**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, 2006


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 jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)




**1020
                Crews Road, Suite J, Matthews, North Carolina
                28106**(Address
                of principal executive offices)




**(704)
                849-0860**(Registrant’s
                telephone number, including area
                code)





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


of
      1934:





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 Securities Exchange Act of
      1934:





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 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, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check
      one):


Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No
x





The
      aggregate market value of the voting common equity held by non-affiliates of
      the
      registrant as of June 30, 2006 was $48,781,076.





On
      March
      10, 2007, there were 9,472,020 outstanding shares of the registrant’s common
      stock.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Certain
      portions of our Proxy Statement for the 2007 Annual Meeting of Shareholders
      have
      been incorporated by reference into Part III of this Annual Report on Form
      10-K.








**ANNUAL
      REPORT ON FORM 10-K**


**Table
      of Contents**




**Page**Cautionary
                Note Regarding Forward-Looking Statements**PART
                I**Item 1.
            
            Business
            
            1Item
                1A.
            
            Risk
                Factors
            
            11Item
                1B.
            
            Unresolved
                Staff Comments
            
            20Item
                2.
            
            Properties
            
            20Item
                3.
            
            Legal
                Proceedings
            
            20Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            21**PART
                II**Item
                5.
            
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            
            21Item
                6.
            
            Selected
                Financial Data
            
            23Item
                7.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            24Item 7A.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            32Item
                8.
            
            Financial
                Statements and Supplementary Data
            
            32Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            32Item
                9A.
            
            Controls
                and Procedures
            
            32Item
                9B.
            
            Other
                Information
            
            32**PART
                III**Item
                10.
            
            Directors,
                Executive Officers and Corporate Governance
            
            33Item
                11.
            
            Executive
                Compensation
            
            33Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            33Item
                13.
            
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            33Item 14.
            
            Principal
                Accounting Fees and Services
            
            33**PART
                IV**Item
                15.
            
            Exhibits,
                Financial Statement Schedules
            
            33INDEX
                TO FINANCIAL STATEMENTS
            
            F-1SIGNATURES
            
            35EXHIBIT
                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, as amended.
      The
      forward-looking statements herein include, but are not limited to, the expected
      adoption of the PokerPro systems by casinos and other customers, the expected
      acceptance of the PokerPro systems by players, our strategy, future operations,
      financial position, revenues or costs, prospects, plans, expectations and
      objectives, and 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 filed with the Securities and Exchange Commission. As a result of
      the
      risks and uncertainties, the results or events indicated by the 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 of this annual report on Form 10-K 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.








**Part
      I**





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





**Overview**





We
      were
      formed to develop and market the PokerPro® system, an electronic poker table
      that provides a fully-automated poker-room environment, to tribal casinos,
      commercial casinos, cruise ships and card clubs. Our first product was a
      10-seated table developed in 2003, and in November 2006 we introduced PokerPro®
Heads-UpTM, our 2-seated product. 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, collecting the “rake”, which is the amount the casino
      or card club charges for each hand of poker, and distributing payouts. 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 the rake.





Poker’s
      popularity has surged in recent years. The American Gaming Association (“AGA”)
      reports that based on a 2006 poll, approximately 18% of American adults have
      played poker in the past 12 months. However, because the poker room’s revenue is
      limited to the rake and because of the labor costs associated with using live
      dealers at each poker table, operating a poker room at a casino or card club
      is
      currently less profitable than other forms of gaming offered in a casino or
      card
      club. As a result, expanding or in some cases continuing the allocation of
      floor
      space to the poker room to support the potential influx of new customers is
      a
      difficult economic decision.





The
      PokerPro system is designed to increase casino revenue while helping to reduce
      the costs associated with poker rooms. The PokerPro system has shown that by
      eliminating a live dealer, more hands of poker can be played in a given amount
      of time, thereby increasing revenue generated by the rake. In addition, the
      elimination of a live dealer allows casinos and card clubs to avoid the labor
      costs of using a live dealer to operate a poker table. The PokerPro system
      is
      also designed to improve players’ gaming experience by eliminating dealer and
      player mistakes, eliminating the need for dealer tipping and by providing
      players with automated game information not available at poker tables operated
      by live dealers. We have also designed the PokerPro system to increase security
      in casinos by eliminating the potential for collusion between a player and
      a
      live dealer. In addition, because the PokerPro system provides automated
      information on bets placed and hands played that is not available with tables
      operated by live dealers, we believe it will increase security by assisting
      casinos in identifying potential collusion between players.





We
      have
      also received approval to conduct business as a company in California, Michigan,
      Arkansas, British Columbia, and various tribal gaming jurisdictions. We have
      also submitted applications in a number of major gaming jurisdictions, including
      Nevada, New Jersey, and Louisiana.





We
      have
      received product certifications from Gaming Laboratories International, Inc.
      (“GLI”) and BMM International (“BMM”), independent testing
      laboratories.





In
      addition our product has received electrical, communications, and safety
      certifications that comply with certain requirements and restrictions
      of:




·
            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;




1


·
            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.





As
      of
      December 31, 2006 we had 14 customers in over 30 sites in the United States,
      cruise ships, United Kingdom, Australia, and South Africa. We are responsible
      for the United States, Canada, and cruise ship markets, and our international
      distributor, Aristocrat International Pty. Limited, is responsible for the
      rest
      of the world.





Additional
      information regarding our revenues during the years ended December 31, 2006,
      2005 and 2004 is contained in Item 8 of this report.





We
      expect
      to generate revenue from licensing the rights to use the software necessary
      to
      operate the PokerPro system and from providing maintenance and support services
      to customers that license the PokerPro system. We expect to derive between
      5%
      and 10% of our revenue from such maintenance and support services. Initially,
      we
      have licensed the PokerPro system to customers because we believe it will
      be easier
      for us to gain entry to our target markets if our customers in such markets
      are
      not required to commit significant resources in order to install and evaluate
      the PokerPro system. However, as the PokerPro system gains market acceptance,
      we
      may sell customers such components.




We
      were
      founded on August 22, 2003, by Gehrig H. “Lou” White, James T. Crawford and
      Arthur Lee Lomax. We were initially organized 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 each member of PokerTek, LLC received six shares
      of
      our 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 by us immediately before the merger were cancelled. Simultaneous
      with this merger, we changed our name to PokerTekTM, Inc.





We
      have
      determined that we have one reportable business segment based on how resources
      are allocated and operating decisions are made. Management evaluates performance
      and allocates
      resources based on operating profit or loss. Financial information regarding
      our
      one segment can be found in Item 8of this report.


**Recent
        Events**
 
 On
        January 24, 2007, we announced five new customer installations. The latest
        installations were:
  ·
              Crown
                  Casino, Melbourne, Australia;
 ·
              Carnival
                  City, Johannesburg, South Africa;
 ·
              Greektown
                  Casino, Detroit, Michigan;
 ·
              MotorCity
                  Casino, Detroit, Michigan; and
 ·
              FLB
                  Sports Bar & Casino, Folsom,
                  California.
 
 On
        February 16, 2007, we announced that after a successful trial period, Princess
        Cruises has agreed to have 22 PokerPro tables installed by the end of fiscal
        2007.




**Overview
      of the PokerPro System**





The
      PokerPro system is an advanced poker table with electronic components that
      allows players to play against other players in the same poker game at the
      same
      poker table using electronic cards and chips. Our original 10-seated table,
      which has the look of a traditional poker table, has 10 player positions. Our
      latest product, Heads-Up, is a two-seated version. Each player position has
      a
      touch screen monitor for the player to view cards, remaining chips and other
      game information, such as hands previously played by the player. The player
      also
      uses the touch screen monitor to input game decisions, such as betting, checking
      and folding. There is a 40" LCD video screen in the center of the 10-seat table
      that displays chips bet by each player and “community” cards dealt, as well as
      other game information. Instead of a live dealer, electronic cards are dealt
      to
      the players by a central server that is physically separate from the poker
      table. The PokerPro system currently allows players to play limit and no-limit
      Texas Hold ’em in both ring/cash games and single table tournaments. We have
      recently successfully tested Omaha, the next most popular variety of casino
      poker after Texas Hold’em, and multi-table tournaments and 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.





2


In
      addition to the PokerPro table, the PokerPro system consists of a Cage Manager,
      which is an automated system that creates and maintains player accounts and
      transacts cash-in and cash-out functions. A player who wants to play on the
      PokerPro system will first establish an account with the Cage Manager 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 sign up at a staffed waiting list station to
      reserve the next available position. The waiting list display indicates where
      a
      player is in the queue and, when a position becomes available, directs the
      player to the appropriate table. The PokerPro system’s administrative tools are
      designed to allow casino management to stop, start and monitor the poker games
      in progress and 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. We have filed applications for numerous patents covering various aspects
      of the PokerPro system.





**Our
      License from WPT Enterprises, Inc.**





WPT
      Enterprises, Inc., which operates the World Poker Tour, made a strategic loan
      of
      $185,090 to our former affiliate PokerTek, LLC and in connection with such
      loan,
      granted PokerTek, LLC 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 to casinos, card rooms,
      and
      other commercial poker venues. Although we repaid the loan in full in October
      2005, we continue to enjoy the rights granted to us pursuant to the license.
      WPT
      may terminate the license it has granted us in the event 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 voluntary bankruptcy proceedings or
      involuntary bankruptcy proceedings that are not dismissed within 30 days. We
      obtained the rights in this license when PokerTek, LLC merged into us in July
      2004.





**Market
      Opportunities for Poker-Related Entertainment**





Consumer
      spending on poker increased dramatically in 2005. The AGA reported that in
      Nevada and New Jersey, the only states that track poker revenue, poker players
      spent $207.2 million on organized poker in 2005, a 37% increase over 2004.
      According to Casino City Press, as of January 31, 2007, there were approximately
      6,000 poker tables operating in the United States and over 2,600 outside the
      United States. Each market presents varying degrees of opportunity and operates
      under different regulatory guidelines.





We
      intend
      to market the PokerPro system to five distinct existing markets:





·
            tribal
                casinos (approximately 1,970 poker
                tables);


·
            commercial
                casinos (approximately 2,700 poker
                tables);


·
            card
                clubs (approximately 1,400 poker
                tables);


·
            cruise
                ships (approximately 150 poker tables);
                and


·
            international
                casinos (approximately 2,620 poker
                tables).





We
      initially established the PokerPro system in tribal casinos, as the regulatory
      requirements for manufacturing and distributing gaming machines to tribal
      casinos are the least burdensome. We next installed tables on cruise ships
      because, as with tribal casinos, there are minimal regulatory requirements.
      We
      also have received regulatory approval to install tables in commercial casinos
      in Arkansas and Michigan and in California card clubs. We continue to seek
      regulatory approval within the card club and commercial casino markets in other
      states.





3


Regulatory
      approval from the date of initial application for commercial casinos could
      take
      up to 24 months or longer. We intend to offer the PokerPro system to commercial
      casinos immediately upon regulatory approval in each state, as we did in both
      Arkansas and Michigan. The international market is much more complex from a
      regulatory standpoint. Regarding the international market, o n
      January
      20, 2006, PokerTek, Inc. entered into an international distribution rights
      agreement with Aristocrat International Pty. Limited and its affiliates.
      Aristocrat International Pty. Limited 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. 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 our PokerPro
      system, in return for Aristocrat’s payment to us of a portion of the license
      fees received by Aristocrat from each customer in connection with Aristocrat’s
      licensing of the PokerPro system. Among other things, we will, at our own
      expense, provide Aristocrat with the necessary training to install, operate,
      maintain and service the PokerPro system and obtain and maintain all current
      approvals of appropriate regulators in existence on the date of the distribution
      agreement. We entered into the agreement with Aristocrat because we believe
      that
      Aristocrat’s existing relationships with over 55 countries could broaden and
      hasten the acceptance of the PokerPro system.





**Markets**





*Tribal
      Casinos* .
      According to the Tribal Court Clearinghouse, of the 562 Federally-recognized
      Native American tribes, 224 were engaged in gaming, operating 354 gaming
      operations in 28 states. We have entered into a definitive agreement with the
      Seminole Tribe of Florida to license the PokerPro system. We currently have
      two
      PokerPro systems at the Seminole Tribe of Florida’s Hard Rock Hotel and Casino
      in Hollywood, Florida and two PokerPro systems at the Seminole Hard Rock Hotel
      and Casino in Tampa, Florida. We have also entered into an agreement with the
      Iowa Tribe of Oklahoma and have one PokerPro system at the Tribe’s Cimarron
      Casino in Perkins, Oklahoma. We have submitted an application seeking approval
      for the PokerPro system to the Connecticut Division of Special Revenue, which
      regulates gaming activity in tribal casinos in Connecticut. We have also
      prepared and submitted approval applications and have retained counsel in
      Louisiana, Mississippi, and Washington state to assist in the application
      process to have PokerTek and PokerPro approved for tribal casinos in those
      jurisdictions.





