial statement preparation and
      presentation and may not prevent or detect misstatements.





Our
      management assessed the effectiveness of the Company’s internal control over
      financial reporting as of December 31, 2007. In making this assessment, our
      management used the criteria set forth by the Committee of Sponsoring
      Organizations of the Treadway Commission (“COSO”) in Internal Control -
      Integrated Framework and in accordance with the interpretive guidance issued
      by
      the SEC in Release No. 34-55929. Based on that evaluation, ** management
      concluded that the Company’s internal control over financial reporting was
      effective as of December 31, 2007.





During
      the course of management’s assessment, our management identified the following
      significant deficiencies in our internal control over financial reporting,
      all
      of which had been remediated as of December 31, 2007:





·
            The
                controls surrounding the review and approval of travel and entertainment
                expenses were found to not be designed or operating effectively.
                This
                deficiency was uncovered during an external gaming review of our
                former
                chief financial officer’s expenditures. This deficiency was remediated
                prior to December 31, 2007 by eliminating executive credit cards
                and
                implementing new policies and procedures surrounding the review and
                approval of travel and entertainment for all
                employees.





·
            Controls
                were in place and operating to approve payroll prior to processing;
                however, there was no documentation of the comparison of the approved
                payroll amounts to the amounts actually disbursed. This deficiency
                was
                remediated prior to December 31, 2007 by adding a control requiring
                the
                review and comparison of the final payroll reports submitted by the
                third
                party service provider to the original reports approved by the Chief
                Financial Officer.





·
            Our
                management is responsible for calculating labor and overhead rates
                and
                properly capitalizing costs into the value of inventory. During 2007,
                the
                allocation of labor and overhead to inventory was not evaluated on
                a
                regular basis and, as a result, there was an adjustment that was
                required
                to be made to the year-end consolidated financial statements. This
                deficiency was remediated as of December 31, 2007****by
                the implementation of a control requiring more timely and detailed
                periodic reviews of the activities and amounts that serve as a basis
                for
                the allocation.





Our
      management’s assessment also identified the following systems-related
      significant deficiencies in our internal control over financial reporting which
      had not been fully remediated as of December 31, 2007:





·
            The
                systems used in tracking and valuing inventory and PokerPro systems
                do not
                provide effective automated controls and are not integrated with
                each
                other or with the general ledger. The lack of integration requires
                manual
                reconciliations between the applications that were not always performed
                or
                reviewed on a timely basis, which required an adjustment to the year-end
                consolidated financial statements.





·
            The
                Company currently utilizes a software package for its general ledger
                that
                does not provide certain automated general controls, such as the
                presence
                of edit reports and workflow
                approvals.





All
      of
      the above significant deficiencies were reported to the Company’s Audit
      Committee by our management and to our independent registered public accounting
      firm. With regard to the systems-related significant deficiencies that had
      not
      been fully remediated as of December 31, 2007, we are evaluating our system
      needs and intend to implement new fixed asset and inventory systems to further
      strengthen our internal controls, although we can provide no assurance that
      new
      systems will be deployed or that the implementation of new systems will fully
      resolve all significant deficiencies. We also implemented a number of
      compensating controls as of December 31, 2007, including more timely
      reconciliations, enhanced review and approval procedures, and more robust
      physical inventory counting and valuation procedures. Accordingly, our
      management believes that these significant deficiencies are not indicative
      of a
      material weakness in internal control over financial reporting and our
      management concluded that, as of December 31, 2007, our internal control
      over financial reporting was effective.




25





This
      annual report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the Securities and Exchange
      Commission that permit the Company to provide only management’s report in this
      annual report.





**Changes
      in Internal Control Over Financial Reporting**





During
      the year ended December 31, 2007, our management implemented a formal internal
      controls compliance program that included a formal risk assessment,
      identification of key controls, development of test and review programs and
      testing of key controls. As a result of this initiative, management implemented
      numerous new procedures designed to strengthen the control environment and
      the
      system of internal controls, including the remediation of deficiencies and
      significant deficiencies detected during this assessment, as discussed in
“Management’s Report on Internal Control Over Financial
      Reporting.”





**Item
      9B.**  **Other
      Information.**





None.




26


**PART
      III**




**Item
      10.**  **Directors,
      Executive Officers and Corporate Governance.**




Information
      called for by this item may be found in our definitive Proxy Statement in
      connection with our 2008 Annual Meeting of Shareholders to be filed with the
      SEC
      under the headings “Board of Directors and Management,” “Section 16(a)
      Beneficial Ownership Reporting Compliance” and “Corporate Governance Matters”
and is incorporated herein by reference.





**Item
      11.**  **Executive
      Compensation.**




Information
      called for by this item may be found in our definitive Proxy Statement in
      connection with our 2008 Annual Meeting of Shareholders to be filed with the
      SEC
      under the headings “Executive Compensation” and “Corporate Governance Matters”
and is incorporated herein by reference.





**Item
          12.** **Security
          Ownership of Certain Beneficial Owners and Management and Related Stockholder
          Matters.**




Information
      called for by this item may be found in our definitive Proxy Statement in
      connection with our 2008 Annual Meeting of Shareholders to be filed with the
      SEC
      under the headings “Equity Compensation Plan Information” and “Security
      Ownership of Certain Beneficial Owners and Management” and is incorporated
      herein by reference.





**Item
      13.**  **Certain
      Relationships and Related Transactions, and Director
      Independence.**




Information
      called for by this item may be found in our definitive Proxy Statement in
      connection with our 2008 Annual Meeting of Shareholders to be filed with the
      SEC
      under the headings “Related Person Transactions” and “Corporate Governance
      Matters” and is incorporated herein by reference.





**Item
      14.**  **Principal
      Accounting Fees and Services.**




Information
      called for by this item may be found in our definitive Proxy Statement in
      connection with our 2008 Annual Meeting of Shareholders to be filed with the
      SEC
      under the headings “Independent Registered Public Accounting Firm Fee
      Information” and “Audit Committee Pre-Approval Policy” and is incorporated
      herein by reference.




27


**PART
      IV**





**Item
      15.**  **Exhibits,
      Financial Statement Schedules.**





(a)  The
      following documents are filed as a part of this Form 10−K:





1.  Financial
      Statements




The
      following financial statements are included in a separate section of this Annual
      Report beginning on page F-1:




·
            Report
                of Independent Registered Public Accounting
                Firm;





·
            Consolidated
                Statements of Operations for the years ended December 31, 2007, December
                31, 2006 and December 31, 2005;





·
            Consolidated
                Balance Sheets as of December 31, 2007 and December 31,
                2006;





·
            Consolidated
                Statements of Shareholders’ Equity for the years ended December 31, 2007,
                December 31, 2006 and December 31, 2005;





·
            Consolidated
                Statements of Cash Flows for the years ended December 31, 2007, December
                31, 2006 and December 31, 2005; and





·
            Notes
                to Consolidated Financial
                Statements.





2.  Financial
      Statement Schedules




The
      following financial statement schedule is included in a separate section of
      this
      Annual Report on page S-1:




·
            Valuation
                and Qualifying Accounts and
                Reserves





Other
      financial statement schedules are omitted because they are not required or
      are
      not applicable, or the required information is provided in the consolidated
      financial statements or notes described in Item 15(a)(1) above.





3.  Exhibits




The
      Exhibits listed in the Exhibit Index, which appears immediately following the
      Financial Statement Schedules and is incorporated herein by reference, are
      filed
      as part of this Annual Report on Form 10-K.





(b)  See
      the
      Exhibit Index.





(c) Separate
      Financial Statements and Schedules




None.




28


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.


POKERTEK,
              INC.Date:
              March 31, 2008
            By:
            /s/
              Christopher
              J.C. HalliganChristopher
              J.C. HalliganChief
              Executive Officer





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.


/s/Christopher
                  J.C. Halligan
              
              Date:
              March
                  31, 2008Name:
              Christopher
                  J.C. HalliganTitle:
              Chief
                  Executive Officer(Principal
                  Executive Officer)/s/Mark
                  D. Roberson
              
              Date:
              March
                  31, 2008Name:
              Mark
                  D. RobersonTitle:
              Chief
                  Financial Officer(Principal
                  Financial Officer and
                Principal
                  Accounting Officer)/s/Lyle
                  Berman
              
              Date:
              March
                  31, 2008Name:
              Lyle
                  BermanTitle:
              Chairman
                  of the Board of Directors/s/Gehrig
                  H. White
              
              Date:
              March
                  31, 2008Name:
              Gehrig
                  H. WhiteTitle:
              Vice
                  Chairman of the Board of Directors/s/James
                  T. Crawford, III
              
              Date:
              March
                  31, 2008Name:
              James
                  T. Crawford, IIITitle:
              President,
                  Secretary and Director/s/Joseph
                  J. Lahti
              
              Date:
              March
                  31, 2008Name:
              Joseph
                  J. LahtiTitle:
              Director/s/Arthur
                  Lee Lomax
              
              Date:
              March
                  31, 2008Name:
              Arthur
                  Lee LomaxTitle:
              Director
  29


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**Page**Report
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Statements of Operations for the years ended December 31, 2007, 2006
                and
                2005
            
            F-3Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            
            F-4Consolidated
                Statements of Shareholders’ Equity for the years ended December 31, 2007,
                2006 and 2005
            
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2007, 2006
                and
                2005
            
            F-6Notes
                to Consolidated Financial Statements
            
            F-7Consolidated
                Financial Statement Schedules:II.
                Valuation and Qualifying Accounts and Reserves
            
            S-1





F-1




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
      the
      Board of Directors and Shareholders


PokerTek,
      Inc.Matthews, North Carolina





We
      have
      audited the consolidated balance sheets of PokerTek, Inc. and Subsidiary
      (“PokerTek” or the “Company”) as of December 31, 2007 and 2006, and the related
      consolidated statements of income, retained earnings and cash flows for each
      of
      the three years in the period ended December 31, 2007. These financial
      statements and financial statement schedules are the responsibility of the
      Company's management. Our responsibility is to express an opinion on these
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of PokerTek as of December
      31,
      2007 and 2006, and the results of their operations and their cash flows for
      each
      of the three years in the period ended December 31, 2007, in conformity with
      U.S. generally accepted accounting principles. Also in our opinion, the
      related financial statement schedules when considered in relation to
      the consolidated financial statements taken as a whole, present fairly, in
      all material respects, the information set forth herein.





As
      discussed in Note 1, the Company has adopted Financial Accounting Standards
      Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,
      an interpretation of FASB Statement No. 109” as of January 1,
      2007.





We
      were
      not engaged to examine management's assertion about the effectiveness of
      PokerTek’s internal control over financial reporting as of December 31, 2007
      included in the accompanying “Management’s Report Over Internal Control” and,
      accordingly, we do not express an opinion thereon.




/s/
      McGladrey & Pullen, LLP


Charlotte,
      North Carolina March
      31,
      2008




F-2


**POKERTEK,
      INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




**Years
                  Ended December 31,****2007**
              
              **2006**
              
              **2005**Revenues:License
                  and service fees
              
              $
              2,494,708
              
              $
              823,986
              
              $
              270,400Product
                  sales
              
              
              1,509,983
              
              
              1,155,931
              
              
              43,948**Total
                  revenues**
              
              
              4,004,691
              
              
              1,979,917
              
              
              314,348Costs
                  and operating expenses:Cost
                  of product sales
              
              
              1,338,043
              
              
              1,127,997
              
              
              38,506Selling,
                  general and administrative
              
              
              9,745,521
              
              
              6,079,583
              
              
              1,759,117Research
                  and development
              
              
              4,281,998
              
              
              3,949,223
              
              
              2,287,795Depreciation
              
              
              2,053,345
              
              
              709,593
              
              
              119,783**Total
                  costs and operating expenses**
              
              
              17,418,907
              
              
              11,866,396
              
              
              4,205,201**Operating
                  loss**
              
              
              (13,414,216
              )
              
              (9,886,479
              )
              
              (3,890,853
              )Other
                  income (expense):Interest
                  income
              
              
              569,050
              
              
              741,932
              
              
              190,309Interest
                  expense
              
              
              (4,450
              )
              
              (1,171
              )
              
              -**Total
                  other income (expense)**
              
              
              564,600
              
              
              740,761
              
              
              190,309**Net
                  loss**
              
              $
              (12,849,616
              )
              $
              (9,145,718
              )
              $
              (3,700,544
              )Net
                  loss per common share - basic and diluted
              
              $
              (1.23
              )
              $
              (0.97
              )
              $
              (0.49
              )Weighted
                  average common shares outstanding - basic and diluted
              
              
              10,462,912
              
              
              9,471,423
              
              
              7,517,278





*The
      accompanying notes are an integral part of these consolidated financial
      statements.*




F-3


**POKERTEK,
      INC.**


**CONSOLIDATED
      BALANCE SHEETS**




**December
                  31,****2007**
              
              **2006****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              1,229,980
              
              $
              1,803,501Short
                  term investments
              
              
              5,950,000
              
              
              7,550,000Accounts
                  receivables, net of allowance of $21,062 and $19,301,
                  respectively
              
              
              968,536
              
              
              272,389Inventory
              
              
              2,642,481
              
              
              1,900,996Prepaid
                  expenses and other assets
              
              
              331,199
              
              
              204,217**Total
                  current assets**
              
              
              11,122,196
              
              
              11,731,103Other
                  assets:PokerPro
                  systems, net of accumulated depreciation
              
              
              4,991,634
              
              
              2,649,889Property
                  and equipment, net of accumulated depreciation
              
              
              605,046
              
              
              396,167Other
                  assets
              
              
              377,029
              
              
              345,638**Total
                  assets**
              
              $
              17,095,905
              
              $
              15,122,797**Liabilities
                  and Shareholders' Equity**Current
                  liabilities:Accounts
                  payable
              
              $
              1,465,202
              
              $
              939,216Accrued
                  liabilities
              
              
              964,173
              
              
              63,970**Total
                  current liabilities**
              
              
              2,429,375
              
              
              1,003,186Commitments
                  and contingenciesShareholders'
                  equity:Preferred
                  stock, no par value per share; authorized 5,000,000, none issued
                  and
                  outstanding
              
              
              -
              
              
              -Common
                  stock, no par value per share; authorized 100,000,000shares, issued
                  and
                  outstanding 10,934,464 and 9,472,020 shares at December 31, 2007
                  and
                  December 31, 2006, respectively
              
              
              -
              
              
              -Additional
                  paid-in capital
              
              
              41,353,220
              
              
              27,956,685Accumulated
                  deficit
              
              
              (26,686,690
              )
              
              (13,837,074
              )**Total
                  shareholders' equity**
              
              
              14,666,530
              
              
              14,119,611**Total
                  liabilities and shareholders' equity**
              
              $
              17,095,905
              
              $
              15,122,797





*The
      accompanying notes are an integral part of these consolidated financial
      statements.*





F-4


**POKERTEK,
        INC.**
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY**




**Common
                  Stock**
              
              **Additional**
                **Paid-in**
              
              **Accumulated**
              
              **Total
                  Shareholders'****Shares**
              
              **Value**
              
              **Capital**
              
              **Deficit**
              
              **Equity****Balance,
                  December 31, 2004**
              
              
              6,695,576
              
              $
              -
              
              $
              2,072,335
              
              $
              (990,812
              )
              $
              1,081,523Proceeds
                  from private placement of common stock
              
              
              538,694
              
              
              -
              
              
              3,005,913
              
              
              -
              
              
              3,005,913Net
                  proceeds from issuance of common stock
              
              
              2,225,000
              
              
              -
              
              
              21,798,218
              
              
              -
              
              
              21,798,218Stock
                  options exercised
              
              
              8,750
              
              
              -
              
              
              23,363
              
              
              -
              
              
              23,363Share-based
                  compensation
              
              
              -
              
              
              -
              
              
              280,212
              
              
              -
              
              
              280,212Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,700,544
              )
              
              (3,700,544
              )**Balance,
                  December 31, 2005**
              
              
              9,468,020
              
              
              -
              
              
              27,180,041
              
              
              (4,691,356
              )
              
              22,488,685Expenses
                  from issuance of common stock
              
              
              
              
              
              -
              
              
              (36,712
              )
              
              -
              
              
              (36,712
              )Stock
                  options exercised
              
              
              4,000
              
              
              -
              
              
              40
              
              
              -
              
              
              40Share-based
                  compensation
              
              
              -
              
              
              -
              
              
              813,316
              
              
              -
              
              
              813,316Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (9,145,718
              )
              
              (9,145,718
              )**Balance,
                  December 31, 2006**
              
              
              9,472,020
              
              
              -
              
              
              27,956,685
              
              
              (13,837,074
              )
              
              14,119,611Net
                  proceeds from private placement of common stock
              
              
              1,444,444
              
              
              -
              
              
              12,507,578
              
              
              -
              
              
              12,507,578Stock
                  options exercised
              
              
              18,000
              
              
              -
              
              
              66,608
              
              
              -
              
              
              66,608Share-based
                  compensation
              
              
              -
              
              
              -
              
              
              822,349
              
              
              -
              
              
              822,349Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (12,849,616
              )
              
              (12,849,616
              )**Balance,
                  December 31, 2007**
              
              
              10,934,464
              
              $
              -
              
              $
              41,353,220
              
              $
              (26,686,690
              )
              $
              14,666,530


*The
      accompanying notes are an integral part of these consolidated financial
      statements.*




F-5




**POKERTEK,
        INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**


**Years
                  Ended December 31,****2007**
              
              **2006**
              
              **2005****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (12,849,616
              )
              $
              (9,145,718
              )
              $
              (3,700,544
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              2,053,345
              
              
              709,593
              
              
              119,783Share-based
                  compensation expense
              
              
              822,349
              
              
              813,316
              
              
              280,212Provision
                  for accounts and other receivables
              
              
              47,129
              
              
              19,301
              
              
              -Changes
                  in assets and liabilities:Accounts
                  and other receivables
              
              
              (743,276
              )
              
              (140,490
              )
              
              (151,200
              )Prepaid
                  expenses and other assets
              
              
              (158,373
              )
              
              (231,505
              )
              
              (315,550
              )Inventory
              
              
              (741,485
              )
              
              (1,300,321
              )
              
              (569,970
              )PokerPro
                  systems
              
              
              (4,250,373
              )
              
              (1,673,909
              )
              
              (975,980
              )Accounts
                  payable and accrued expenses
              
              
              1,426,189
              
              
              788,721
              
              
              199,695**Net
                  cash used in operating activities**
              
              
              (14,394,111
              )
              
              (10,161,012
              )
              
              (5,113,554
              )**Cash
                  flows from investing activities:**Proceeds
                  from sale of equipment
              
              
              -
              
              
              44,907
              
              
              -Purchases
                  of property and equipment
              
              
              (353,596
              )
              
              (867,622
              )
              
              (336,868
              )Sale
                  of investments
              
              
              28,600,000
              
              
              17,550,000
              
              
              -Purchase
                  of investments
              
              
              (27,000,000
              )
              
              (10,050,000
              )
              
              (15,050,000
              )**Net
                  cash provided by (used in) investing activities**
              
              
              1,246,404
              
              
              6,677,285
              
              
              (15,386,868
              )**Cash
                  flows from financing activities:**Proceeds
                  (expenses) from issuance of common stock, net of expenses
              
              
              12,507,578
              
              
              (36,712
              )
              
              21,798,218Proceeds
                  from common stock options exercised
              
              
              66,608
              
              
              40
              
              
              23,363Proceeds
                  from private placement of common stock
              
              
              -
              
              
              -
              
              
              3,005,913Repayments
                  on loans from shareholders
              
              
              -
              
              
              -
              
              
              (326,043
              )**Net
                  cash provided by (used in) financing activities**
              
              
              12,574,186
              
              
              (36,672
              )
              
              24,501,451**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              (573,521
              )
              
              (3,520,399
              )
              
              4,001,029**Cash
                  and cash equivalents, beginning of year**
              
              
              1,803,501
              
              
              5,323,900
              
              
              1,322,871**Cash
                  and cash equivalents, end of year**
              
              $
              1,229,980
              
              $
              1,803,501
              
              $
              5,323,900**Supplemental
                  Disclosure of Cash Flow Information**Cash
                  payments for interest
              
              $
              4,450
              
              $
              1,171
              
              $
              -





*The
      accompanying notes are an integral part of these consolidated financial
      statements.*




F-6




**POKERTEK,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**December
      31, 2007**





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




**Nature
      of Business**





PokerTek,
      Inc. (“PokerTek” or the “Company”) is engaged in the development, manufacture
      and marketing of electronic poker-related products for use in the gaming and
      amusement markets.