In
      October 2006, PokerTek and the PokerPro system was granted approval by GLI,
      whose certification is necessary before we may install the PokerPro system
      in
      certain tribal casinos. GLI certification allows us to market and distribute
      the
      PokerPro system to a majority of the tribal casinos in the United States where
      poker is allowed without any further product certification, since GLI has
      contracts with the majority of tribal casinos for product testing. In addition
      to GLI certification, we will also need to become certified as a gaming supplier
      with each tribal casino.





*Commercial
      Casinos* .
      The
      commercial casino segment of the poker market is the most mature and is almost
      as large as the tribal casino segment. The AGA reported that there were 455
      casinos operating in the 11 states that offered legalized gaming in 2005. The
      largest markets in terms of gross gaming revenue for commercial casinos were
      Nevada, which in 2005 had 268 casinos, and New Jersey, which in 2005 had 12
      casinos. According to Casino City Press, as of February 28, 2007 commercial
      casinos operated approximately 2,700 poker tables in the United States. We
      have
      submitted applications seeking approval for the PokerPro system to the
      appropriate regulatory bodies in Mississippi, Nevada and New Jersey and has
      retained counsel in Louisiana to assist with the commercial casino application
      approval process.





*Card
      Clubs* .
      In
      addition to poker tables either in commercial or tribal casinos, 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, as of
      February 28, 2007, California is the largest card club market in the United
      States, with 67 card clubs operating a total of approximately 1,100 tables,
      and
      72 card clubs located in Washington state operating approximately 240 tables.
      PokerTek has submitted an application to California and retained counsel in
      Washington to assist in the application process to have PokerTek and PokerPro
      approved for use by card clubs in those jurisdictions.





4


*Cruise
      Ships* .
      The
      cruise ship segment of the poker market is the newest. There were no poker
      tables on cruise ships until the PokerPro launch in April 2006. There are
      approximately 200 ocean-going cruise ships in the world, of which PokerPro
      currently has approximately 25 tables on 23 of these ships.





**Geographic
      Financial Information**





To
      date,
      we have generated substantially all of our revenues in the United States and
      all
      our long-lived assets are located in the United States or on cruise ships in
      international waters.





**Competition**





The
      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 working on a product similar to the PokerPro system. However, we
      expect that if we are successful in establishing market acceptance of the
      PokerPro system, we will attract additional competitive forces into the market.
      We expect that such competition may come from established manufacturers of
      gaming devices as well as newer companies. We anticipate that those potential
      competitors that are established manufacturers of gaming devices will have
      widespread brand recognition, substantially greater resources and marketing
      capabilities than we have and some, if not all, of the regulatory approvals
      that
      would be required to market and sell automated poker tables in our target
      markets. If we are unable to compete successfully against such potential
      competitors, we may be unable to establish market acceptance for the PokerPro
      system, which could prevent us from achieving or sustaining
      profitability.





We
      compete with other gaming and entertainment products and gaming supply companies
      for space on the casino customer’s floor, as well as for our customer’s capital
      spending. Some of the larger gaming supply companies with whom we compete with
      in this regard are International Game Technology, Progressive Gaming
      International, ShuffleMaster, and WMS Industries, Inc.





We
      will
      compete with poker tables using live dealers and other gaming and entertainment
      products within casinos and card clubs, including slot games, roulette, craps,
      sportsbook, keno, public domain table games such as blackjack, and other live
      and automated table games. In addition, we also expect to compete with Internet
      poker websites and other forms of Internet gaming.





We
      will
      compete to gain and expand market acceptance of the PokerPro system among owners
      and operators of casinos and card clubs as well as among poker players. The
      bases on which we will compete will differ between these two groups. We expect
      to compete for space on a casino’s or card club’s floor principally on the bases
      of revenue generation, cost savings, relationships with owners and operators
      of
      such casinos and card clubs and costs associated with switching from existing
      gaming devices. We expect to compete to attract and retain poker players
      principally on the bases of ease of play, speed of play, product functionality
      and costs associated with play.





**Research
      and Development**





Our
      research and development efforts to date have been solely focused on the
      development of the PokerPro system. Our research and development expenses were
      $3,949,223 during the fiscal year ended December 31, 2006, $2,287,795 during
      the
      fiscal year ended December 31, 2005, and $476,583 during the fiscal year ended
      December 31, 2004. The PokerPro system currently allows players to play limit
      and no-limit Texas Hold’em and Omaha in both ring/cash games and single and
      multi-table tournaments. We are in the process of designing improvements to
      the
      PokerPro system that allow other varieties of poker to be played and to add
      other functions that are currently unavailable in the PokerPro system or in
      other gaming technologies. We also may develop other related gaming technologies
      that are designed to benefit casinos or card clubs in the operation of their
      poker rooms.





5


**Description
      of Owned Intellectual Property**





We
      currently have applications for approximately 50 patents pending before the
      U.S.
      Patent and Trademark Office which relate to various aspects of the PokerPro
      system. However, patent applications can take many years to issue and we can
      provide no assurance that any of these patents will be issued at all. As we
      continue to develop new technology, we may file patent applications with respect
      to such technology. Although initiating and maintaining suits against third
      parties for infringement of intellectual property rights will likely require
      substantial financial resources, we intend to aggressively pursue anyone we
      reasonably believe is infringing upon our intellectual property rights. We
      have
      also registered the www.pokertek.com Internet domain name.





Gehrig
      “Lou” White, our Chief Executive Officer, and James Crawford, our President and
      Secretary, have jointly filed an application with the U.S. Patent and Trademark
      Office to register the “PokerPro” trademark. The application is pending. They
      have assigned us their rights in this application and have agreed to assign
      us
      the trademark if the trademark is registered by the U.S. Patent and Trademark
      Office.





**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 and our customers
      must
      comply with the applicable regulations of each jurisdiction in which we operate.
      We expect it to take 24 months or longer to obtain regulatory approval in some
      jurisdictions. Because the PokerPro system represents a new and innovative
      technology, it is impossible for us to accurately determine how the various
      regulatory authorities will view its sale and use, or how long it will take
      to
      obtain any required approvals or licenses. It is possible that the approval
      of
      the PokerPro system will take much longer than we expect or that the PokerPro
      system will not be approved in the jurisdictions where we intend to operate,
      in
      which case we will be unable to generate revenues in such jurisdictions. 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.





Initially,
      we intend to market the PokerPro system to tribal casinos nationally and to
      card
      clubs located in California and Washington. Another market where we have quickly
      gained acceptance are on cruise ships, which have regulations that are less
      burdensome than other markets. Eventually, we plan to market the PokerPro system
      to commercial casinos located in Nevada and to other potential customers both
      in
      the United States and internationally. We currently have customers in five
      states and three countries as well as on cruise ships. In the United States,
      we
      have received approval of the PokerPro system from the Seminole Tribe of
      Florida, the Chickasaw Nation of Oklahoma, the Iowa Tribe of Oklahoma, the
      California Gaming Control Commission, the Mississippi Gaming Commission, and
      the
      Arkansas Racing Commission. We have submitted applications seeking the approval
      of the PokerPro system to the Connecticut Division of Special Revenue, the
      New
      Jersey Casino Control Commission, Loto-Quebec, and the Nevada Gaming Control
      Board. The Seminole Tribe of Florida, which operates seven casinos in Florida,
      has registered the PokerPro system for use in its casinos, based on its
      classification of the PokerPro system as a “Class II” gaming device, as
      described below under “Tribal Casinos”. Internationally we will be relying on
      the distribution agreement entered into with Aristocrat, one of the largest
      gaming companies in the world.





At
      the
      Federal level, gaming devices are governed by the Federal Gambling Devices
      Act
      of 1962 (the “Johnson Act”) and the Indian Regulatory Gaming Act of 1988 (the
“IGRA”). 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 generally requires registration
      for manufacturers of gaming devices.





6


Enacted
      in 1988, 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. Gaming on Native American lands
      is also governed by the National Indian Gaming Commission (the “NIGC”), which
      promulgates regulations to enforce certain aspects of the IGRA.





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 may apply
      to
      us in some of the jurisdictions in which we intend to market and sell the
      PokerPro system.





*Tribal
      Casinos* .
      Gaming
      on tribal lands is governed by the IGRA, 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 divides tribal gaming into categories: Class I, Class II
      and
      Class III. Class I gaming includes traditional Native American social and
      ceremonial games, and is 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.





Based
      on
      our understanding of classification under IGRA, we believe that the PokerPro
      system will qualify as a permissible aid to Class II gaming and that tribal
      casinos that are located in states where poker is either expressly permitted
      or
      not expressly prohibited (so long as poker is being played somewhere in the
      state) will be legally entitled to use the PokerPro system, provided they
      otherwise comply with the IGRA, NIGC regulations and any applicable tribal
      regulations.





Before
      using the PokerPro system, a tribal casino may require a legal opinion stating
      that the device falls within the Class II category. The casino may also seek
      an
      advisory opinion from the NIGC. It may be difficult or expensive to obtain
      the
      necessary favorable legal or advisory opinions and we may not be able to obtain
      such opinions at all. Although NIGC opinions are only advisory and not binding
      upon a court of law, an adverse opinion by the NIGC would severely impact our
      ability to sell the PokerPro system to tribal casinos.





Many
      tribal casinos require devices such as the PokerPro system be approved by GLI
      before the casino will agree to use it. We received approval for the PokerPro
      system from GLI in October 2006. In addition to GLI certification, we must
      also
      become approved as a gaming supplier with each tribal casino.





It
      is
      possible that a court decision or a formal NIGC opinion may determine that
      the
      PokerPro system is not a form of Class II gaming, but instead a form of Class
      III gaming. Class III gaming is only permitted in tribal casinos where the
      tribe
      and the state in which the tribe is located have entered into a tribal-state
      compact that permits such gaming. Far fewer tribal casinos are allowed to engage
      in Class III gaming compared to Class II gaming. Therefore, if the PokerPro
      system is classified as a Class III game, it would have a material adverse
      effect on our business plan and other severe consequences, as any tribal casino
      using the PokerPro system that was not covered by an appropriate tribal-state
      compact would be engaged in illegal gambling.





7


*Card
      Clubs* .
      States
      that allow poker to be played in card clubs have various regulatory requirements
      that apply to manufacturers of gambling devices. We will be required to become
      a
      licensed manufacturer of gambling devices and the PokerPro system may have
      to
      meet certain technical requirements before we may manufacture and distribute
      the
      PokerPro system for use in card clubs. We have not obtained any licenses to
      use
      the PokerPro system in any state-regulated card clubs and there is no guarantee
      that we will be able to obtain such licenses in a timely fashion or at a cost
      acceptable to us, if at all.





*Commercial
      Casinos* .
      States
      that allow some form of casino-style gambling 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 will require that a license or finding of suitability be
      issued with respect to us as an entity, the PokerPro system, or both. Among
      those states that require regulatory approval for both us and the PokerPro
      system, some states will consider such approval simultaneously, while others,
      such as Nevada, will require that we obtain regulatory approval before
      considering approval for the PokerPro system. 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
      they deem reasonable and there is no guarantee that we will be able to obtain
      the required licenses and findings of suitability in a timely fashion or at
      a
      cost acceptable to us.





If
      a
      state requires that we obtain regulatory approval in addition to the regulatory
      approval required for the PokerPro system, we will be required to submit
      detailed financial and operating reports and furnish any other information
      the
      state commission may require. 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. We are unaware of
      any
      circumstances that would categorically prevent any gaming authority from finding
      any of our executive officers, directors, certain key employees or significant
      shareholders suitable.




*Cruise
      Ships* .
      The
      PokerPro system is currently under no regulatory restrictions aboard cruise
      ships.





All
      of
      our executive officers, certain key employees and all of our directors 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, certain key employees, directors or significant shareholders suitable,
      we may be prohibited from leasing, licensing or selling the PokerPro system
      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 executive officers,
      directors, certain key employees or significant shareholders
      suitable.





Gehrig
      H.
“Lou” White, our Chief Executive Officer, a director and beneficial owner of
      approximately 24% of our common stock, intends to disclose in applications
      for
      the determination of suitability to be 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 & Associates, Ltd. 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
      clients 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.





8


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 the
      PokerPro system 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 our introducing the PokerPro
      system into such jurisdictions or prevent us from introducing the system in
      such
      jurisdictions altogether. Depending on how material such jurisdictions are
      to
      our plan of operations, failure to obtain such findings of suitability could
      have a material adverse effect on our result 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 the results of our 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 special
      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.