The
      Company currently has two product lines, PokerPro® gaming products and Heads-Up
      ChallengeTM amusement products. The PokerPro system is an electronic poker table
      that provides a fully-automated poker-room environment to tribal casinos,
      commercial casinos, cruise ships and card clubs. The Heads-Up Challenge World
      Series of Poker® edition is an innovative heads-up amusement device that enables
      two players to compete against each other in a game of Texas Hold’em poker for
      entertainment purposes in non-gambling venues such as bars and restaurants.




**Basis
      of Presentation and Principles of Consolidation**





These
      consolidated financial statements include the accounts of PokerTek, Inc. and
      its
      consolidated subsidiary. They have been prepared by the Company in accordance
      with accounting principles generally accepted in the United States. All
      significant intercompany transactions and accounts have been
      eliminated.




**Significant
      Accounting Policies**




***Accounting
      estimates*** **:** The
      preparation of the consolidated financial statements in conformity with
      accounting principles generally accepted in the United States requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the consolidated financial statements and the reported amounts
      of
      revenues and expenses during the reporting period. Actual results could differ
      from those estimates.





***Revenue
      recognition:*** The
      Company recognizes revenue in accordance with Statement of Position No. 97-2
      (“SOP 97-2”), *Software Revenue Recognition* (as
      amended by SOP No. 98-4 and SOP No. 98-9), and Staff Accounting Bulletin No.
      101
      (“SAB 101”), *Revenue
      Recognition in Financial Statements* ,
      as
      updated by SAB 104 *Revenue
      Recognition.* If
      multiple product deliverables are included under a sale or license agreement,
      the Company allocates revenue to each product based upon their respective fair
      values in relation to the total contract value and defers revenue recognition
      on
      those deliverables that have not met all requirements of revenue
      recognition.





In
      many
      cases, arrangements include recurring fees based on either a fixed monthly
      fee
      or a pre-determined percentage of the amount the casino or card club charges
      for
      each hand of poker (the “rake”).  In some cases, the Company may also
      charge separately for installation, training and post contract customer support
      (“PCS”).  Where the Company is responsible for performing initial
      installation and training, all revenue is deferred until such time as those
      services have been rendered. Following installation, the Company accounts for
      hardware, software license, PCS and other elements in accordance with SOP 97-2
      and consistent with the guidance provided by the American Institute of Certified
      Public Accountants’ Technical Practice Aid (TPA) 5100.76, *Fair
      Value in Multiple-Element Arrangements That Include Contingent Usage-Based
      Fees
      and Software Revenue Recognition* (“TPA
      5100.76”).  License and service fees are recognized when persuasive
      evidence of an arrangement exists, services have been rendered, the price is
      fixed and determinable and collectability is reasonably assured. This normally
      occurs on a monthly basis as the amounts contractually due are computed and
      invoiced, PCS is delivered and all other revenue recognition criteria are
      satisfied.





***Cash
      and cash equivalents:*** The
      Company considers all cash accounts and highly liquid debt instruments purchased
      with an original maturity of three months or less to be cash equivalents. The
      Company maintains cash balances with highly reputable financial
      institutions.





***Investments
      in Auction Rate Securities (“ARS”):*** The
      Company accounts for its auction rate securities in accordance with Statement
      of Financial Accounting Standards No. 115 (“FAS
      115”), *Accounting
      for Certain Investments in Debt and Equity Securities* ,
      and
      classifies them as “available for sale.” Investments in available-for-sale
      securities are recorded at fair value, and unrealized gains or losses (that
      are
      deemed to be temporary) are recognized, net of tax, through shareholders’
equity, as a component of other comprehensive income in the Company’s
      consolidated balance sheet. The Company records an impairment charge to earnings
      when an investment has experienced a decline in value that is deemed to be
      other-than-temporary. As of December 31, 2007, the Company revised the
      classification of investments in auction rate securities from cash and cash
      investments to available-for-sale securities on its consolidated balance sheet.
      At December 31, 2007, the carrying value of auction rate securities approximated
      fair value.




F-7




The
      ARS
      held by the Company are securities with long-term nominal maturities for which
      the interest rates have historically been reset through a dutch auction each
      month. The monthly auctions historically have provided a liquid market for
      these
      securities. The Company’s investments in ARS represent interests in
      collateralized debt obligations supported by pools of federally backed student
      loans. Consistent with the Company’s investment policy, the ARS investments held
      by the Company all have AAA/Aaa credit ratings and are backed by The Federal
      Family Education Loan Program. With the liquidity issues experienced in global
      credit and capital markets, the ARS held by the Company at December 31,
      2007 have experienced failed auctions as the amount of securities submitted
      for
      sale has exceeded the amount of purchase orders during early 2008. Based on
      its
      review of the collateral and available market prices, the Company does not
      consider these investments to be impaired as of December 31, 2007. The Company
      will continue to update its evaluation in future periods.




***Concentrations
      of credit risk:*** Financial instruments that subject the Company to credit risk primarily consist
      of cash and cash equivalents, marketable securities and accounts receivables.
      The Company’s credit risk is managed by investing primarily in high-quality
      money market instruments and securities guaranteed by the U.S. government and
      its agencies.





***Receivables
      and allowance for doubtful accounts:*** The
      Company evaluates the collectability of the accounts receivable balances based
      on a combination of factors. The Company periodically reviews the receivable
      aging for delinquent accounts and records a reserve to reduce the related
      receivable to the amount expected to be recovered given all information
      available at that time. The Company also initiates dialogue with the customer
      when an account becomes past due to determine the cause. As of December 31,
      2007
      and December 31, 2006, the Company recorded reserves of $21,062 and $19,301,
      respectively. If circumstances related to specific customers change, estimates
      of the recoverability of receivables could also change.





***Deferred
      licensing fees:*** Deferred
      licensing ****** fees
      consist of amounts paid to various regulatory agencies. As approvals are
      obtained, the Company begins expensing the fees over the estimated term of
      the
      license.





***Patents.*** ** Legal
      fees and application costs related to the Company’s patent application process
      are expensed. There is a high degree of uncertainty in the outcome of approval
      for any of the Company’s patents.





***Research
      and development*** **:** Research
      and development costs are charged to expense when incurred and are included
      in
      the consolidated statements of operations, except when certain qualifying
      expenses are capitalized in accordance with Statement of Financial Accounting
      Standards No. 86 (“FAS 86”), *Accounting
      for the Costs of Computer Software to Be Sold, Leased or Otherwise
      Marketed* .
      Capitalization of development costs of software products begins once the
      technological feasibility of the product is established. Capitalization ceases
      when such software is ready for general release, at which time amortization
      of
      the capitalized costs begins. As of December 31, 2007 and 2006, no amounts
      were
      capitalized as technological feasibility is generally established at or near
      the
      time of general release.





***Advertising:*** Advertising and promotional costs are expensed as incurred. Advertising costs
      for the years ended December 31, 2007, 2006 and 2005 were $129,625, $143,918
      and
      $0 respectively.




***Inventories*** **:** Inventories are stated at the lower of cost or market, where cost is determined
      on a first-in, first-out basis. The Company includes an allocation of direct
      labor, indirect labor and overhead for each PokerPro system. Costs not clearly
      related to the procurement, manufacture and implementation are expensed as
      incurred. Repairs, maintenance and rework are expensed as incurred.





***PokerPro
      systems and property and equipment*** **:** PokerPro
      systems and property and equipment are stated at cost, less accumulated
      depreciation. Depreciation is computed using the straight-line method over
      the
      estimated useful life of the asset. Estimated useful lives are generally three
      years for PokerPro systems and five years for equipment and office furniture.
      Leasehold improvements are amortized over the shorter of the term of the lease
      or the useful life of the improvement. Expenditures for maintenance and repairs
      are expensed as incurred (see Note 2 - “PokerPro Systems” and Note 3 - “Property
      and Equipment”).




F-8




***Offering
      costs*** **:** Offering
      costs incurred in connection with the Company’s equity offerings, consisting
      principally of legal, accounting and underwriting fees, and have been charged
      to
      additional paid in capital. As of December 31, 2007, approximately $3.2 million
      of offering costs, on a cumulative basis, has been incurred.




***Income
      taxes*** **:** The
      Company accounts for income taxes in accordance with Statement
      of Financial Accounting Standards No.
      109
      (“FAS 109”), *Accounting for Income Taxes* .
      Deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of assets and liabilities and their respective tax bases.
      Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The effect on deferred
      tax
      assets and liabilities of a change in tax rates is recognized in the period
      that
      includes the enactment date.





The
      Company has also adopted FASB
      Interpretation No. 48 (“FIN 48”), *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109* as
      of
      January 1, 2007.





The
      accounting for income taxes involves significant judgments and estimates and
      deals with complex tax regulations. The recoverability of certain deferred
      tax
      assets is based in part on estimates of future income and the timing of
      temporary differences (see Note 7 - “Income Taxes”).




***Earnings
      (loss) per share*** **:** The
      Company computes earnings (loss) per share in accordance with Statement
      of Financial Accounting Standards No.
      128
      (“FAS 128”), *Earnings per Share* .
      FAS 128
      requires presentation of both basic and diluted earnings per share (“EPS”) on
      the face of the income statement. Basic EPS is computed by dividing net income
      (loss) available to common shareholders by the weighted-average number of shares
      outstanding during the period. Diluted EPS reflects the potential dilution
      that
      could occur if securities or other contracts to issue common stock were
      exercised or converted to common stock. In computing Diluted EPS, the average
      stock price for the period is used in determining the number of shares assumed
      to be purchased from the exercise of stock options or warrants. Diluted EPS
      excludes all potential dilutive shares due to their anti-dilutive effect.




***Share-based
      compensation*** **:** Effective January 1, 2006, the Company adopted Statement of Financial Accounting
      Standards No. 123R (“FAS 123R”), *Share Based Payment* ,
      which
      replaced Statement of Financial Accounting Standards No. 123 (“FAS 123”), *Accounting
      for Stock-Based Compensation* and
      superseded APB Opinion No. 25 (“APB 25”), *Accounting
      for Stock Issued to Employees* .
      Prior
      to this adoption, share-based employee compensation awards were accounted for
      in
      accordance with FAS 123.





As
      of the
      adoption of FAS 123R, the Company began to recognize compensation expense for
      options that vest over time using the straight-line attribution approach. For
      options that vest over time that were issued prior to the adoption of FAS 123R,
      the Company continues to use the graded attribution approach. Compensation
      expense is recognized net of a forfeiture rate and only for those options
      expected to vest. The Company allocates share-based compensation costs between
      selling, general and administrative and research and development expenses in
      a
      manner consistent with the allocation of cash compensation and other
      costs.





Under
      FAS
      123R, the Company values its stock options issued based upon the Black-Scholes
      option pricing model and recognizes the value over the period in which the
      options vest. There are inherent estimates made by management regarding the
      calculation of stock option expense, including volatility, expected life and
      forfeiture rate (see Note 9 - “Shareholders’ Equity - Stock Incentive Plan”).





For
      performance based options issued to third-parties, compensation expense is
      determined at the measurement date in accordance with the fair value method
      prescribed by the provisions of Emerging Issues Task Force Issue No. 96-18, *Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* ("EITF
      96-18"). Until the measurement date is reached, the total amount of compensation
      expense remains uncertain. Compensation expense is recorded based on the fair
      value of the award at the reporting date and then revalued, or the total
      compensation is recalculated, based on the current fair value at each subsequent
      reporting date.





***Reclassifications*** :
      Certain
      reclassifications of previously reported balances have been made to conform
      with
      the current presentation. These reclassifications primarily relate to the
      presentation of PokerPro systems and investments on the accompanying
      consolidated balance sheets and consolidated statements of cash flows. Such
      reclassifications had no impact on previously reported net loss or shareholders'
      equity.




F-9





**Recent
      Accounting Pronouncements**





In
      December 2007, the SEC issued Staff Accounting Bulletin 110 (“SAB 110”), *Valuation
      of Employee Share Option Grants - an Amendment of SAB
      No. 107* .
      SAB 110
      states that the staff will continue to accept, under certain circumstances,
      the
      use of the simplified method for estimating the expected term of plain vanilla
      stock options beyond December 31, 2007. The Company has evaluated the
      impact of adopting SAB 110 and has determined it will not have a material impact
      on the overall results of operations, financial position or cash
      flows.





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard No. 160 (“FAS 160”), *Noncontrolling
      Interest in Consolidated Financial Statements - an amendment of ARB
      No. 51* .
      FAS 160
      changes reporting standards for noncontrolling interests in a subsidiary. The
      standard is effective for fiscal years beginning on or after December 15,
      2008. The Company is currently evaluating the impact of FAS 160 and does not
      expect any material impact on the overall results of operations, financial
      position or cash flows.





In
      December 2007, the FASB issued Statement of Financial Accounting Standard
      No. 141 (Revised 2007) (“RAS 141R”), *Business
      Combinations* .
      FAS
      141R establishes requirements of how the acquirer should recognize and measure
      identifiable assets acquired, liabilities assumed, and any noncontrolling
      interest in the acquired entity. The statement also clarifies the recognition
      and measurement of goodwill acquired in a business combination and a gain from
      a
      bargain purchase. Additionally, FAS 141R clarifies the required disclosures
      in a
      business combination. The standard is effective for fiscal years beginning
      on or
      after December 15, 2008. The Company is currently evaluating the impact of
      FAS 141R and does not expect any material impact on the overall results of
      operations, financial position or cash flows.





In
      February 2007, the FASB issued Statement of Financial Accounting Standard
      No. 159, (“FAS 159”) *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment of FASB Statement No. 115* .
      FAS 159
      permits companies to choose to measure certain financial instruments and other
      items at fair value. FAS 159 also establishes presentation and disclosure
      requirements designed to facilitate comparison between entities that choose
      different measurement attributes for similar types of assets and liabilities.
      The standard is effective for fiscal years beginning after November 15,
      2007. The Company has evaluated the impact of adopting FAS 159 and has
      determined it will not have a material impact on the overall results of
      operations, financial position or cash flows.





In
      September 2006, the FASB issued Statement of Financial Accounting Standard
      No. 157 (“FAS 157”), *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value in
      accordance with generally accepted accounting principles and expands disclosures
      about fair value measurements. FAS 157 is effective for fiscal years beginning
      after November 15, 2007, however the FASB has delayed the effective date of
      FAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial
      assets and nonfinancial liabilities, except those items recognized or disclosed
      at fair value on an annual or more frequently occurring basis. The Company
      is
      currently evaluating the impact of FAS 157 and does not expect any material
      impact on the overall results of operations, financial position or cash
      flows.





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109* .
      The
      Company adopted FIN 48 on January 1, 2007. FIN 48 clarifies the accounting
      for
      uncertainty in income taxes recognized in an enterprise’s financial statements
      in accordance with Statement of Financial Accounting Standard No. 109 (“FAS
      109”), *Accounting
      for Income Taxes* and
      prescribes a minimum recognition threshold of more-likely-than-not to be
      sustained upon examination that a tax position must meet before being recognized
      in the financial statements. Under FIN 48, the impact of an uncertain income
      tax
      position on the income tax return must be recognized at the largest amount
      that
      is more-likely-than-not to be sustained upon audit by the relevant taxing
      authority. An uncertain income tax position will not be recognized if it has
      less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition (see Note 7 - “Income
      Taxes”).




F-10




**Note
      2.  PokerPro Systems**





PokerPro
      systems at December 31, 2007 and 2006 consist of the following:




**2007**
              
              **2006**PokerPro
                  systems
              
              $
              6,837,941
              
              $
              2,933,901Temporarily
                  idle PokerPro systems(a)
              
              
              501,701
              
              
              431,8057,339,642
              
              
              3,365,706Less:
                  accumulated depreciation(a)
              
              
              (2,348,008
              )
              
              (715,817
              )PokerPro
                  systems, net
              
              $
              4,991,634
              
              $
              2,649,889




*(a)
      The systems will be redeployed as scheduling allows. Included in the December
      31, 2007 and December 31, 2006 accumulated depreciation is $206,178 and
      $170,558, respectively, related to the temporarily idle PokerPro
      systems.*




**Note
      3. Property and Equipment**





Property
      and equipment at December 31, 2007 and 2006 consist of the following:




**2007**
              
              **2006**Equipment
              
              $
              673,188
              
              $
              407,873Leasehold
                  improvements
              
              
              189,157
              
              
              100,875862,345
              
              
              508,748Less:
                  accumulated depreciation
              
              
              (257,299
              )
              
              (112,581
              )Property
                  and equipment, net
              
              $
              605,046
              
              $
              396,167





**Note
      4. Inventory**




Inventory
      at December 31, 2007 and 2006 consist of the following:


**2007**
              
              **2006**Raw
                  materials and components
              
              $
              1,398,752
              
              $
              859,945PokerPro
                  systems in process
              
              
              620,224
              
              
              1,041,051Finished
                  goods(a)
              
              
              623,505
              
              
              -Inventory
              
              $
              2,642,481
              
              $
              1,900,996




*(a)
      Finished goods represent amusement products received or in-transit from the
      contract manufacturer.*




F-11




**Note
      5. Prepaid Expenses and Other Assets**





Prepaid
      expenses and other assets at December 31, 2007 and 2006 consist of the
      following:




**2007**
              
              **2006**Prepaid
                  expenses
              
              $
              252,418
              
              $
              188,590Other
              
              
              78,781
              
              
              15,627Prepaid
                  expenses and other assets
              
              $
              331,199
              
              $
              204,217Deferred
                  licensing fees, net
              
              $
              329,229
              
              $
              342,838Other
              
              
              47,800
              
              
              2,800Other
                  assets
              
              $
              377,029
              
              $
              345,638




**Note
      6. Accrued Liabilities**





Accrued
      liabilities at December 31, 2007 and 2006 consist of the following:




**2007**
              
              **2006**Deferred
                  revenue
              
              $
              399,900
              
              $
              -Accrued
                  professional fees
              
              
              334,731
              
              
              4,167Other
              
              
              229,542
              
              
              59,803Accrued
                  liabilities
              
              $
              964,173
              
              $
              63,970




**Note
      7. Income Taxes**




As
      of
      December 31, 2007 and December 31, 2006, the Company has federal net operating
      loss carryforwards of approximately $23,561,000 and $12,069,000, respectively,
      North Carolina net economic loss carryforwards of approximately $11,303,000
      and
      $6,589,000, respectively and California net operating losses in the amounts
      of
      approximately $458,000 and $67,000, respectively. Included in the federal net
      operating loss carryforward is a deduction for the exercise of nonqualified
      stock options. However, the net operating loss attributable to the excess of
      the
      tax deduction for the exercised nonqualified stock options over the cumulative
      deduction recorded pursuant to FAS 123R in the consolidated financial statements
      is not recorded as a deferred tax asset. The benefit of the excess deduction
      of
      $37,000 will be recorded to additional paid in capital when the Company realizes
      a reduction in its current taxes payable. These carryforwards can be used to
      offset taxable income in future years, which expire through 2027. The Company
      also has research and experimentation tax credit carryforwards for both federal
      and North Carolina of approximately $384,000 and $35,000, respectively. These
      credit carryforwards may be used to offset both federal and North Carolina
      income taxes in future years through their expiration in 2027. Additionally,
      the
      Company has North Carolina new jobs tax credits
      aggregating approximately $15,000. These credit carryforwards may be
      used to offset North Carolina income taxes through their expiration in
      2017.