A
      state
      commission may have the authority to disapprove a change in our officers,
      directors and key employees. Some corporate transactions, including those that
      may be advantageous to our shareholders, may require prior approval of various
      state commissions. These states may also require the PokerPro system to undergo
      rigorous testing by the commission, a field trial and a determination as to
      whether the PokerPro system meets the typically strict technical standards
      set
      forth in the applicable regulations of the state commission.




The
      failure to comply with any requirements imposed by various state commissions
      or
      required by state law could prevent us from selling the PokerPro system in
      such
      state, subject us to criminal and civil penalties, substantial fines and
      materially adversely affect our business.





*Federal
      Regulation* .
      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 court decisions have held that electronic aids to
      permitted Class II gaming under the IGRA are not prohibited by the Johnson
      Act.
      However, there is no guarantee that our belief is correct.





9


The
      prior
      court 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.
      PokerTek, Inc. currently manufactures and offers electronic poker tables that
      we
      consider to be outside the scope of the Johnson Act. However, we have filed
      under the Johnson Act and will maintain the required documentation under the
      Johnson Act to attempt to avoid any possible rulings prohibiting the
      installation of our products.





*International
      Regulation* .
      As
      mentioned above under the “Market Opportunities for Poker-Related
      Entertainment”, we have signed an international distribution rights agreement
      with Aristocrat. Certain foreign countries permit the importation, sale and
      operation of gaming equipment in casino and non-casino environments. To market
      the PokerPro system in these jurisdictions, we and the PokerPro system must
      comply with each individual country’s applicable regulations.





**Seasonality
      and Business Fluctuations**





We
      expect
      that quarterly revenue and net income may vary based on the timing of the
      opening of new gaming jurisdictions, gaming regulatory approval or denial of
      our
      product and corporate licenses, the introduction of new products or the
      seasonality of customer capital budgets.





**Customer
      Dependence**





As
      discussed above under “Overview”, as of December 31, 2006 we have 14 customers.
      Two of our customers, the Seminole Tribe of Florida and Carnival Corporation
      & plc, made up approximately 42% of our aggregate 2006 license fees. We also
      generated equipment sales revenue in 2006 and 2005. Substantially all of this
      revenue was attributable to Aristocrat, our international distributor, which
      enabled them to display our tables to licensing bodies and install our tables
      at
      international customers. The loss of these customers would have a material
      adverse effect on our business.





**Product
      Supply**





We
      obtain
      the parts, including hardware components, table game felts, signs, and
      accessories for the PokerPro system from third-party suppliers. We currently
      assemble the PokerPro system from such component parts; however, we expect
      that
      when development of the PokerPro system is complete, we will retain one or
      more
      third-party manufacturers to complete all phases of manufacturing.





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 is uncertain and subject to significant backlogs from time
      to
      time due to spikes in demand. We compete with other companies for the production
      capacity of third-party manufacturers and 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.





Other
      than as discussed above, we believe that our sources of supply for components
      and raw materials are adequate and that alternative sources of materials are
      available.




10


**Working
      Capital Practices**





We
      have
      funded our growth through loans from our principals and from issuances of our
      common stock. See Item 7, “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations - Liquidity and Capital Resources” regarding
      our liquidity, financial position and sources and uses of funds.





Our
      credit policy has provided for negligible reserve requirements to date on our
      accounts receivable. Outstanding accounts are reviewed regularly and reserves
      are provided for potential write off, if applicable.





We
      facilitate short product lead times required by some of our customers.
      Accordingly, we generally maintain our inventory at levels that we believe
      are
      sufficient to satisfy the anticipated needs of our customers based upon
      historical or forecasted usage and market conditions. Inventories are valued
      at
      lower of cost or market. To date we have not incurred material obsolescence
      or
      write-offs, but may incur such charges in the future.





**Backlog**





We
      are
      regularly negotiating agreements with various potential customers, but as of
      December 31, 2006 and December 31, 2005 we had not experienced any
      backlog.





**Employees**





As
      of
      December 31, 2006, we had 69 full-time employees. We consider our relationships
      with our employees to be satisfactory. None of our employees is covered by
      a
      collective bargaining agreement.





**Available
      Information**





Our internet
      address is www.pokertek.com. Our transfer agent is American Stock Transfer
&
Trust Company and their address is 59 Maiden Lane, Plaza Level, New York, NY
      10038.





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





***We
      have a limited operating history on which to evaluate our
      business.***





We
      are a
      company that has only recently begun to receive operating revenue and our
      management has limited experience in our market. Our business model is unproven
      and the lack of meaningful historical financial data makes it difficult to
      evaluate our prospects. To the extent that we are able to implement our business
      plan, our business will be subject to all of the problems that typically affect
      a business with a limited operating history, such as unanticipated expenses,
      capital shortfalls, delays in program development and possible cost overruns.
      In
      addition, our only product, the PokerPro system, is an innovative product that
      has not yet been introduced to the market on a wide scale. Although we have
      completed development of the initial version of the PokerPro system, we are
      still in the process of developing and testing the software that will allow
      additional poker games to be played on the PokerPro system and enhancing the
      PokerPro system’s player tracking and accounting system.





***We
      have minimal operating revenue to date 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 operating losses for each quarterly and annual period since our
      inception in August 2003. We experienced net losses of $9,145,718 for the year
      ended December 31, 2006 and $3,700,544 for the year ended December 31, 2005.
      As
      of December 31, 2006, we had an accumulated deficit of $13,837,074. To implement
      our business plan and generate revenue from other sources, 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 incur increased expenses,
      losses and cash flow deficits as we seek regulatory approval for our PokerPro
      system and market it in various jurisdictions. We may not receive further
      regulatory approvals. 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.





11


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





Our
      success will depend 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 the 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.





Initially,
      we intend to enter into month-to-month agreements with our customers under
      which
      we will license the software associated with the PokerPro system. If and when
      market acceptance of the PokerPro system has been established, we intend to
      negotiate long-term agreements with our customers and may sell components to
      customers rather than license them. However, if the PokerPro system fails to
      achieve market acceptance quickly, our customers may not renew such agreements,
      which would reduce our net revenue and impede our efforts to market 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. Some 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.





Obtaining
      requisite approvals is a time-consuming and costly process and cannot be
      assured. Although a manufacturer of gaming devices may pursue entity regulatory
      approval with regulators of tribal casinos at the same time that it pursues
      regulatory approval for its gaming devices, states that license commercial
      casinos, such as Nevada, require that a manufacturer obtain entity regulatory
      approval before seeking approval for its gaming devices. In addition, because
      the PokerPro system is an innovative product, we expect that some regulatory
      authorities will be uncertain as to how to classify it. We expect that this
      uncertainty will result in additional time and expense associated with obtaining
      necessary regulatory approvals. Even after incurring significant time and
      expense seeking such regulatory approvals, we may not be able to obtain
      them.





We
      have
      received approval to conduct business as a company in California, Michigan,
      Arkansas, British Columbia, Mississippi, and various tribal gaming
      jurisdictions. We have also submitted applications in a number of major
      jurisdictions including Nevada, New Jersey, and Louisiana. Our current
      registrations and any other registrations, licenses, approvals or findings
      of
      suitability that we may obtain may be revoked, suspended or conditioned. The
      revocation or denial of a license in a particular jurisdiction means that we
      cannot distribute the PokerPro system in that jurisdiction, and could adversely
      affect our ability to obtain or maintain licenses in other
      jurisdictions.





12


Gaming
      devices are regulated at the federal level by the Johnson Act. We believe the
      Johnson Act does not apply to the use of the PokerPro system by tribal casinos
      because several court decisions 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. We currently
      manufacture and offer electronic poker tables that we consider to be outside
      the
      scope of the Johnson Act. However, we have filed under the Johnson Act and
      will
      maintain the required documentation under the Johnson Act to attempt to avoid
      any possible rulings prohibiting the installation of its products. These court
      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 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 regulatory approvals in other jurisdictions.





If
      we
      fail to obtain a necessary registration, license, approval or finding of
      suitability in a given jurisdiction, we would likely be prohibited from
      distributing our PokerPro system in that jurisdiction. In addition, some
      jurisdictions require license holders to obtain government approval before
      engaging in some transactions, such as business combinations, reorganizations,
      stock offerings and repurchases. We may not be able to obtain all necessary registrations, licenses, permits, approvals or findings of suitability
      in a timely manner, or at all. Our failure to obtain in a timely manner
      necessary regulatory approvals in jurisdictions that are material to us, whether
      individually or in the aggregate, would have a material adverse effect on our
      net revenue and delay or prevent market acceptance of the PokerPro system.





***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 introduction of PokerPro 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 the PokerPro
      system 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.





Gehrig
      H.
“Lou” White, our Chief Executive Officer, a director and beneficial owner of
      approximately 24% of our common stock, intends to disclose in applications
      for
      the determination of suitability to be 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 clients 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.





13


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 the
      PokerPro system 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 our introducing the PokerPro
      system into such jurisdiction or
      prevent us from introducing the system in such jurisdictions 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 result 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 the results of our 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 special
      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.





***Because
      there are few significant barriers to entry to the market for our products,
      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. Although we are unaware of any competitors
      offering automated poker tables such as ours, the costs of entry into the
      markets for competitive products are low, and there are few significant barriers
      to entry. The primary barriers to entry, some of which we are still in the
      process of overcoming, 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. However, we anticipate 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, we anticipate that the barriers to entry discussed above would not
      pose a significant obstacle for such manufacturers if they sought to compete
      with us.





14


Due
      to
      the limited barriers to entry, we believe that the early establishment of market
      share is a key factor in our plan of operations, especially given the finite
      market for the PokerPro system. If we are unable to obtain significant early
      market presence or we lose market share to our competitors, it may cause us
      to
      reduce the price at which we license or sell the PokerPro system, which would
      materially affect our net revenue. There are many companies that could introduce
      directly competitive products in the short term that also have established
      industry relationships, the potential to develop technology quickly and greater
      resources than we have.





***We
      compete in a single industry, and our business would suffer if demand for gaming
      in general, or poker in particular, decreases.***





We
      expect
      to 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 January 31, 2007, there were approximately 6,000 poker tables in the
      United States and approximately 2,600 poker tables in other countries. 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, and 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.***





We
      believe that our long-term success will depend to a large degree on our ability
      to protect the proprietary technology that we have developed or acquired or
      may
      develop or acquire in the future. We currently have applications for
      approximately 50 patents pending before the U.S. Patent and Trademark Office
      that relate to various aspects of the PokerPro system. However, 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.





15


***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. 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 may later 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.





***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 will be subject to additional testing by regulators in certain gaming
      jurisdictions. We may not be able to build and maintain products that are free
      from defects or manipulation and that 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.




***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.





16


***The
      loss of the services of our Chairman, Chief Executive Officer, President or
      other key employees, or the failure to attract additional key individuals,
      would
      materially adversely affect our business*** .





Our
      success depends on the continued services of Lyle Berman, who serves as the
      Chairman of our Board of Directors. In addition, although they have limited
      experience in the gaming industry, we believe that due to their leadership
      in
      the development of our business, our success also depends on Gehrig H. “Lou”
White, who has served as our Chief Executive Officer since our inception, and
      James T. Crawford, who has served in an executive officer capacity since our
      inception and who currently serves as our President and Secretary. Our success
      will also depend on retention of other key management executives who have been
      instrumental in our development thus far, and on our ability to attract and
      retain employees to complete the development of enhancements to the PokerPro
      system and to market it throughout the United States.





Mr.
      Berman is the Executive Chairman of WPT Enterprises, Inc., the operator of
      the
      World Poker Tour. We hope to develop business relationships from introductions
      to strategic partners in the gaming industry that we believe Mr. Berman can
      facilitate. Mr. Berman is under no obligation to facilitate such introductions
      and if our relationship with Mr. Berman is terminated or impaired, we may not
      be
      able to develop such business relationships, which could delay market acceptance
      of the PokerPro system and otherwise have a material adverse effect on our
      business.





We
      have
      not entered into an employment agreement or non-competition agreement with
      either Mr. White or Mr. Crawford. Therefore, either may terminate their
      employment with us at any time and immediately use certain information and
      contacts they obtained from their employment with us to compete with our
      business. The loss of Mr. White, Mr. Crawford or our other senior executives
      or
      an inability to attract or retain other key individuals could materially
      adversely affect us. Growth in our business depends, to a large degree, on
      our
      ability to retain and attract such employees. We seek to compensate and
      incentivize our key executives, as well as other employees, through competitive
      salaries, stock ownership and bonus plans, but these programs may not be
      sufficient to allow us to retain key employees or hire new
      employees.