The
      Company records a valuation allowance when it is more likely than not that
      some
      portion or all of the deferred tax assets will not be realized. The Company
      has
      assessed its earnings history and anticipated earnings, the expiration date
      of
      the carryforwards and other factors and has determined that valuation allowances
      should be established against the deferred tax assets as of December 31,
      2007 and 2006. . The change in the valuation allowance of $4,234,997 for the
      year ended December 31, 2007 was primarily due to additional net operating
      loss
      carryforwards.




F-12




Temporary
      differences between the financial statement carrying amounts and tax bases
      of
      assets that give rise to significant portions of the deferred tax assets are
      as
      follows:




**2007**
              
              **2006**Deferred
                  tax asset:Start-up
                  costs capitalization
              
              $
              157,100
              
              $
              176,852Loss
                  carryforwards
              
              
              8,539,053
              
              
              4,410,834Property
                  and equipment
              
              
              205,109
              
              
              40,766Tax
                  credit carryforwards
              
              
              225,135
              
              
              297,723Share-based
                  compensation expense
              
              
              139,134
              
              
              87,919Inventory
              
              
              19,485
              
              
              -Other
              
              
              9,019
              
              
              8,0669,294,035
              
              
              5,022,160Deferred
                  tax liability:Accounts
                  receivable
              
              
              (62,810
              )
              
              (20,981
              )Prepaid
                  expenses
              
              
              (64,017
              )
              
              (68,768
              )(126,827
              )
              
              (89,749
              )Net
                  deferred tax asset
              
              
              9,167,208
              
              
              4,932,411Less
                  valuation allowance
              
              
              (9,167,208
              )
              
              (4,932,411
              )$
              -
              
              $
              -




A
      reconciliation of income tax expense at statutory rates (approximately 36%
      federal and state) to the income tax expense reported in the consolidated
      statements of operations is as follows for the years ended December 31,
      2007, 2006 and 2005:




**2007**
              
              **2006**
              
              **2005**Federal
                  tax benefit at statutory rate
              
              $
              4,368,870
              
              $
              3,109,544
              
              $
              1,258,185State
                  tax benefit, net of federal taxes
              
              
              220,264
              
              
              266,537
              
              
              80,478Research
                  & experimentation credits
              
              
              73,171
              
              
              237,448
              
              
              -FAS
                  123R expense on incentive stock options
              
              
              (230,415
              )
              
              (226,401
              )
              
              -Increase
                  in valuation allowance
              
              
              (4,234,797
              )
              
              (3,319,063
              )
              
              (1,316,126
              )Prior
                  year true-up
              
              
              5,022
              
              
              (49,289
              )
              
              -FIN
                  48 and other
              
              
              (202,115
              )
              
              (18,776
              )
              
              (22,537
              )Income
                  tax expense
              
              $
              -
              
              $
              -
              
              $
              -





**Adoption
      of FIN 48**





As
      a
      result of the adoption of FIN 48, the Company recognized an $118,725 decrease
      in
      the deferred tax assets for the unrecognized tax benefits to tax positions
      taken
      in prior periods. The amount was fully offset by a valuation allowance. As
      such,
      this decrease has no impact to retained earnings in accordance with the position
      of FIN 48. At the adoption date, the Company had $118,725 of unrecognized tax
      benefits, all of which would affect the effective tax rate if recognized,
      without consideration of the related valuation allowance previously recorded.
      The Company did not recognize any adjustment to reserves for uncertain tax
      positions as a result of the related implementation of FIN 48.





During
      2007, the Company recognized a $73,171 decrease in the deferred tax asset for
      the unrecognized tax benefits related to tax positions taken in the current
      period. This amount was fully offset by a valuation allowance. The current
      period unrecognized tax benefits of $73,171 would affect the effective tax
      rate
      if recognized, without consideration of the related valuation allowance. The
      Company's policy is to include interest and penalties recognized in accordance
      with FIN 48 in the consolidated financial statements as a component of income
      tax expense. However, the unrecognized tax benefits at December 31, 2007 would
      not result in any interest or penalties to date as the amounts did not result
      in
      a reduction of income taxes previously payable by the Company.




F-13





The
      following table summarizes the changes to the amount of unrecognized tax
      benefits for the year ended December 31, 2007:




**2007**Unrecognized
                  tax benefits at January 1, 2007
              
              $
              118,725Gross
                  increases—tax positions in prior period
              
              
              -Gross
                  decreases—tax positions in prior period
              
              
              -Gross
                  increases—tax positions in current period
              
              
              73,171Gross
                  decreases—tax positions in current period
              
              
              -Settlements
              
              
              -Unrecognized
                  tax benefits at December 31, 2007
              
              $
              191,896




PokerTek
      files U.S. federal, U.S. state and Canadian tax returns. 2003 through 2007
      tax
      years remain subject to examination by the IRS for U.S. federal tax purposes,
      as
      do U.S. state tax returns by the appropriate state taxing authorities and the
      Canadian tax returns by Revenue Canada.




**Note
      8. Employee Benefit Plan**




The
      Company has established a salary deferral plan under Section 401(k) of the
      Internal Revenue Code covering substantially all employees. The plan allows
      eligible employees to defer 3% to 5% of their annual compensation. The Company
      matches the contributions equal to 100% on the first 3% of the deferral and
      50%
      on the deferral from 3% to 5%. For the years ended December 31, 2007, 2006
      and 2005 the Company’s contributions were $110,473, $49,150 and $15,762,
      respectively.




**Note
      9. Shareholders’ Equity**




**Common
      and Preferred Stock**





***Common
      Stock:*** There
      are 100,000,000 authorized shares of the Company’s common stock of which
      10,934,464 and 9,472,020 were outstanding as of December 31, 2007 and December
      31, 2006, respectively.





On
      April
      23, 2007, the Company entered into a Securities Purchase Agreement, pursuant
      to
      which the Company issued and sold an aggregate of 1,444,444 shares of common
      stock in a private placement to certain investors for a purchase price of $9.00
      per share. The private placement, which was completed on April 26, 2007,
      resulted in gross proceeds of approximately $13.0 million and net proceeds
      of
      approximately $12.5 million after fees and expenses associated with the private
      placement, including a cash placement agent fee.





***Preferred
      Stock:*** There
      are
      5,000,000 authorized shares of preferred stock, of which none are outstanding
      as
      of December 31, 2007 and December
      31, 2006.





**Warrants**





As
      part
      of the initial public offering, the Company issued to the underwriter, for
      a
      purchase price of $50.00, a warrant (the “Underwriter’s Warrant”) to purchase up
      to 200,000 shares of common stock. The Underwriter’s Warrant is exercisable at a
      price of $17.60 per share for a period of four years. The Underwriter’s Warrant
      contains customary anti-dilution provisions and certain demand and participatory
      registration rights. The Underwriter’s Warrant also includes a “cashless”
exercise provision entitling the Underwriter to convert the Underwriter’s
      Warrant into shares of PokerTek common stock. The fair value of the warrant
      was
      computed at the time of issue
      and was nominal.




F-14





As
      part
      of the April 2007 private placement, the Company issued each Investor a warrant
      (the “Warrants”) to acquire additional shares of the Company’s common stock
      (together, the “Warrant Shares”). The Warrants, which expire on April 26, 2012,
      are convertible into an aggregate of 439,541 Warrant Shares at an exercise
      price
      of $10.80 per Warrant Share.  The
      Warrants contain customary anti-dilution provisions and certain demand and
      participatory registration rights. The Warrants also include a “cashless”
exercise provision entitling the Investors to convert the Warrants into shares
      of PokerTek common stock.





To
      comply
      with certain rules and regulations of The NASDAQ Stock Market LLC (“NASDAQ”)
      relating to the maximum number of shares issuable in a transaction without
      obtaining shareholder approval, the initial number of Warrant Shares issuable
      is
      439,541 and the Warrants contain additional provisions limiting the issuance
      of
      Warrant Shares to avoid exceeding the limits imposed by such rules and
      regulations. The Company has agreed to seek shareholder approval to increase
      the
      number of Warrant Shares issuable to 505,555 and to allow issuances above the
      limits imposed by NASDAQ rules and regulations if certain anti-dilution
      provisions in the Warrants are triggered.




**Stock
      Incentive Plan**





In
      2004,
      the Company’s Board of Directors approved the 2004 Stock Incentive Plan (the
“2004 Plan”), which provided for the issuance of up to 825,000 shares of common
      stock. On July 29, 2005, the Company adopted the 2005 Stock Incentive Plan
      (the
“2005 Plan”). The 2005 Plan authorized the issuance of up to (i) 800,000 shares
      of common stock, plus (ii) any shares remaining available for issuance as of
      the
      effective date of the 2005 Plan under any prior plan, plus (iii) any shares
      of
      common stock subject to an award granted under a prior plan, in which the award
      was forfeited, cancelled, terminated, expired or lapsed for any reason without
      the issuance of shares. On May 23, 2007 the Company adopted the 2007 Stock
      Incentive Plan (the “2007 Plan”) which authorized the issuance of up to (i)
      500,000 shares of common stock, plus (ii) any shares remaining available for
      issuance as of the effective date of the 2007 Plan under any prior plan, plus
      (iii) any shares of common stock subject to an award granted under a prior
      plan,
      in which the award was forfeited, cancelled, terminated, expired or lapsed
      for
      any reason without the issuance of shares.





The
      fair
      value of each option award is estimated on the date of grant using the
      Black-Scholes option pricing model. Options
      granted under the plans generally vest over periods ranging from date of grant
      to four years and expire in ten years. Principal
      assumptions are as follows: (a) expected future volatility for the Company's
      stock price is based on a combination of the Company’s historical volatility and
      observed volatility rates of other companies in the gaming industry, (b)
      expected term is based on historical exercise data and forfeitures, (c) the
      forfeiture rate is derived from an expectation of future forfeitures and (d)
      the
      risk-free rate is the rate on U.S. Treasury securities with a maturity equal
      to,
      or closest to, the expected life of the options.