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





We
      have
      not yet demonstrated that we are able to implement our business plan fully
      or in
      a timely manner. 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. Our management team
      also has limited experience with the process of obtaining the regulatory
      licenses, certifications and approvals that we will need in order to market
      and
      distribute the PokerPro system in additional jurisdictions. 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.***





Although
      we have not received significant operating revenue, we have experienced and
      expect to continue to experience rapid growth in our headcount and operations,
      placing significant demands on our operational and financial infrastructure.
      We
      intend to increase modestly the number of our employees in the next 12 months
      to
      further our research and development and sales efforts and to meet our
      administrative needs. If we do not effectively manage our growth, our ability
      to
      develop and market the PokerPro system could suffer, which could negatively
      affect our operating results. To manage our expected growth effectively, we
      must
      continue to improve our operational, financial and management controls and
      our
      reporting systems and procedures. These systems enhancements and improvements
      will require significant capital expenditures and allocation of valuable
      management resources. If required improvements are not implemented successfully,
      our ability to manage our expected growth will be impaired and we may have
      to
      make significant additional expenditures to address these issues.





17


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





Although
      we currently manufacture the PokerPro system from component parts obtained
      from
      third-party suppliers, we expect that when development of the PokerPro system
      is
      complete, we will retain third-party manufacturers to complete all phases of
      manufacturing. Should the selected manufacturers not be able to meet our
      requirements, we would be significantly hampered from serving our customers
      and
      may miss revenue-generating opportunities. 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 market and distribute our PokerPro system outside of the United
      States and Canada. We cannot predict the timing or acceptance of our product
      at
      this time. 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. While changing distributors
      is
      not impossible, doing so would require significant time and effort on the part
      of our management team and may cause us to miss further revenue-generating
      opportunities.





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





Although
      initially we have licensed the components of the PokerPro system to customers,
      in the future we may sell customers such components. Until such time as we
      are
      able to sell such hardware components to our customers, our ability to license
      the PokerPro system to our customers on a large scale may require us to obtain
      additional financing necessary for the manufacture of such hardware components.
      Such financing may not be available on terms that are favorable to us, or at
      all. Our inability to obtain such financing on terms that allow us to license
      the PokerPro system profitably would hamper our ability to distribute PokerPro
      systems on a large scale and may therefore delay our ability to obtain
      significant market presence as well as market acceptance of the PokerPro
      system.





In
      addition, if our revenue is less than we anticipate or if we incur unforeseen
      expenses, 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 develop the PokerPro system, 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.





18


***A
      decline in general economic conditions would have a greater material adverse
      effect on our business than on other businesses.***





The
      demand for entertainment and leisure activities, including gaming activities
      like poker, tends to be highly sensitive to consumers’ disposable incomes.
      Therefore, a decline in general economic conditions would have more of a
      material adverse effect on our business, operating results and financial
      condition and the price of our common stock than on other businesses that are
      not as dependent on consumers’ disposable incomes.





***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.





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





Many
      of
      our 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.




***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;




19


·
            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
      may be forced to reduce or delay growth initiatives and capital expenditures,
      obtain additional equity capital or assume debt if we are unable to generate
      sufficient cash flow to meet our operational requirements.***





If
      our
      future cash flows and capital resources are insufficient to meet our operational
      needs and commitments, we may be forced to reduce or delay activities and
      capital expenditures, obtain additional equity capital or assume debt. In the
      event that we are unable to do so, we may be left without sufficient liquidity
      and we may not be able to meet current needs.





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





None.





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





We
      currently lease two spaces totaling 18,000 square feet of office space located
      in Matthews, North Carolina. Our leased office spaces are in good order and
      condition, are fully utilized and are adequate to satisfy our current
      needs.





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





Our
      current litigation and our current assessments are described below. Litigation
      is inherently unpredictable. Our assessment of each matter may change based
      on
      future unknown or unexpected events. If any litigation were to have an adverse
      result that we did not expect, there could be a material impact on our results
      of operations or financial position. We believe costs associated with litigation
      will not have a material impact on our financial position or liquidity, but
      may
      be material to the results of operations in any given period. We assume no
      obligation to update the status of pending litigation, except as may be required
      by applicable law, statute or regulation.





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 TM. 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. We believe the lawsuit lacked any legal merit.





On
      February 5, 2007, Tellis Software, Inc. (“Tellis”) filed a Complaint against
      PokerTek and Lou White, our Chief Executive Officer, in the United States
      District Court for the Southern District of Texas. The Complaint alleges that
      PokerTek breached a Software Development Agreement (the “Agreement”), that
      PokerTek and Mr. White committed fraud in connection with alleged statements
      about the Agreement or its purported terms, and that PokerTek has been unjustly
      enriched and/or that Tellis is entitled to a quantum meruit recovery. As to
      all
      counts, Tellis seeks damages that it alleges are equivalent to a 2% equity
      interest in PokerTek and bonuses that could eventually total $730,000, plus
      attorneys’ fees, costs, and interest. For the fraud count, Tellis also seeks
      unspecified exemplary damages. On March 27, 2007, PokerTek and Mr. White filed
      a
      motion to dismiss the entire case for lack of personal jurisdiction or,
      alternatively, for a transfer of venue to the United States District Court
      for the Western District of North Carolina.  The motion also seeks
      to dismiss the fraud count for failure to state a claim against Mr. White.
      PokerTek and Mr. White believe they have meritorious defenses.





20


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





None.




**Part
      II**





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





*Market
      for Registrant’s Common Equity*





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
      period indicated, as reported by the NASDAQ Global Market. We first began
      trading on the Nasdaq Global Market (formerly known as the NASDAQ National
      Market) on October 14, 2005. We
      have
      never paid any cash dividends 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
      be at the discretion of the Board of Directors and will depend on such factors
      as earnings levels, capital requirements, our overall financial condition and
      any other factors deemed relevant by our Board of Directors. As of
      March 10, 2007, there were approximately 1,200 holders of record of our common
      stock.








**2006***Quarter
                ended:*
            
            **High**
            
            **Low**March
                31
            
            $
            14.68
            
            $
            8.52June
                30
            
            
            15.95
            
            
            9.25September
                30
            
            
            13.28
            
            
            8.11December
                31
            
            
            15.26
            
            
            8.05





**2005***Quarter
                ended:*
            
            **High**
            
            **Low**December
                31 (beginning October 14)
            
            $
            12.28
            
            $
            7.44





21


The
      graph
      below compares, for the period since we began being traded (October 14, 2005)
      through December 31, 2006, the “cumulative total return” to our shareholders as
      compared with the return of the NASDAQ Composite Index and the Standard and
      Poor’s Smallcap Casino and Gaming Index, our industry index. “Cumulative total
      return” has been computed assuming an investment of $100 at the beginning of the
      period indicated in our common stock and the stock of the companies included
      in
      the NASDAQ Composite Index and the Standard and Poor’s Smallcap Casino and
      Gaming Index, and assuming the reinvestment of dividends. The stock price
      performance depicted in the graph is not necessarily an indicator of future
      stock price performance.











**Total
                Return Index for:**
            October
                14, 2005
            December
                30, 2005
            December
                29, 2006PokerTek,
                Inc.
            100.00
            96.00
            80.78NASDAQ
                Composite Index
            100.00
            107.72
            117.98S&P
                Smallcap Casino & Gaming Index
            100.00
            109.75
            151.88





The
      information regarding the performance graph provided in this Item 5 of this
      Annual Report on Form 10-K is not deemed to be “soliciting material” or to be
“filed” with the Securities and Exchange Commission or subject to Regulation 14A
      or 14C under the Securities Exchange Act of 1934, as amended, or to the
      liabilities of Section 18 of the Securities Exchange Act of 1934, as amended,
      and will not be deemed to be incorporated by reference into any filing under
      the
      Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
      as
      amended, except to the extent that we specifically incorporate it by reference
      into such a filing.





22


*Use
      of Proceeds*





The
      SEC
      declared our registration statement filed on Form S−1 under the Securities Act
      (File No. 333−127181) effective on October 13, 2005, in connection with the
      initial public offering of 2,000,000 shares of our common stock, no par value
      per share. The underwriter for the offering was Feltl and Company.





During
      the year ended December 31, 2006, we spent approximately $2,542,000 on capital
      expenditures (approximately $3,627,000 since the IPO), which consisted primarily
      of the purchase of components for the PokerPro system and related tables, and
      approximately $10,321,000 on working capital (approximately $10,816,000 since
      the IPO). Other than as set forth herein, we have not spent any of the remaining
      net proceeds from the initial public offering. All such payments described
      herein were direct payments to others.





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





The
      following selected financial data has been derived from audited financial
      statements for the years ended December 31, 2006, 2005, 2004 and the period
      from
      August 22, 2003 (date of inception) to December 31, 2003. The statement of
      operations data reflects our July 27, 2004 merger with PokerTek, LLC. The
      selected financial data set forth below should be read together with Item 8,
      “Financial Statements and Supplementary Data” and the related notes to those
      financial statements, as well as Item 7, “Management’s Discussion and Analysis
      of Financial Condition and Results of Operations,” appearing in this Annual
      Report on Form 10-K.




**Statement
      of Operations Data:** ****





**Year
                Ended December 31,**
            
            **Period
                from August 22, 2003 (date of inception) to****2006**
            
            **2005**
            
            **2004**
            
            **December
                31, 2003**Operating
                Revenues
            
            $
            1,979,917
            
            $
            314,348
            
            $
            —
            
            $
            —Costs
                and Operating Expenses:Costs
                of Product Sales
            
            
            1,127,997
            
            
            38,506
            
            
            —
            
            
            —Selling,
                General and Administrative
            
            
            6,079,583
            
            
            1,759,117
            
            
            454,989
            
            
            —Research
                and Development
            
            
            3,949,223
            
            
            2,287,795
            
            
            476,583
            
            
            64,975Depreciation
            
            
            709,593
            
            
            119,783
            
            
            306
            
            
            —Operating
                Loss
            
            
            (9,886,479
            )
            
            (3,890,853
            )
            
            (931,878
            )
            
            (64,975
            )Interest
                income, net
            
            
            740,761
            
            
            190,309
            
            
            6,041
            
            
            —Net
                Loss
            
            
            ($9,145,718
            )
            
            ($3,700,544
            )
            
            ($925,837
            )
            
            ($64,975
            )Net
                Loss Per Common Share — Basic andDiluted
                (1)
            
            
            ($0.97
            )
            
            ($0.49
            )
            
            ($0.16
            )Weighted
                Average Common SharesOutstanding —
                Basic and Diluted (1)
            
            
            9,471,423
            
            
            7,517,278
            
            
            5,743,957





23


**Balance
      Sheet Data:**





**December
                31,****2006**
            
            **2005**Current
                Assets
            
            $
            11,731,103
            
            $
            21,441,325Total
                Assets
            
            
            15,122,797
            
            
            22,703,150Current
                Liabilities
            
            
            1,003,186
            
            
            214,465Stockholders
                Equity
            
            
            14,119,611
            
            
            22,488,685Working
                Capital
            
            
            10,727,917
            
            
            21,226,860





(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, 2006, 2005 and 2004, there were options
                to
                purchase an aggregate of 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 (the
      “Exchange Act”). 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.*





*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**





We
      were
      formed to develop and market the PokerPro system, an electronic poker table
      that
      provides a fully-automated poker-room environment, to tribal casinos, commercial
      casinos, cruise ships and card clubs. The PokerPro system is designed to
      increase casino revenue and security while helping to reduce the expenses
      associated with poker rooms. We believe that with the PokerPro system, more
      hands of poker can be played in a given amount of time, thereby increasing
      revenue. The PokerPro system is also designed to improve players’ gaming
      experience by eliminating dealer and player mistakes, eliminating the need
      for
      dealer tipping and by providing players with automated game information not
      available at poker tables operated by live dealers, such as chip stack
      calculation, pot calculation and the ability to view previous hands
      played.





24


**Executive
      Summary - Significant events for the year ended December 31,
      2006**





·
            We
                have expanded our customer base from two customers with 22 tables
                at
                December 31, 2005 to 14 customers with 71 tables at December 31,
                2006. As
                of February 28, 2007 we had 16 customers with 77
                tables.


·
            During
                2006, we were approved to conduct business as a company in California,
                Michigan, Arkansas, the Iowa Tribe of Oklahoma, , and the Peoria
                Tribe of
                Oklahoma. In early 2007 we were approved to conduct business as a
                company
                in British Columbia and
                Mississippi.


·
            In
                October 2006, Gaming Laboratories International (“GLI”) certified the
                PokerPro system and product line. This marks the first Electronic
                Poker
                Table certification to the newly released GLI-24, Electronic Table
                Game
                system by GLI. In addition, PokerPro is certified as fully compliant
                for
                on-line monitoring of real time events, accounting, reporting, security,
                and cashless gaming, marking PokerPro as a complete turnkey solution
                for
                the poker industry.


·
            In
                addition to GLI and BMM product certifications, we also received
                the
                electrical, communications and safety certifications of UL, CE, FCC,
                and
                ROHS.


·
            In
                November 2006, we announced the release of PokerPro Heads-Up, the
                industry’s first two-seated heads-up style electronic poker table. To our
                knowledge, there has never been an automated heads-up table available
                for
                play in a casino. PokerPro Heads-Up uses only 20% of the floor space
                of a
                traditional table. This compact design allows operators more flexibility
                to position the poker table in the poker room and throughout the
                casino
                floor.


·
            In
                January 2007, PokerPro dealt the world’s first automated hand of Omaha at
                Hollywood Park Casino and a multi-table tournament using the PokerPro
                system was played at Folsom Lake Bowl and
                Casino.




**Recent
        Events**
 
 On
        January 24, 2007, we announced five new customer installations. The latest
        installations were:
  ·
              Crown
                  Casino, Melbourne, Australia;
 ·
              Carnival
                  City, Johannesburg, South Africa;
 ·
              Greektown
                  Casino, Detroit, Michigan;
 ·
              MotorCity
                  Casino, Detroit, Michigan; and
 ·
              FLB
                  Sports Bar & Casino, Folsom,
                  California.
 
 On
        February 16, 2007, we announced that after a successful trial period, Princess
        Cruises has agreed to have 22 PokerPro tables installed by the end of fiscal
        2007.




**Fiscal
      Year 2007 Goals**





We
      expect
      to continue growing our customer base and revenue in 2007, both through our
      own
      efforts in the United States and Canada, and through Aristocrat with respect
      to
      the rest of the world. We expect to continue to invest in research and
      development in order to enhance our current products, which we believe will
      improve the poker player’s experience and the casino operator’s acceptance of
      PokerPro.





25


**Trends**





The
      growth of poker has been steadily increasing, as shown by the table below from
      Casino City Press as of January 31, 2007, except for the cruise ships figure
      which is from independent research conducted by our employees. We believe we
      have an innovative product from both the casino and the player perspective
      and
      can capture a piece of this rapidly growing market.





**2003**
            
            **2004**
            
            **2005**
            
            **2006**Commercial
                Casinos
            
            
            840
            
            
            868
            
            
            1,722
            
            
            2,692Tribal
                Casinos
            
            
            909
            
            
            1,046
            
            
            1,755
            
            
            1,969Card
                Clubs
            
            
            890
            
            
            1,028
            
            
            1,198
            
            
            1,402Cruise
                ships
            
            
            -
            
            
            -
            
            
            -
            
            
            155Other
            
            
            230
            
            
            269
            
            
            341
            
            
            335Total
                Domestic Market
            
            
            2,869
            
            
            3,211
            
            
            5,016
            
            
            6,553Total
                International Market
            
            
            1,302
            
            
            1,670
            
            
            2,006
            
            
            2,619Total
                Global Market
            
            
            4,171
            
            
            4,881
            
            
            7,022
            
            
            8,837Domestic
                Annual Growth
            
            
            
            
            
            11.9
            %
            
            56.2
            %
            
            30.6
            %International
                Annual Growth
            
            
            
            
            
            28.3
            %
            
            20.1
            %
            
            30.6
            %





**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
      from
      $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 and equipment sales of the PokerPro
      system to
      Aristocrat International Pty. Limited and its affiliates, our international
      distributors, for their use in demonstrations to licensing bodies and potential
      customers.





*Selling,
      General and Administrative Expenses.* Selling,
      general and administrative expenses (“SG&A”) increased by $4,320,466 for the
      year ended December 31, 2006 to $6,079,583 from $1,759,117 during 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 (“R&D”) increased by $1,661,428 to $3,949,223 for
      the year ended December 31, 2006 from $2,287,795 for the year ended December
      31,
      2005. The increase was the result of a significant increase in research and
      development activity related to developing the new heads-up product as well
      as
      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 place during 2005 and
      2006.





26


*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 the cash and cash equivalents,
      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.* SG&A
      increased by $1,304,128 for the year ended December 31, 2005 to $1,759,117
      from
      $454,989 during 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.* R&D
      increased by $1,811,212 to $2,287,795 for the year ended December 31, 2005
      from
      $476,583 for the year ended December 31, 2004. The increase was the result
      of a
      significant increase in research and development 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 place during 2005.





*Net
      Interest Income* .
      Net
      interest income increased by $184,268 for the year ended December 31, 2005
      to
      $190,309 from $6,041 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 our initial public offering during the fourth quarter
      of
      2005.





**Liquidity
      and Capital Resources**





Since
      our
      inception, we have funded our startup costs, operating costs and capital
      expenditures through loans from our principals and from issuances of our common
      stock. As of October 12, 2005, we repaid all such loans.





For
      the
      year ended December 31, 2006, we incurred a net loss of $9,145,718 and used
      $8,487,103 of cash in operating activities. At December 31, 2006, we had an
      accumulated deficit of $13,837,074. The generation of cash flow sufficient
      to
      meet our cash needs depends on the continued development of the PokerPro system
      and obtaining the regulatory approvals required to license it and successfully
      market it to tribal casinos, card clubs, cruise ships and commercial
      casinos.





We
      anticipate our cash requirements to be approximately $700,000 to $900,000 per
      month as a result of our expected growth and the need to manufacture PokerPro
      systems to meet anticipated demand.





27


On
      October 13, 2005, the SEC declared effective our registration statement that
      registered 2,000,000 shares of our common stock, at $11.00 per share, in our
      initial public offering and up to an additional 300,000 shares of our common
      stock that may be sold if the underwriter involved in the offering exercised
      its
      over-allotment option. Our common stock was approved for trading on the NASDAQ
      Global Market (formerly the NASDAQ National Market) and began trading on October
      14, 2005. The initial closing of the offering occurred on October 19, 2005,
      at
      which we sold 2,000,000 shares of common stock and we received proceeds of
      approximately $19.6 million, net of estimated offering expenses and underwriting
      discounts. On November 29, 2005, the underwriter exercised its over-allotment
      option with respect to an additional 225,000 shares of common stock, resulting
      in our receipt of additional net proceeds of $2.2 million.





Based
      on
      our cash flow projections, we expect that the proceeds of the offering and
      anticipated revenues will be sufficient to support our operations into the
      fourth quarter of fiscal year 2007. If sales of the PokerPro system do not
      meet
      our projections or our expenses exceed our expectations, then we may need to
      attempt to raise additional funds through additional public or private offerings
      of our securities, through the establishment of a credit facility or through
      a
      sale-leaseback arrangement. In such event, if we are unable to secure additional
      funds on a timely basis or at all, our financial condition would be adversely
      affected.





**Impact
      of Inflation**





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





**Contractual
      Obligations**





The
      table
      below sets forth our known contractual obligations as of December 31,
      2006:




**Payments
                due by period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than 1 year**
            
            **1
                - 3 years**
            
            **3
                - 5 years**
            
            **More
                than 5 years**Long-term
                debt obligations
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Operating
                lease obligations (1)
            
            
            603,471
            
            
            171,518
            
            
            338,053
            
            
            93,900
            
            
            -Capital
                lease obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Purchase
                obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Other
                long-term liabilities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            603,471
            
            $
            171,518
            
            $
            338,053
            
            $
            93,900
            
            $
            -





(1)  We
      entered into a five-year lease for two of our current office spaces in May
      2005.
      An additional lease was entered into in September 2006. The amount paid per
      month under all of these leases is currently $14,300. The amount set forth
      in
      the table above assumes that we remain in two of our current spaces and make
      monthly lease payments through March 2010, and the remaining space through
      August 2011. Also included above is a monthly copier lease of $260 per month
      through February 2008.





**Related
      Party Transactions**





In January
      2006, we entered into an international distribution rights agreement with
      Aristocrat International Pty. Limited and its affiliates. Aristocrat
      International Pty. Limited 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. 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 our PokerPro
      system, in return for Aristocrat’s payment to us of a portion of the license
      fees received by Aristocrat from each customer in connection with Aristocrat’s
      licensing of the PokerPro system. Aristocrat also purchased our common stock
      during 2006, and as December 31, 2006 owns approximately 19% of our common
      stock. During 2006 we recorded approximately $13,735 and $1,144,829 of license
      fees and equipment sales, respectively. At December 31, 2006, Aristocrat owed
      the Company $169,344 and this was paid in full during January 2007.





28


In
      September 2006 an entity owned and controlled by our Chief Executive Officer
      and
      President purchased one of the buildings in which we lease one of our two
      spaces. During February 2007, the entity purchased the other building in which
      we lease space. The initial terms were negotiated at arms’ length and the terms
      of our existing leases were not modified upon this change in building ownership.
      Rent expense recorded for the leased space for the year ended December 31,
      2006
      was $147,090, of which $45,490 was paid to the related party.





**Critical
      Accounting Policies**





The
      discussion and analysis of our financial condition and results of operations
      are
      based on our financial statements, which have been prepared in accordance with
      U.S. generally accepted accounting principles. The preparation of these
      financial statements requires us to make 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, including those
      related to the valuation of equity awards issued. 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 to our financial statements appearing elsewhere in this Annual 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
      generate revenue from licensing the rights to use the software necessary to
      operate the PokerPro system and from providing maintenance and support services
      to customers that license the PokerPro system. Although initially we have
      licensed the components of the PokerPro system to customers, in the future
      we
      may sell customers such components. We recognize revenue in accordance with
      Statement of Position (“SOP”) No. 97−2, *Software
      Revenue Recognition* (as
      amended by SOP No. 98−4 and SOP No. 98−9).





We
      recognize revenue on sales of the PokerPro system, net of rebates, discounts
      and
      allowances, when persuasive evidence of an agreement exists, the sales price
      is
      fixed or determinable, the PokerPro system is delivered and collectibility
      is
      reasonably assured. We anticipate that license agreements will be based on
      either a fixed monthly fee or a pre-determined percentage of the monthly net
      win
      of each PokerPro system.





If
      multiple product deliverables are included under a sales or license agreement,
      we intend to allocate revenue to each product based upon their respective fair
      values against the total contract value and defer revenue recognition on those
      deliverables where we have not met all requirements of revenue
      recognition.





We
      intend
      to recognize revenue from maintenance and support services ratably over the
      term
      of the software support services agreement. We intend to recognize any revenues
      from professional services not essential to the customers’ use of the software
      under time-and-materials-based agreements as services are
      performed.





29


*Research
      and development* .
      All
      employee and product costs associated with the development of our products
      are
      expensed until technological feasibility is reached. Technological feasibility
      is established when a product design and a working model of the software product
      have been completed and the completeness of the working model and its
      consistency with the product design have been confirmed by testing.





*Capitalized
      Software.* We
      expense internally-developed software costs in accordance with the Financial
      Accounting Standards Board’s (“FASB”) Statement of Financial Accounting
      Standards (“SFAS”) No. 86, *Accounting
      for the Costs of Computer Software to Be Sold, Leased or Otherwise
      Marketed* .
      Research and development costs relating principally to the design and
      development of products are expensed as incurred.





*Equity-based
      compensation* . Beginning
      November 1, 2006, we account for share-based compensation in accordance
      with the provisions of SFAS No. 123 (revised 2004) (“SFAS 123R”),
“ *Share-Based Payment* ”,
      and
      SEC Staff Accounting Bulletin No. 107 (“SAB 107”), “ *Share-Based Payment* ”.
      Under
      the fair value recognition provisions of SFAS No. 123R, share-based
      compensation cost is estimated at the grant date based on the fair value of
      the
      award and is recognized as expense ratably over the requisite service period
      of
      the award. Determining the appropriate fair value model and calculating the
      fair
      value of share-based awards requires judgment, including estimating stock price
      volatility, forfeiture rates and expected life. If actual results differ
      significantly from these estimates, share-based compensation expense and our
      results of operations could be materially impacted.





The
      application of this policy affects the level of our research and development
      expenses, selling and administrative expenses, and additional paid-in capital.
      During fiscal 2006, we had no material changes in the critical accounting
      estimates arising from the application of this policy and we do not anticipate
      material changes in the near term.




Under
      SFAS 123R, we value stock options issued based upon the Black-Scholes
      option-pricing model and recognize this value as an expense over the period
      in
      which the options vest. Based on the Black-Scholes model, we recorded $813,316,
      $280,212 and $11,271 of compensation expense during the years ended December
      31,
      2006, 2005 and 2004, respectively.





To
      determine the exercise price for our options in relation to fair market value,
      following the completion of our initial public offering, we use the closing
      price of our common stock as reported by the NASDAQ Global Market on the day
      the
      option is granted as being fair market value. In the past when we were a private
      company, we generally based the fair market value of our common stock on the
      offering price used in the most recent private placement of our common stock
      preceding the grant date of such options. The offering prices with respect
      to
      these private placements were determined by arm’s-length negotiations with
      unaffiliated investors in such private placements. The factors and assumptions
      upon which such offering prices were based include the development of the
      PokerPro system, the development of our intellectual property and negotiations
      with potential customers.