At
      December 31, 2007 and December 31, 2006, options to purchase 2,034,825 and
      1,600,650 shares of common stock, respectively, were outstanding and held by
      certain directors, officers, employees and independent contractors of the
      Company. The amount of related expense calculated using the Black-Scholes option
      pricing model and recognized in 2007, 2006 and 2005 was $822,349, $813,316
      and
      $280,212, respectively.




**2007**
            
            **2006**
            
            **2005**Expected
                Volatility
            
            
            45%
            
            
            30%
                - 45%
            
            
            0%
                - 30%Expected
                Dividends
            
            
            0%
            
            
            0%
            
            
            0%Expected
                Term
            
            
            5
                - 6 yrs
            
            
            5
                yrs
            
            
            3
                - 5 yrsRisk-free
                Rate
            
            
            3.49%
                - 4.92%
            
            
            4.59%
                - 5.1%
            
            
            3.65%
                - 4.33%




F-15


A
      summary
      of option activity and changes during the year for the year ended December
      31,
      2007 is as follows:


**Weighted
                  Average****Remaining**
              
              
              **Aggregate****Exercise**
              
              
              **Contractual**
              
              
              **Intrinsic****Shares**
              
              
              **Price**
              
              
              **Term**
              
              
              **Value**Outstanding
                  at January 1, 2007
              
              
              1,600,650
              
              $
              7.25Granted
              
              
              660,400
              
              
              10.24Exercised
              
              
              (18,000
              )
              
              3.70Forfeited
              
              
              (208,225
              )
              
              5.55Expired
              
              
              -
              
              
              -Outstanding
                  at December 31, 2007
              
              
              2,034,825
              
              $
              8.42
              
              
              8.3
              
              $
              (1,368,395
              )Exercisable
                  at December 31, 2007
              
              
              807,615
              
              $
              6.49
              
              
              7.5
              
              $
              1,020,497


The
      weighted-average grant-date fair value of options granted during the years
      2007,
      2006 and 2005 was $4.68, $4.21 and $1.31, respectively. The total intrinsic
      value of options exercised during the years ended December 31, 2007, 2006 and
      2005 were $114,138, $46,920 and $66,763, respectively.





A
      summary
      of the status of non-vested shares as of December 31, 2007, and changes during
      the year ended December 31, 2007 is presented below:


**Weighted****Average
                    Grant****Date
                    Fair****Shares**
                
                **Value**Balance
                    at January 1, 2007
                
                
                1,034,833
                
                $
                2.62Granted
                
                
                660,400
                
                
                4.68Forfeited
                
                
                (74,475
                )
                
                2.84Vested
                
                
                (393,548
                )
                
                2.54Balance
                    at December 31, 2007
                
                
                1,227,210
                
                $
                3.74


As
      of
      December 31, 2007, there was $3,474,365 of total unrecognized compensation
      cost
      related to non-vested options. This cost is expected to be recognized over
      a
      weighted-average period of 38.5 months.




The
      total
      fair value of options vested during the years ended December 31, 2007, 2006
      and
      2005 was $912,879, $441,417 and $78,134, respectively.




**Note
      10. Related Party Transactions**




**Transactions
      with Aristocrat**





During
      2006, Aristocrat International Pty. Limited and its affiliates (“Aristocrat”)
      purchased PokerTek common stock. Aristocrat is a wholly owned subsidiary and
      affiliate of Aristocrat Leisure Limited, a leading
      global provider of gaming solutions that focuses primarily on video slot
      machines, progressive systems and casino management systems. As
      of
      December 31, 2007 and December 31, 2006 Aristocrat owned 16.53% and 19.08%,
      respectively, of PokerTek common stock.





In January
      2006, the Company entered into an international distribution rights agreement
      with Aristocrat. The
      distribution agreement provides Aristocrat with the sole and exclusive right
      to
      globally ( excluding
      the United States and Canada) distribute, market, enter into license agreements and, under certain
      circumstances, manufacture the PokerPro
      system. Aristocrat purchases PokerPro systems manufactured by PokerTek and
      pays
      PokerTek a portion of the license fees received from each customer in connection
      with Aristocrat’s licensing of the PokerPro system. License fees and equipment
      sales from Aristocrat of $388,611 and $1,337,342, respectively, were recorded
      in
      2007, while $13,735 and $1,144,829, respectively, were recorded during 2006. As
      of
      December 31, 2007, Aristocrat owed the Company $176,476, which was paid in
      full
      in January 2008.




F-16




**Office
      Lease**





The
      Company currently leases its office and manufacturing facility from an entity
      owned and controlled by the Company’s President and Vice Chairman of the Board
      of Directors. The entity purchased the building while the Company was already
      a
      tenant. The lease terms were negotiated and are consistent with the rent paid
      by
      other tenants in the building. Rent expense recorded for the leased space for
      the year ended December 31, 2007 was $160,766 and for the year ended December
      31, 2006, rent expense was $147,090, of which $45,490 was paid to the related
      party.





**Note
      11. Commitments and Contingencies**





**Leases**





The
      Company leases its corporate
      office and manufacturing facility under a
      lease agreement with a term of 4 years. The lease requires the Company to pay
      property taxes, insurance and maintenance. This
      facility is approximately 21,600 square feet and is located in Matthews, North
      Carolina.  This
      facility is leased by an
      entity
      owned and controlled by the Company’s President and Vice Chairman of the Board
      of Directors (see Note 10 - “Related Party Transactions”).





The
      Company also leases certain equipment under lease agreements with terms up
      to 3
      years and a storage facility with a one-year term.





The
      following is a schedule by year of the future minimum lease payments due under
      agreements with terms extending beyond one year:


**Year
                  Ending December 31,**
              
              **Amount**2008
              
              $
              264,4862009
              
              
              257,2022010
              
              
              241,5352011
              
              
              146,400$
              909,623


Rent
      expense for the years ended December 31, 2007, 2006 and 2005 was $192,636,
      $151,809 and $76,138, respectively.




**Employment
      Agreements**





The
      Company has entered into employment agreements with certain officers that
      include commitments related to base salaries and certain benefits. These
      agreements have terms of two years.





**Reviews
      and Audits by Regulatory Authorities**





The
      Company’s operations are subject to a number of regulatory authorities,
      including various gaming regulators, the Internal Revenue Service, and other
      state and local authorities.  From time to time, the Company is notified by
      such authorities of reviews or audits they wish to conduct.  To date,
      reviews have been resolved with minimal, if any, financial impact to the
      Company.  The state of North Carolina is currently performing a routine
      sales and use tax audit covering periods from 2004 through 2007.  The
      Company may be subject to other income, property, sales and use, or franchise
      tax audits in the normal course of business.  The Company believes it has
      complied with relevant regulations, and based on facts presently known, does
      not
      believe the outcome of the current audit will have a material adverse effect
      on
      the Company’s financial condition or results of operations.




F-17





**Indemnifications**





The
      Company maintains directors’ and officers’ liability insurance for the benefit
      of its directors and certain of its officers. The Company has entered into
      a
      separate indemnification agreement with Lyle Berman, the Chairman of the Board
      of Directors, which provides for indemnification for related expenses including
      attorneys’ fees, judgments, fines and settlement amounts incurred by Mr. Berman
      in any action or proceeding.





The
      Company also indemnifies its casino customers from any claims or suits brought
      by a third party alleging infringement of a United States patent, copyright
      or
      mask work right. The Company agrees to pay all costs and damages, provided
      the
      customer provides prompt written notice of any claim.





**Legal
      Proceedings**





The
      Company is subject to claims and assertions in the ordinary course of business.
      Legal matters are inherently unpredictable and the Company’s assessments may
      change based on future unknown or unexpected events.





***Tellis*** :
      On
      February 5, 2007, Tellis Software, Inc. (“Tellis”) filed a Complaint against
      PokerTek and Gehrig “Lou” White, the Company’s Vice Chairman of the Board of
      Directors and former Chief Executive Officer, in the United States District
      Court for the Southern District of Texas. The Complaint alleged that PokerTek
      breached a Software Development Agreement (the “Development Agreement”), that
      PokerTek and Mr. White committed fraud in connection with the Development
      Agreement and that PokerTek had been unjustly enriched and/or that Tellis was
      entitled to a *quantum
      merit* recovery. As to all counts, Tellis sought damages equivalent to a 2% equity
      interest in PokerTek and bonuses of up to $730,000, plus attorneys’ fees, costs,
      and interest. For the fraud count, Tellis also sought unspecified exemplary
      damages.





In
      December 2007, the parties settled the lawsuit, which was withdrawn with
      prejudice.





***Lightning
      PokerTM:*** On
      August 2, 2006, the Company was served with a complaint filed on July 25, 2006,
      in the United States District Court for the Eastern District of Pennsylvania,
      by
      Pokermatic, Incorporated, d/b/a Lightning Poker The complaint alleged antitrust
      violations, unfair competition, civil conspiracy, trade slander, tortious
      interference and defamation, and sought a declaration of non-infringement of
      the
      Company’s design patent. The complaint sought treble damages, attorneys' fees
      and declaratory and injunctive relief.





On
      August
      17, 2006, PokerTek asked the United States District Court in Philadelphia,
      Pennsylvania to dismiss the case or transfer venue and to award costs and
      attorneys’ fees. On September 27, 2006, the judge granted the Company’s request
      regarding improper venue and ordered the case  transferred
      to the United States District Court for the Western District of North
      Carolina.  The
      case
      arrived in  United
      States District Court for the Western District of North Carolina on or about
      November 8, 2006.





On
      November 16, 2006, Pokermatic dismissed the case without prejudice.





Subsequent
      to December 31, 2007, Lightning Poker filed a complaint in the United States
      District Court for the District of New Jersey alleging PokerTek had infringed
      United States Patent No. 7,306,516, owned by Lightning Poker (see Note 14 -
      “Subsequent Events”).