Prior
      to
      our IPO, our Board of Directors determined not to retain an independent
      valuation specialist to determine the fair market value of our common stock.
      Between July 2004 and February 2005, our Board of Directors did not revise
      its
      determination of the fair market value of our common stock, because there was
      no
      substantial change in our business during that period that would have justified
      such an increase. As of February 2005, we had yet to receive any operating
      revenue or enter into a binding agreement with a customer.





In
      March
      2005, our Board of Directors determined that the fair market value of our common
      stock had increased from $2.67 per share to $5.58 per share, based on the
      negotiated offering price for a private placement of our common stock that
      closed in April 2005. As a result, options issued from March 2005 through May
      2005 had an exercise price of $5.58 per share. In August 2005, our Board of
      Directors determined that the fair market value of our common stock had
      increased from $5.58 per share to $11.00 per share, based on the receipt of
      our
      initial operating revenue and the progress of negotiations with potential
      customers. As a result, options issued in August 2005 had an exercise price
      of
      $11.00 per share. In addition, our Board of Directors amended the terms of
      certain options granted in July 2005 to increase the exercise price of such
      options from $5.58 per share to $11.00 per share.





30


*Patents.* We
      expense legal fees and application costs related to our patent application
      process. There is
      a high degree of uncertainty in the outcome of approval for any of our patents.
      Once the patents are approved, any costs incurred to defend and register these
      patents will be capitalized.





*Income
      Taxes* .
      We
      account for income taxes under the asset and liability method. 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 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, and the failure to fully realize such deferred
      tax assets could result in a higher tax provision in future
      periods.





**Recent
      Accounting Pronouncements**





In
      March 2006, the FASB issued SFAS No. 156, *“Accounting
      for Servicing of Financial Assets,”* which
      amends FASB Statement No. 140, *“Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities”.* SFAS
      No.
      156 is effective in fiscal years beginning after September 15, 2006. The
      Company is currently assessing the impact, if any, of the adoption of SFAS
      No.
      156 on the fiscal year 2007 financial statements.





In
      July
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *“Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement
      No. 109”.* FIN
      48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with SFAS No. 109, *Accounting
      for Income Taxes.* FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. FIN 48 is effective for fiscal years beginning after
      December 15, 2006, and applies to all tax positions accounted for in
      accordance with SFAS No. 109. The Company is currently evaluating the
      impact that the adoption of FIN 48 will have on the fiscal year 2007 financial
      statements.





In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ” .
      SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value,
      and expands disclosure requirements regarding fair value measurement. Where
      applicable, SFAS
      No.
      157 simplifies and codifies previously issued guidance within GAAP related
      to
      fair value. Although SFAS
      No.
      157 does not require any new fair value measurements, its application may,
      in
      certain instances, change current practice. SFAS 157 is effective for fiscal
      years beginning after November 15, 2007. The Company is currently reviewing SFAS
      No.
      157 to determine its impact on our financial statements upon
      adoption.





In
      September 2006, the staff of the Securities and Exchange Commission (the
“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, which provides
      interpretive guidance regarding the process for quantifying financial statement
      misstatements. SAB
      No.
      108is
      effective for fiscal years ending after November 15, 2006. We do not expect
      the adoption of SAB
      108
      to have a material impact on our financial position, results of operations
      or
      cash flows.





31





**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





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





Our
      financial instruments are limited to cash and cash equivalents. Our main
      investment objective is the preservation of capital. 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. As of December 31, 2006, the carrying value
      of
      our cash and cash equivalents approximates fair value. We may in the future
      obtain marketable debt securities (principally consisting of commercial paper,
      corporate bonds and government securities) having a weighted average duration
      of
      one year or less. Consequently, such securities would not be subject to
      significant interest rate risk.





**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.**  **Controls
      and Procedures.**





*Evaluation
      of disclosure controls and procedures*





As
      of
      December 31, 2006, our management, with the participation of our Chief Executive
      Officer and Chief Financial Officer, evaluated the effectiveness of our
      disclosure controls and procedures in accordance with Rule 13a−15 under the
      Exchange Act. Based on their evaluation, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      effective, 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.





We
      are
      not currently required to comply with Section 404 (Management’s Annual Report on
      Internal Control Over Financial Reporting) of the Sarbanes-Oxley Act of 2002
      because we are not an “accelerated filer,” as defined by Rule 12b-2 under the
      Exchange Act. We are in the process of implementing internal control over
      financial reporting structures and procedures for our financial reporting so
      that our management, when required to do so, can provide the report as to these
      structures and procedures in a future Annual Report on Form 10-K.





*Changes
      in internal control over financial reporting*





There
      were no changes in our internal control over financial reporting that occurred
      during the fiscal quarter ended December 31, 2006 that have materially affected,
      or are reasonably likely to materially affect, our internal control over
      financial reporting.





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





None.





32


**Part
      III**





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





The
      information required by Item 10 of this annual report on Form 10-K appears
      in
      our proxy statement for the 2007 annual meeting of shareholders and is
      incorporated herein by reference.





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





The
      information required by Item 11 of this annual report on Form 10-K appears
      in
      our proxy statement for the 2007 annual meeting of shareholders and is
      incorporated herein by reference.





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





The
      information required by Item 12 of this annual report on Form 10-K appears
      in
      our proxy statement for the 2007 annual meeting of shareholders and is
      incorporated herein by reference.





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





The
      information required by Item 13 of this annual report on Form 10-K appears
      in
      our proxy statement for the 2007 annual meeting of shareholders and is
      incorporated herein by reference.





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





The
      information required by Item 14 of this annual report on Form 10-K appears
      in
      our proxy statement for the 2007 annual meeting of shareholders and is
      incorporated herein by reference.





**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;


·
            Balance
                Sheets as of December 31, 2006 and December 31,
                2005;


·
            Statements
                of Operations for the years ended December 31, 2006, December 31,
                2005 and
                December 31, 2004;


·
            Statements
                of Shareholders’ Equity for the years ended December 31, 2006, December
                31, 2005 and December 31, 2004;


·
            Statements
                of Cash Flows for the years ended December 31, 2006, December 31,
                2005 and
                December 31, 2004; and


·
            Notes
                to Financial Statements.





33


2.
      Financial Statement Schedules





Financial
      statement schedules are omitted because they are not required or are not
      applicable, or the required information is provided in the 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
      signature page 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.





34


**INDEX
      TO FINANCIAL STATEMENTS**




**Page**Report
                of Independent Registered Public Accounting Firm
            
            F-2Balance
                Sheets as of December 31, 2006 and 2005
            
            F-3Statements
                of Operations for the years ended December 31, 2006, 2005 and
                2004
            
            F-4Statements
                of Shareholders’ Equity for the years ended December 31, 2006, 2005 and
                2004
            
            F-5Statements
                of Cash Flows for the years ended December 31, 2006, 2005 and
                2004
            
            F-6Notes
                to Financial Statements
            
            F-7





F-1


**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Directors


PokerTek,
      Inc.


Matthews,
      North Carolina




We
      have
      audited the accompanying balance sheets of PokerTek, Inc. (the “Company”) as of
      December 31, 2006 and 2005, and the related statements of operations,
      shareholder’s equity (deficit) and cash flows for the years ended December 31,
      2006, 2005 and 2004. Our audits also included the financial statement schedules
      listed at Item 8 in the Company’s annual report on Form 10-K. These financial
      statements and the financial statement schedules are the responsibility of
      the
      Company’s management. Our responsibility is to express an opinion on these
      financial statements and the financial statement schedules 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 financial statements referred to above present fairly, in all
      material respects, the financial position of the Company as of December 31,
      2006
      and 2005, and the results of its operations and its cash flows for the years
      ended December 31, 2006, 2005 and 2004 in conformity with accounting principles
      generally accepted in the United States of America. Also, in our opinion, the
      financial statement schedules, when considered in relation to the basic
      financial statements taken as a whole, present fairly, in all material respects,
      the information set forth therein.





As
      discussed in Note 1, the Company adopted the provisions of Statement of
      Financial Accounting Standards No. 123(R), *Accounting
      for Stock-Based Payment* ,
      on
      January 1, 2006.




/s/
      McGladrey & Pullen, LLP




Charlotte,
      North Carolina


March
      26,
      2007





F-2


**PokerTek,
      Inc.**


**Balance
      Sheets**





December
                31,**Assets**
            
            2006
            
            2005Current
                AssetsCash
                and cash equivalents
            
            $
            9,353,501
            
            $
            20,373,900Trade
                and other receivables, net of allowance as of December 31,
                2006and
                December 31, 2005, $19,301 and -0-, respectively
            
            
            272,389
            
            
            151,200Prepaid
                expenses and other assets (Note 5)
            
            
            204,217
            
            
            315,550Inventory
                (Note 4)
            
            
            1,900,996
            
            
            600,675**Total
                current assets**
            
            
            11,731,103
            
            
            21,441,325Other
                AssetsOther
                assets (Note 5)
            
            
            345,638
            
            
            2,800Property
                and equipment, net of accumulated depreciation (Note 3)
            
            
            3,046,056
            
            
            1,259,025**Total
                assets**
            
            $
            15,122,797
            
            $
            22,703,150**Liabilities
                and Shareholder's Equity**Current
                LiabilitiesAccounts
                payable and accrued expenses
            
            $
            1,003,186
            
            $
            214,465Commitments
                (Notes 7 and 8)
            
            
            -
            
            
            -Shareholder's
                Equity (Note 10)Preferred
                stock, no par value per share; authorized 5,000,000, noneissued
                and outstanding
            
            
            -
            
            
            -Common
                stock, no par value per share; authorized 100,000,000
                shares,issued
                and outstanding 9,472,020 and 9,468,020 shares atDecember
                31, 2006 and December 31, 2005, respectively
            
            
            -
            
            
            -Capital
            
            
            27,956,685
            
            
            27,180,041Accumulated
                deficit
            
            
            (13,837,074
            )
            
            (4,691,356
            )**Total
                shareholder's equity**
            
            
            14,119,611
            
            
            22,488,685**Total
                liabilities and shareholder's equity**
            
            $
            15,122,797
            
            $
            22,703,150





See
      Notes
      to Financial Statements.


F-3


**PokerTek,
      Inc.**


**Statements
      of Operations**





Years
                Ended December 31,2006
            
            2005
            
            2004Revenues:License
                Fees
            
            $
            823,986
            
            $
            270,400
            
            $
            -Product
                Sales
            
            
            1,155,931
            
            
            43,948
            
            
            -**Total
                revenues**
            
            
            1,979,917
            
            
            314,348
            
            
            -Costs
                and operating expenses:Cost
                of product sales
            
            
            1,127,997
            
            
            38,506
            
            
            -Selling,
                general and administrative
            
            
            6,079,583
            
            
            1,759,117
            
            
            454,989Research
                and development
            
            
            3,949,223
            
            
            2,287,795
            
            
            476,583Depreciation
            
            
            709,593
            
            
            119,783
            
            
            30611,866,396
            
            
            4,205,201
            
            
            931,878**Operating
                loss**
            
            
            (9,886,479
            )
            
            (3,890,853
            )
            
            (931,878
            )Non-operating
                income (expense):Interest
                income
            
            
            741,932
            
            
            190,309
            
            
            6,142Interest
                (expense)
            
            
            (1,171
            )
            
            -
            
            
            (101
            )740,761
            
            
            190,309
            
            
            6,041**Net
                loss**
            
            $
            (9,145,718
            )
            $
            (3,700,544
            )
            $
            (925,837
            )Net
                Loss Per Common Share - Basic and Diluted:
            
            $
            (0.97
            )
            $
            (0.49
            )
            $
            (0.16
            )Weighted
                Average Common Shares Outstanding -Basic
                and Diluted:
            
            
            9,471,423
            
            
            7,517,278
            
            
            5,743,957





See
      Notes to Financial Statements.