F-18


**Note
      12. Summarized Quarterly Financial Information
      (Unaudited)**


**2007**Q1
              
              Q2
              
              Q3
              
              Q4
              
              TotalRevenues:License
                  and service fees
              
              $
              508,111
              
              $
              601,991
              
              $
              621,413
              
              $
              763,193
              
              $
              2,494,708Product
                  sales
              
              
              83,465
              
              
              313,705
              
              
              455,439
              
              
              657,374
              
              
              1,509,983**Total
                  revenues**
              
              
              591,576
              
              
              915,696
              
              
              1,076,852
              
              
              1,420,567
              
              
              4,004,691Costs
                  and operating expenses:Cost
                  of product sales
              
              
              73,587
              
              
              243,865
              
              
              379,715
              
              
              640,876
              
              
              1,338,043Selling,
                  general and administrative(a)
              
              
              1,862,703
              
              
              2,060,840
              
              
              3,257,939
              
              
              2,564,039
              
              
              9,745,521Research
                  and development
              
              
              1,007,288
              
              
              1,122,791
              
              
              1,144,586
              
              
              1,007,333
              
              
              4,281,998Depreciation
              
              
              365,808
              
              
              467,443
              
              
              563,477
              
              
              656,617
              
              
              2,053,3453,309,386
              
              
              3,894,939
              
              
              5,345,717
              
              
              4,868,865
              
              
              17,418,907**Operating
                  loss**
              
              
              (2,717,810
              )
              
              (2,979,243
              )
              
              (4,268,865
              )
              
              (3,448,298
              )
              
              (13,414,216
              )Interest
                  income, net
              
              
              90,832
              
              
              168,422
              
              
              178,909
              
              
              126,437
              
              
              564,600**Net
                  loss**
              
              $
              (2,626,978
              )
              $
              (2,810,821
              )
              $
              (4,089,956
              )
              $
              (3,321,861
              )
              $
              (12,849,616
              )Net
                  loss per common share - basic and diluted
              
              $
              (0.28
              )
              $
              (0.27
              )
              $
              (0.37
              )
              $
              (0.30
              )
              $
              (1.23
              )Weighted
                  average common shares outstanding -basic
                  and diluted
              
              
              9,472,020
              
              
              10,503,810
              
              
              10,920,257
              
              
              10,934,464
              
              
              10,462,912


*a)*
              *Note
                  that selling, general and administrative expenses for the third
                  quarter of
                  2007 included higher than normal legal expenses, including a $250,000
                  accrual for settlement of the Tellis lawsuit discussed in Note
                  11.*


**2006**Q1
              
              Q2
              
              Q3
              
              Q4
              
              TotalRevenues:License
                  and service fees
              
              $
              360,000
              
              $
              133,178
              
              $
              135,424
              
              $
              195,384
              
              $
              823,986Product
                  sales
              
              
              112,516
              
              
              181,086
              
              
              104,018
              
              
              758,311
              
              
              1,155,931**Total
                  revenues**
              
              
              472,516
              
              
              314,264
              
              
              239,442
              
              
              953,695
              
              
              1,979,917Costs
                  and operating expenses:Cost
                  of product sales
              
              
              109,688
              
              
              172,613
              
              
              98,153
              
              
              747,543
              
              
              1,127,997Selling,
                  general and administrative
              
              
              992,576
              
              
              1,517,816
              
              
              1,596,041
              
              
              1,973,150
              
              
              6,079,583Research
                  and development
              
              
              1,040,759
              
              
              910,662
              
              
              872,241
              
              
              1,125,561
              
              
              3,949,223Depreciation
              
              
              115,923
              
              
              152,007
              
              
              182,019
              
              
              259,644
              
              
              709,5932,258,946
              
              
              2,753,098
              
              
              2,748,454
              
              
              4,105,898
              
              
              11,866,396**Operating
                  loss**
              
              
              (1,786,430
              )
              
              (2,438,834
              )
              
              (2,509,012
              )
              
              (3,152,203
              )
              
              (9,886,479
              )Interest
                  income, net
              
              
              195,695
              
              
              206,849
              
              
              192,647
              
              
              145,570
              
              
              740,761**Net
                  loss**
              
              $
              (1,590,735
              )
              $
              (2,231,985
              )
              $
              (2,316,365
              )
              $
              (3,006,633
              )
              $
              (9,145,718
              )Net
                  loss per common share - basic and diluted
              
              $
              (0.17
              )
              $
              (0.24
              )
              $
              (0.24
              )
              $
              (0.32
              )
              $
              (0.97
              )Weighted
                  average common shares outstanding - basicand
                  diluted
              
              
              9,469,598
              
              
              9,472,020
              
              
              9,472,020
              
              
              9,472,020
              
              
              9,471,423


F-19
  **2005**Q1
              
              Q2
              
              Q3
              
              Q4
              
              TotalRevenues:License
                  and service fees
              
              $
              -
              
              $
              -
              
              $
              42,000
              
              $
              228,400
              
              $
              270,400Product
                  sales
              
              
              -
              
              
              -
              
              
              5,360
              
              
              38,588
              
              
              43,948**Total
                  revenues**
              
              
              -
              
              
              -
              
              
              47,360
              
              
              266,988
              
              
              314,348Costs
                  and operating expenses:Cost
                  of product sales
              
              
              -
              
              
              -
              
              
              4,267
              
              
              34,239
              
              
              38,506Selling,
                  general and administrative
              
              
              259,779
              
              
              354,855
              
              
              383,769
              
              
              760,714
              
              
              1,759,117Research
                  and development
              
              
              464,988
              
              
              511,929
              
              
              532,166
              
              
              778,712
              
              
              2,287,795Depreciation
              
              
              3,314
              
              
              3,313
              
              
              13,813
              
              
              99,343
              
              
              119,783728,081
              
              
              870,097
              
              
              934,015
              
              
              1,673,008
              
              
              4,205,201**Operating
                  loss**
              
              
              (728,081
              )
              
              (870,097
              )
              
              (886,655
              )
              
              (1,406,020
              )
              
              (3,890,853
              )Interest
                  income, net
              
              
              3,082
              
              
              14,557
              
              
              15,504
              
              
              157,166
              
              
              190,309**Net
                  loss**
              
              $
              (724,999
              )
              $
              (855,540
              )
              $
              (871,151
              )
              $
              (1,248,854
              )
              $
              (3,700,544
              )Net
                  loss per common share - basic and diluted
              
              $
              (0.11
              )
              $
              (0.12
              )
              $
              (0.12
              )
              $
              (0.14
              )
              $
              (0.49
              )Weighted
                  average common shares outstanding - basicand
                  diluted
              
              
              6,695,576
              
              
              7,080,357
              
              
              7,234,270
              
              
              9,036,294
              
              
              7,517,278


**Note
      13. Segment Information**




The
      Company has determined that there is one reportable business segment with two
      product lines based on how resources are allocated and operating decisions
      are
      made. Management evaluates performance and allocates
      resources based on operating profit or loss. However, a s
      the
      amusement product line matures, the manner in which management operates the
      business may change in the future.




**Note
      14. Subsequent Events**





On
      March
      17, 2008, PokerTek was served with a complaint filed on March 6, 2008 in the
      United States District Court for the District of New Jersey, by Lightning
      Gaming, Inc. and Lightning Poker, Inc. The complaint alleges that PokerTek
      infringes United States Patent No. 7,306,516, owned by Lightning Poker. The
      complaint is seeking unspecified monetary damages from PokerTek as well as
      a
      permanent injunction enjoining the Company from infringing the patent or
      unfairly competing with the plaintiffs. PokerTek believes that either its
      products do not violate the patent that forms the basis of the lawsuit, that
      the
      patent is invalid, or both.





On
      March
      19, 2008, PokerTek, Inc received an extension of credit from UBS Financial
      Services resulting in the creation of a direct financial obligation. PokerTek,
      Inc. received $1.0 million from UBS Financial Services bearing interest payable
      monthly at 30-day LIBOR plus 0.25%. This extension of credit is collateralized
      by the Company’s portfolio of $3.9 million of auction rate securities held at
      UBS.





On
      March
      24, 2008, PokerTek, Inc. entered into a loan agreement with Lyle A. Berman,
      James T. Crawford III, Arthur Lee Lomax and Gehrig White. Messrs. Crawford,
      Lomax and White are the founders of the Company. Each of the lenders are also
      members of our board of directors, with Mr. Berman serving as Chairman and
      Mr.
      White serving as Vice Chairman. Upon closing, the lenders loaned the Company
      $2.0 million and the Company issued the lenders a promissory note in the
      principal amount of $2.0 million The loan bears interest at 13% with all unpaid
      principal and interest payable on March 24, 2010. The Company intends to pay
      interest on a monthly basis and the principle amount of the loan may be repaid
      prior to maturity without penalty. The loan contains no restrictive covenants
      and is collateralized by a security interest in the Company’s PokerPro
      systems deployed in North America and on cruise ships as of December 31, 2007.




F-20


**SCHEDULE
      II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**


**Balance
                    at**
                  **Beginning
                    of**
                  **Period**
                
                **Additions**
                  **Charged
                    to**
                  **Costs
                    and**
                  **Expenses**
                
                **Charged
                    to**
                  **Other**
                  **Accounts**
                
                **Deductions**
                  **for
                    Amounts**
                  **Written
                    Off**
                
                **Balance
                    at**
                  **End
                    of**
                  **Period****ALLOWANCE
                    FOR DOUBTFUL ACCOUNTS****Year
                    ended December 31, 2007**
                
                $
                19,301
                
                $
                47,129
                
                $
                -
                
                $
                45,368
                
                $
                21,062**Year
                    ended December 31, 2006**
                
                
                -
                
                
                19,301
                
                
                -
                
                
                -
                
                
                19,301**Year
                    ended December 31, 2005**
                
                
                8,000
                
                
                -
                
                
                
                
                
                8,000
                
                
                -
  S-1




**EXHIBIT
      INDEX**


Exhibit
                  No.
              