F-4


**PokerTek,
      Inc.**


**Statements
      of Shareholder’s Equity (Deficit)**




Common
                Stock
            
            
            
            Accumulated
            
            Total
                Shareholder'sShares
            
            Value
            
            Capital
            
            Deficit
            
            Equity
                (Deficit)Balance,
                December 31, 2003
            
            
            4,725,000
            
            
            -
            
            
            -
            
            
            (64,975
            )
            
            (64,975
            )Noncash
                compensation
            
            
            -
            
            
            -
            
            
            11,271
            
            
            -
            
            
            11,271Stock
                issued (Notes 9 and 10)
            
            
            1,970,576
            
            
            -
            
            
            2,061,064
            
            
            -
            
            
            2,061,064Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (925,837
            )
            
            (925,837
            )Balance,
                December 31, 2004
            
            
            6,695,576
            
            
            -
            
            
            2,072,335
            
            
            (990,812
            )
            
            1,081,523Noncash
                compensation
            
            
            -
            
            
            -
            
            
            280,212
            
            
            -
            
            
            280,212Proceeds
                from private placement of commonstock
                (Note 10)
            
            
            538,694
            
            
            -
            
            
            3,005,913
            
            
            -
            
            
            3,005,913Net
                proceeds from issuance of common stock(Note
                10)
            
            
            2,225,000
            
            
            -
            
            
            21,798,218
            
            
            -
            
            
            21,798,218Stock
                options exercised
            
            
            8,750
            
            
            -
            
            
            23,363
            
            
            -
            
            
            23,363Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,700,544
            )
            
            (3,700,544
            )Balance,
                December 31, 2005
            
            
            9,468,020
            
            
            -
            
            
            27,180,041
            
            
            (4,691,356
            )
            
            22,488,685Noncash
                compensation
            
            
            -
            
            
            -
            
            
            813,316
            
            
            -
            
            
            813,316Expenses
                from issuance of common stock(Note
                10)
            
            
            -
            
            
            -
            
            
            (36,712
            )
            
            -
            
            
            (36,712
            )Stock
                options exercised
            
            
            4,000
            
            
            -
            
            
            40
            
            
            -
            
            
            40Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (9,145,718
            )
            
            (9,145,718
            )Balance,
                December 31, 2006
            
            
            9,472,020
            
            $
            -
            
            $
            27,956,685
            
            $
            (13,837,074
            )
            $
            14,119,611




See
      Notes
      to Financial Statements.




F-5


**PokerTek,
      Inc.**


**Statements
      of Cash Flows**





Years
                Ended December 31,2006
            
            2005
            
            2004Cash
                Flows from Operating ActivitiesNet
                loss
            
            $
            (9,145,718
            )
            $
            (3,700,544
            )
            $
            (925,837
            )Adjustments
                to reconcile net loss to net cash usedin
                operating activities:Depreciation
            
            
            709,593
            
            
            119,783
            
            
            306Stock-based
                compensation expense
            
            
            813,316
            
            
            280,212
            
            
            11,271Provision
                for trade and other receivables
            
            
            19,301
            
            
            -
            
            
            8,000Changes
                in assets and liabilities:Increase
                in trade and other receivables
            
            
            (140,490
            )
            
            (151,200
            )
            
            (8,000
            )Increase
                in prepaid expenses and other assets
            
            
            (231,505
            )
            
            (315,550
            )
            
            (2,800
            )Increase
                in inventory
            
            
            (1,300,321
            )
            
            (569,970
            )
            
            (30,705
            )Increase
                in accounts payable and accruedexpenses
            
            
            788,721
            
            
            199,695
            
            
            10,558**Net
                cash used in operating activities**
            
            
            (8,487,103
            )
            
            (4,137,574
            )
            
            (937,207
            )Cash
                Flows from Investing ActivitiesProceeds
                from sale of equipment
            
            
            44,907
            
            
            -
            
            
            -Purchases
                of property and equipment
            
            
            (2,541,531
            )
            
            (1,312,848
            )
            
            (66,266
            )**Net
                cash used in investing activities**
            
            
            (2,496,624
            )
            
            (1,312,848
            )
            
            (66,266
            )Cash
                Flows from Financing ActivitiesNet
                proceeds from issuance of common stock,private
                placement of common stock andcommon
                stock options exercised
            
            
            (36,672
            )
            
            24,827,494
            
            
            2,061,064Proceeds
                (repayments) on loans from shareholders
            
            
            -
            
            
            (326,043
            )
            
            245,091**Net
                cash (used in) provided by financing****activities**
            
            
            (36,672
            )
            
            24,501,451
            
            
            2,306,155**Net
                increase (decrease) in cash and cash****equivalents**
            
            
            (11,020,399
            )
            
            19,051,029
            
            
            1,302,682Cash
                and cash equivalents:Beginning
            
            
            20,373,900
            
            
            1,322,871
            
            
            20,189Ending
            
            $
            9,353,501
            
            $
            20,373,900
            
            $
            1,322,871Supplemental
                Disclosure of Cash Flow InformationCash
                payments for interest
            
            $
            1,171
            
            $
            -
            
            $
            101





See
      Notes
      to Financial Statements.




F-6


**POKERTEK,
      INC.**




**NOTES
      TO FINANCIAL STATEMENTS**


**December
      31, 2006**





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




*Nature
      of business* :
      PokerTek, Inc. (the “Company”) is located in Matthews, North Carolina and was
      formed on August 22, 2003 to develop and manufacture electronic poker tables
      and
      related software for use in the gaming industry. The Company also develops
      software, which can be used by casinos to gather certain data, track table
      games, and monitor player activity. The Company’s products focus on increasing
      the casino’s productivity, profitability, and security while eliminating dealer
      and player mistakes.




The
      Company in prior years was considered a development stage company. During 2006,
      however, the Company increased its customer base and revenue to the point that
      we no longer believe this classification is necessary.





The
      Company has yet to generate significant revenues, and has no assurance of future
      revenues. To management’s knowledge, no company has yet marketed a similar
      salable product using the technology that has been developed by the Company.
      Even if marketing efforts are successful, substantial time could pass before
      significant revenues will be realized and, during this period, the Company
      may
      require additional funds that may not be available to it.





The
      Company concluded its initial public offering (“IPO”) in October 2005 and sold
      2,000,000 shares of PokerTek, Inc. common stock while raising approximately
      $19.6 million, net of offering expenses and underwriting discounts. In November
      2005, the underwriter exercised its over-allotment option to acquire an
      additional 225,000 common shares, resulting in additional net proceeds of
      approximately $2.2 million to the Company (see Note 10). Prior to the IPO,
      the
      Company completed two private placements of its common stock. In July 2004,
      the
      Company issued 770,576 shares and raised approximately $2.1 million; in April
      2005, the Company issued 538,694 shares and raised approximately $3.0
      million.





Basis
      of
      Presentation: These financial statements have been prepared by the Company
      in
      accordance with accounting principles generally accepted in the United States
      of
      America.





A
      summary
      of the Company’s significant accounting policies follows:




*Revenue
      Recognition:* We
      generate revenue from licensing the rights to use the software necessary to
      operate the PokerPro system and in the near future from providing maintenance
      and support services to customers that license the PokerPro system. We recognize
      revenue in accordance with Statement of Position (“SOP”) No. 97-2, *Software Revenue Recognition* (as
      amended by SOP No. 98-4 and SOP No. 98-9) and Staff Accounting Bulletin (“SAB”)
      No. 101, updated by SAB’s 103 and 104 “Update of Codifications of Staff
      Accounting Bulletins.”




We
      recognize revenue on the sale or license of the PokerPro system when persuasive
      evidence of an agreement exists, the sales price is fixed or determinable,
      the
      PokerPro system is delivered and collectibility is reasonably assured.
      Agreements are based on either a fixed monthly fee or a pre-determined
      percentage of the “rake”,
      which is the amount the casino or card club charges for each hand of
      poker .




If
      multiple product deliverables are included under a sale or license agreement,
      we
      intend to allocate revenue to each product based upon their respective fair
      values against the total contract value and defer revenue recognition on those
      deliverables where we have not met all requirements of revenue recognition.
      As
      of December 31, 2006, there were no multiple product deliverable agreements
      entered into by the Company.


F-7





We
      intend
      to recognize revenue from maintenance and support services ratably over the
      term
      of the software support services agreement when such agreements are executed.
      We
      intend to recognize any revenues from professional services not essential to
      the
      customers’ use of the software under time-and-materials-based agreements as
      services are performed.




*Accounting
      estimates* :
      The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.




*Cash
      and cash equivalents:* For the
      purposes of reporting the statement of cash flows, 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 maintained
      and will maintain cash balances with highly reputable financial institutions,
      which at times throughout the year exceeded the Federally-insured amount. The
      Company has not historically experienced any such losses.





*Concentrations
      of Credit Risk:* Financial instruments that subject us to credit risk primarily consist of cash,
      cash equivalents and trade receivables. Our credit risk is managed by investing
      cash and cash equivalents primarily in high-quality money market instruments
      and
      securities of the U.S. government and its agencies. Accounts receivable include
      amounts owed by various customers and groups of customers. No collateral is
      required. Accounts receivable are not sold or factored. The Company periodically
      reviews its trade receivables in determining its allowance for doubtful accounts
      and at December 31, 2006 and December 31, 2005, allowance for doubtful accounts
      receivables was $19,301 and $0, respectively.





*Receivables
      and Allowance for Doubtful Accounts:* We
      regularly evaluate the collectibility of our trade receivable balances based
      on
      a combination of factors. When a customer’s account becomes past due, we
      initiate dialogue with the customer to determine the cause. If it is determined
      that the customer will be unable to meet its financial obligation to us, such
      as
      in the case of a bankruptcy filing, deterioration in the customer’s operating
      results or financial position or other material events impacting their business,
      we record a specific reserve for bad debts to reduce the related receivable
      to
      the amount we expect to recover given all information presently available.
      As of
      December 31, 2006, we recorded a reserve of $19,301. Except for this reserve,
      we
      believe all our other receivables are collectible. If circumstances related
      to
      specific customers change, our estimates of the recoverability of receivables
      could materially change. Recoveries of receivables previously written off are
      recorded when recovered.





*Patents.* We
      expense legal fees and application costs related to our patent application
      process. There is a high degree of uncertainty in the outcome of approval for
      any of our patents. Once the patents are approved, any costs incurred to defend
      and register these patents will be capitalized.





*Research
      and development* :
      Research and development costs are charged to expense when incurred and are
      included in the statement of operations, except when certain qualifying expenses
      are capitalized in accordance with Financial Accounting Standards Board (“FASB”)
      Statement of Financial Accounting Standards (“SFAS”) No. 86. As of December 31,
      2006 and 2005, no amounts had been capitalized.




*Advertising:* The
      Company follows the policy of charging the cost of advertising to expense as
      incurred. Advertising costs for the years ended December 31, 2006, 2005, and
      2004 was $474,270, $78,033, and $1,494, respectively.




F-8


*Inventories* :
      Inventories are stated at the lower of cost, determined on a first-in, first-out
      basis, or market. The Company has included a standard labor amount in inventory
      for each PokerPro system in process. Costs not directly related to the
      components of the PokerPro system are expensed as incurred.





*Offering
      Costs* :
      Offering costs consist principally of legal, accounting, and underwriting fees
      incurred in connection with the Company’s offerings. These costs, which amount
      to approximately $2.6 million, have been charged to capital upon the receipt
      of
      capital.




*Income
      taxes* :
      The
      Company accounts for income taxes in accordance with SFAS No. 109, *Accounting for Income Taxes* (“SFAS
      No. 109”). 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
      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, and the failure to fully realize such deferred tax assets
      could result in a higher tax provision in future periods.




*Earnings
      (loss) per share* :
      The
      Company computes earnings (loss) per share in accordance with SFAS No.
      128, *Earnings per Share* (“SFAS
      No. 128”). SFAS No. 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 (numerator) by
      the
      weighted-average number of shares outstanding (denominator) during the period.
      Diluted EPS gives effect to all potential dilutive common shares outstanding
      during the period including stock options, using the treasury stock method,
      and
      convertible preferred stock, using the if-converted method. 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.




*Property
      and Equipment* :
      Property and equipment are stated at cost, less accumulated depreciation. Direct
      costs incurred to implement the PokerPro system and make the asset ready for
      use
      are capitalized. Depreciation is computed using the straight-line method over
      the estimated useful life of the asset. Leasehold improvements are amortized
      over the shorter of the initial term of the lease or the useful life of the
      improvement. Expenditures for maintenance and repairs are expensed as incurred.
      For the years ended December 31, 2006, December 31, 2005, and December 31,
      2004,
      the Company recorded $709,593, $119,783, and $306 of depreciation expense,
      respectively.




*Stock-based
      compensation* :
      The
      Company accounts for its stock-based compensation awards in accordance with
      SFAS
      No. 123R, *Share Based Payment* (“SFAS
      No. 123R”). Under SFAS No. 123R, the Company values its stock options issued
      based upon the Black-Scholes option pricing model and recognizes this 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. As the Company acquires more
      historical data related to its stock price and stock option activity, these
      estimates may be significantly different in future periods. Based on the
      Black-Scholes model, the Company recorded $813,316, $280,212, and $11,271 of
      compensation expense during the years ended December 31, 2006, 2005, and 2004,
      respectively.




F-9


*Recent
      accounting pronouncements:*




In
      March 2006, the FASB issued SFAS No. 156, *“Accounting
      for Servicing of Financial Assets,”* which
      amends FASB Statement No. 140, *“Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities”.* SFAS
      No.
      156 is effective in fiscal years beginning after September 15, 2006. The
      Company is currently assessing the impact, if any, of the adoption of SFAS
      No.
      156 on the fiscal year 2007 financial statements.