              Description2.1
              
              Plan
                  of Merger of PokerTek, LLC with and into PokerTek, Inc. (f/k/a
                  National
                  Card Club Corporation), dated July 27, 2004 (incorporated by reference
                  to
                  Exhibit 2.1 to our Registration Statement on Form S-1 filed on
                  August 4,
                  2005 (No. 333-127181)).3.1
              
              Restated
                  Articles of Incorporation (incorporated by reference to Exhibit
                  3.1 to our
                  Registration Statement on Form S-1 filed on August 4, 2005 (No.
                  333-127181)).3.2
              
              Bylaws
                  (As Amended and Restated Through July 29, 2005) (incorporated by
                  reference
                  to Exhibit 3.2 to our Registration Statement on Form S-1 filed
                  on August
                  4, 2005 (No. 333-127181)).4.1
              
              Specimen
                  Common Stock certificate (incorporated by reference to Exhibit
                  4.1 to
                  Amendment No. 2 to our Registration Statement on Form S-1/A filed
                  on
                  October 5, 2005 (No. 333-127181)).4.2
              
              Securities
                  Purchase Agreement by and among PokerTek, Inc. and the investors
                  listed on
                  the Schedule of Buyers attached thereto, dated as of April 23,
                  2007
                  (incorporated by reference to Exhibit 4.1 to our Current Report
                  on Form
                  8-K filed on April 27, 2007).4.3
              
              Form
                  of Warrant to Purchase Common Stock (incorporated by reference
                  to Exhibit
                  4.2 to our Current Report on Form 8-K filed on April 27,
                  2007).4.4
              
              Registration
                  Rights Agreement, by and among PokerTek, Inc. and the Buyers listed
                  therein, dated as of April 26, 2007 (incorporated by reference
                  to Exhibit
                  4.3 to our Current Report on Form 8-K filed on April 27,
                  2007).10.1
              
              Option
                  Agreement between World Poker Tour, LLC and PokerTek, Inc. (as
                  successor
                  to PokerTek, LLC), dated April 7, 2004 (incorporated by reference
                  to
                  Exhibit 10.1 to our Registration Statement on Form S-1 filed on
                  August 4,
                  2005 (No. 333-127181)).10.2
              
              Amendment
                  to Option Agreement between World Poker Tour, LLC and PokerTek,
                  Inc. (as
                  successor to PokerTek, LLC), dated as of June 10, 2004 (incorporated
                  by
                  reference to Exhibit 10.2 to our Registration Statement on Form
                  S-1 filed
                  on August 4, 2005 (No. 333-127181)).10.3
              
              Amendment
                  Two to Option Agreement between PokerTek, Inc. and WPT Enterprises,
                  Inc.,
                  dated as of April 23, 2007 (incorporated by reference to Exhibit
                  10.1 to
                  our Current Report on Form 8-K filed on May 14, 2007).10.4
              
              Non-Exclusive
                  Software License Agreement between PokerTek, Inc. and Standing
                  Stone
                  Gaming, LLC, dated as of January 26, 2005 (incorporated by reference
                  to
                  Exhibit 10.3 to our Registration Statement on Form S-1 filed on
                  August 4,
                  2005 (No. 333-127181)).10.5
              
              Office/Warehouse
                  Lease Agreement between PokerTek, Inc. and AdBel, Ltd., dated March
                  28,
                  2005 (incorporated by reference to Exhibit 10.4 to our Registration
                  Statement on Form S-1 filed on August 4, 2005 (No.
                  333-127181)).10.6
              
              Trademark
                  Assignment Agreement among PokerTek, Inc., James Crawford and Gehrig
                  H.
                  White, effective July 13, 2005 (incorporated by reference to Exhibit
                  10.5
                  to our Registration Statement on Form S-1 filed on August 4, 2005
                  (No.
                  333-127181)).10.7
              
              PokerTek,
                  Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit
                  99 to
                  our Registration Statement on Form S-8 filed on June 6, 2007 (No.
                  333-143552)).*10.8
              
              Form
                  of Employee Incentive Stock Option Agreement for PokerTek, Inc.
                  2007 Stock
                  Incentive Plan (incorporated by reference to Exhibit 10.3 to our
                  Form 10-Q
                  for the quarterly period ending June 30, 2007 filed on August 14,
                  2007).*10.9
              
              Form
                  of Employee Nonqualified Stock Option Agreement for PokerTek, Inc.
                  2007
                  Stock Incentive Plan (incorporated by reference to Exhibit 10.4
                  to our
                  Form 10-Q for the quarterly period ending June 30, 2007 filed on
                  August
                  14, 2007).*
  
  10.10
              
              Form
                  of Non-Employee Director Nonqualified Stock Option Agreement for
                  PokerTek,
                  Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit
                  10.5
                  to our Form 10-Q for the quarterly period ending June 30, 2007
                  filed on
                  August 14, 2007).*10.11
              
              Form
                  of Independent Contractor Nonqualified Stock Option Agreement for
                  PokerTek, Inc. 2007 Stock Incentive Plan (incorporated by reference
                  to
                  Exhibit 10.6 to our Form 10-Q for the quarterly period ending June
                  30,
                  2007 filed on August 14, 2007).*10.12
              
              Form
                  of Restricted Stock Award Agreement for PokerTek, Inc. 2007 Stock
                  Incentive Plan (incorporated by reference to Exhibit 10.7 to our
                  Form 10-Q
                  for the quarterly period ending June 30, 2007 filed on August 14,
                  2007).*10.13
              
              PokerTek,
                  Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit
                  10.6
                  to our Registration Statement on Form S-1 filed on August 4, 2005
                  (No.
                  333-127181)).*10.14
              
              Form
                  of Stock Option Agreement for PokerTek, Inc. 2005 Stock Incentive
                  Plan
                  (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to
                  our
                  Registration Statement on Form S-1/A filed on September 13, 2005
                  (No.
                  333-127181)).*10.15
              
              Form
                  of Non-Employee Director Stock Option Agreement for PokerTek, Inc.
                  2005
                  Stock Incentive Plan (incorporated by reference to Exhibit 99.2
                  to our
                  Current Report on Form 8-K filed on March 6, 2006).*10.16
              
              PokerTek,
                  Inc. 2004 Stock Incentive Plan, as amended and restated through
                  July 29,
                  2005 (incorporated by reference to Exhibit 10.8 to our Registration
                  Statement on Form S-1 filed on August 4, 2005 (No.
                  333-127181)).*10.17
              
              Form
                  of Stock Option Agreement for 2004 Stock Incentive Plan (incorporated
                  by
                  reference to Exhibit 10.9 to our Registration Statement on Form
                  S-1 filed
                  on August 4, 2005 (No. 333-127181)).*10.18
              
              Employment
                  Agreement by and between PokerTek, Inc. and Christopher J.C. Halligan,
                  dated January 17, 2008.*10.19
              
              Employment
                  Agreement by and between PokerTek, Inc. and Mark D. Roberson, dated
                  January 17, 2008.*10.20
              
              Key
                  Employee Agreement between PokerTek, Inc. and Hal Shinn, dated
                  as of
                  August 9, 2004 (incorporated by reference to Exhibit 10.12 to our
                  Registration Statement on Form S-1 filed on August 4, 2005 (No.
                  333-127181)).*10.21
              
              Amendment
                  to Key Employee Agreement between PokerTek, Inc. and Hal Shinn,
                  effective
                  as of July 1, 2005 (incorporated by reference to Exhibit 10.13
                  to our
                  Registration Statement on Form S-1 filed on August 4, 2005 (No.
                  333-127181)).*10.22
              
              Extension
                  to Key Employee Agreement between PokerTek, Inc. and Hal Shinn,
                  effective
                  as of August 9, 2006 (incorporated by reference to Exhibit 10.1
                  to our
                  Current Report on Form 8-K filed on April 13, 2007).*10.23
              
              Indemnification
                  Agreement between PokerTek, Inc. and Lyle Berman, effective as
                  of January
                  31, 2005 (incorporated by reference to Exhibit 10.14 to our Registration
                  Statement on Form S-1 filed on August 4, 2005 (No.
                  333-127181)).*10.24
              
              Board
                  Member Agreement between PokerTek, Inc. and Lyle Berman, dated
                  January 31,
                  2005 (incorporated by reference to Exhibit 10.20 on our Form 10-K
                  for the
                  fiscal year ended December 31, 2005 filed on March 16,
                  2006).*10.25
              
              Board
                  Member Agreement between PokerTek, Inc. and Joe Lahti, dated March
                  2, 2006
                  (incorporated by reference to Exhibit 99.1 to our Current Report
                  on Form
                  8-K filed on March 6, 2006).*10.26
              
              Form
                  of Subscription Agreement for PokerTek, Inc. (incorporated by reference
                  to
                  Exhibit 10.16 to our Registration Statement on Form S-1 filed on
                  August 4,
                  2005 (No. 333-127181)).10.27
              
              Form
                  of Warrant Agreement between PokerTek, Inc. and Feltl and Company
                  (incorporated by reference to Exhibit A to Exhibit 1.1 to Amendment
                  No. 1
                  to our Registration Statement on Form S-1/A filed on September
                  13, 2005
                  (No. 333-127181)).









10.28
              
              PokerPro
                  Software Licensing Agreement between PokerTek, Inc. and Seminole
                  Tribe of
                  Florida, dated September 1, 2005 (incorporated by reference to
                  Exhibit
                  10.19 to Amendment No. 2 to our Registration Statement on Form
                  S-1/A filed
                  on October 5, 2005 (No. 333-127181)).10.29
              
              Distribution
                  Agreement between PokerTek, Inc. and Aristocrat International Pty.
                  Limited
                  and its Affiliates, dated January 20, 2006 (incorporated by reference
                  to
                  Exhibit 10.1 to our Current Report on Form 8-K filed on January
                  26,
                  2006).21
              
              Subsidiaries23.1
              
              Consent
                  of McGladrey & Pullen, LLP.31.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.32.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002.32.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002.





*  Compensatory
      plan or arrangement or management contract