In
      July
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *“Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement
      No. 109”.* FIN
      48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with SFAS No. 109, *Accounting
      for Income Taxes.* FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. FIN 48 is effective for fiscal years beginning after
      December 15, 2006, and applies to all tax positions accounted for in
      accordance with SFAS No. 109. Based on the Company’s recording of a
      valuation allowance against its deferred tax assets, we expect any adjustment
      under FIN 48 to result in a reduction of gross deferred tax assets with a
      corresponding decrease in the required valuation allowance. Therefore, we
      estimate that the adoption of this standard will not have a material impact
      on
      the opening balance of retained earnings for 2007 and will have no impact to
      our
      cash flows.





In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ” .
      SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value,
      and expands disclosure requirements regarding fair value measurement. Where
      applicable, SFAS No. 157 simplifies and codifies previously issued guidance
      within GAAP related to fair value. Although SFAS No. 157 does not require any
      new fair value measurements, its application may, in certain instances, change
      current practice. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007. The Company is currently reviewing SFAS No. 157 to determine
      its impact on our financial statements upon adoption.





In
      September 2006, the staff of the Securities and Exchange Commission (the
“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, which provides
      interpretive guidance regarding the process for quantifying financial statement
      misstatements. SAB No. 108 is
      effective for fiscal years ending after November 15, 2006. We do not expect
      the adoption of SAB 108 to have a material impact on our financial position,
      results of operations or cash flows.





**Note
      3. Property and Equipment**





Property
      and equipment consists of the following at December 31, 2006 and 2005:





Useful
                life(years)
            
            2006
            
            2005PokerPro
                systems
            
            
            3
            
            $
            2,933,901
            
            $
            1,074,423Temporarily
                idle PokerPro systems (a)
            
            
            3
            
            
            431,805
            
            
            -Equipment
            
            
            5
            
            
            407,873
            
            
            273,628Leasehold
                improvements
            
            
            4
            
            
            100,875
            
            
            31,063$
            3,874,454
            
            $
            1,379,114Less:
                accumulated depreciation (a)
            
            
            
            
            
            (828,398
            )
            
            (120,089
            )Property
                and equipment, net
            
            
            
            
            $
            3,046,056
            
            $
            1,259,025





F-10


(a)
      The
      systems are ready for customer and regulatory use and will be installed as
      agreements are signed and scheduling allows. Included in the $828,398
      accumulated depreciation above is $170,558 related to the temporarily idle
      PokerPro systems.





**Note
      4. Inventory**




Inventory
      consists of the following at December 31, 2006 and 2005:





2006
            
            2005Raw
                Materials
            
            $
            859,945
            
            $
            600,675Tables
                in process
            
            
            1,041,051
            
            
            -Total
                Inventory
            
            $
            1,900,996
            
            $
            600,675




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





Prepaid
      expenses and other assets consist of the following at December 31, 2006 and
      2005:





Prepaid
                expenses and other assets, current:
            
            2006
            
            2005Prepaid
                expenses
            
            $
            188,590
            
            $
            280,027Interest
                income receivable
            
            
            15,627
            
            
            35,523Total
                prepaid expenses and other assets, current
            
            $
            204,217
            
            $
            315,550Other
                assets, non-current:Intangible
                assets, net
            
            $
            342,838
            
            $
            -Security
                deposit
            
            
            2,800
            
            
            2,800-Total
                other assets, non-current
            
            $
            345,638
            
            $
            2,800





Intangible
      assets, net consists of license fees paid in advance to various regulatory
      agencies. When the Company receives approval in a jurisdiction, the Company
      will
      expense the fee paid over the term of the license. If the Company is rejected
      for approval, all unreturned fees will be expensed in that period.





**Note
      6. Income Taxes and Change in Tax Status**




For
      the
      period from August 22, 2003 (date of inception) to July 27, 2004, the
      Company, with the consent of its shareholders, elected to be taxed under certain
      sections of federal and state income tax law that provide that, in lieu of
      corporation income taxes, the shareholders separately account for their pro
      rata
      shares of the Company’s income deductions, losses and credits. On July 27,
      2004, the Company’s shareholders terminated this election effective
      July 28, 2004.




As
      a
      result of the July 27, 2004 termination, the Company has federal net
      operating loss carryforwards as of December 31, 2006 and December 31,
      2005 in the amount of approximately $12,124,000 and $3,530,000, respectively,
      and North Carolina net economic loss carryforwards of approximately $6,634,000
      and $1,990,000, respectively. Included in the federal net operating loss
      carryforward above 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 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 2026. The December
      31, 2004 carryforward has been adjusted to reflect the capitalization of
      start-up costs for an amended 2004 tax return the Company has filed. The Company
      also has research and experimentation tax credit carryforwards for both federal
      and North Carolina of approximately $237,000 and $91,000, respectively. These
      credit carryforwards may be used to offset both federal and North Carolina
      tax
      in future years through their expiration in 2026.




F-11


The
      Company is required to record 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 reflected below should be established against the deferred
      tax assets as of December 31, 2006 and 2005.




Temporary
      differences between the financial statement carrying amounts and tax bases
      of
      assets that give rise to significant portions of the deferred tax assets relate
      to the following at December 31, 2006 and 2005.





2006
            
            2005Deferred
                tax asset:Start-up
                costs capitalization
            
            $
            176,852
            
            $
            178,469Loss
                carryforwards
            
            
            4,410,834
            
            
            1,290,650Property
                and equipment
            
            
            40,766
            
            
            17,487Tax
                credit carryforwards
            
            
            297,723
            
            
            -Share-based
                compensation expense
            
            
            87,919
            
            
            105,443Other
            
            
            8,066
            
            
            21,2995,022,160
            
            
            1,613,348Deferred
                tax liability:Accounts
                receivable
            
            
            (20,981
            )
            
            -Prepaid
                expenses
            
            
            (68,768
            )
            
            -(89,749
            )
            
            -Net
                deferred tax asset
            
            
            4,932,411
            
            
            1,613,348Less
                valuation allowance
            
            
            (4,932,411
            )
            
            (1,613,348
            )$
            -
            
            $
            -





A
      reconciliation of income tax expense at statutory rates (approximately 36%
      federal and state) to the income tax expense reported in the statements of
      operations is as follows for the years ended December 31, 2006, 2005 and
      2004:





2006
            
            2005
            
            2004Federal
                tax benefit at statutory rate
            
            $
            3,109,544
            
            $
            1,258,185
            
            $
            262,793State
                tax benefit, net of federal taxes
            
            
            267,537
            
            
            80,478
            
            
            22,525Research
                & experimentation credits
            
            
            237,448
            
            
            -
            
            
            -SFAS
                123R expense on incentive stock options
            
            
            (226,401
            )
            
            -
            
            
            -Loss
                taxed at shareholder level
            
            
            -
            
            
            -
            
            
            -Increase
                in valuation allowance
            
            
            (3,319,063
            )
            
            (1,316,126
            )
            
            (297,222
            )Prior
                year true-up
            
            
            (49,289
            )Other
            
            
            (18,776
            )
            
            (22,537
            )
            
            11,904Income
                tax expense
            
            $
            -
            
            $
            -
            
            $
            -





F-12


**Note
      7. Commitments**




The
      Company leases corporate offices under lease agreements with terms up to 5
      years
      and which require the Company to pay property taxes, insurance and maintenance.
      The Company also leases certain office equipment under lease agreements with
      terms up to 3 years. The following is a schedule by year of the future minimum
      lease payments due under agreements with terms extending beyond one
      year:




Year
                EndingDecember
                31,
            
            Amount2007
            
            $
            171,5182008
            
            
            169,2532009
            
            
            168,8002010
            
            
            69,9002011
            
            
            24,000$
            603,471




Rent
      expense for the years ended December 31, 2006, 2005, and 2004 was $151,809,
      $76,138, and $11,295, respectively.




The
      Company has entered into employment agreements with certain officers that
      include base salaries and certain benefits. These agreements have terms ranging
      from two to four years.





**Note
      8. Employee Benefit Plan**




The
      Company has established a salary deferral plan under Section 401(k) of the
      Internal Revenue Code. The plan allows eligible employees to defer a portion
      of
      their compensation ranging from 3% to 5%. Such deferrals accumulate on a tax
      deferred basis until the employee withdraws the funds. The Company makes a
      matching contribution equal to 100% on the first 3% of the participants’
elective deferral and 50% on deferral from 3% to 5%. Total expense recorded
      for the Company’s match for the years ended December 31, 2006, 2005 and 2004 was
      $49,150, $15,762, and $267, respectively.





**Note
      9. Loans from Shareholders**




On
      June
      10, 2004, the Company executed an unsecured promissory note (“Note”) with WPT
      Enterprises, Inc. (“WPT”) for approximately $185,000. In consideration for the
      Note given to the Company, the Company issued 1,080,000 shares of common stock
      to WPT. The fair value of the common stock computed at the time of issue was
      nominal. The Note bears interest at the lowest Federal applicable rate and
      was
      originally due in June 2009. In addition, as part of the transaction with WPT,
      the Company received a 10-year royalty-free license to use the “World Poker
      Tour” name and related logo and trademark in the United States within the
      commercial poker table market. The Note was repaid in full in the amount of
      $185,090 on October 12, 2005.




Also
      included in loans from shareholders were various non-interest bearing loans
      from
      shareholders in connection with the initial start-up of the Company. These
      loans
      had no scheduled maturity date. The aggregate outstanding amount of these
      non-interest bearing loans totaled $140,953 and was repaid on October 12,
      2005.




F-13


**Note
      10. Shareholder’s Equity**




*Private
      Placements:* On July
      29, 2004, the Company completed a private placement offering whereby the Company
      issued 770,576 shares of common stock for $2.67 each. The Company raised
      approximately $2,057,400 in gross proceeds relating to this offering.





On
      April
      26, 2005, the Company completed a second private placement offering whereby
      the
      Company issued 538,694 shares of common stock. The gross proceeds from the
      private placement offering were $3,005,913.





*Initial
      Public Offering:* On July
      29, 2005, the Company’s Board of Directors approved the sale of up to 2,300,000
      shares of common stock in the public market. On October 14, 2005, the SEC
      declared effective a registration statement of the Company that registered
      the
      offer and sale of 2,000,000 shares of the Company’s common stock, at $11.00 per
      share, in the Company’s initial public offering and up to an additional 300,000
      shares of the Company’s common stock that may be sold if the underwriter
      involved in the offering exercised its over-allotment option. The Company’s
      common stock was approved for trading on the NASDAQ Global Market (formerly
      the
      NASDAQ National Market) and began trading on October 14, 2005. The initial
      closing of the offering, at which the Company sold 2,000,000 shares of common
      stock, occurred on October 19, 2005, with the Company receiving proceeds of
      approximately $19.6 million, net of offering expenses and underwriting
      discounts. On November 23, 2005, the underwriter gave notice that it would
      exercise its over-allotment option to acquire an additional 225,000 shares
      of
      common stock, resulting in additional net proceeds of $2.2 million to the
      Company.




*Common
      and Preferred Stock* :
      On July
      29, 2005, the Company’s Board of Directors adopted the Amended and Restated
      Articles of Incorporation (the “Amendment”). Pursuant to the Amendment, the
      Company increased the number of shares of common stock that were authorized
      to
      issue from 10,000,000 to 100,000,000 and authorized the issuance, without
      further shareholder approval, of up to 5,000,000 shares of “blank check”
preferred stock, no par value, in one or more series, having such rights and
      preferences, privileges and restrictions as the Company’s Board of Directors may
      determine.





*Consulting
      Services* :
      On
      April 7, 2004, the Company issued 120,000 shares of common stock in exchange
      for
      certain consulting services. The fair value of the common stock computed at
      the
      time of issue was nominal and has been included in additional
      paid-in-capital.





*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 to the Company’s employees, directors and designated independent
      contractors. On July 29, 2005, the Company adopted the 2005 Stock Incentive
      Plan
      (the “2005 Plan”). The 2005 Plan authorizes the issuance of up to 812,500 shares
      of common stock, plus up to 812,500 shares that were subject to outstanding
      awards under the 2004 Plan as of the effective date of the 2005 Plan that cease
      for any reason to be subject to such awards, up to a maximum of 1,625,000 shares
      of common stock.





Effective
      January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), "Share-Based
      Payment" (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB Opinion
      No. 25. SFAS No. 123R requires all share-based payments to employees, including
      grants of employee stock options, to be recognized in the financial statements
      based on their fair values. Prior to this adoption, we accounted for our
      share-based employee compensation awards in accordance with SFAS No. 123,
      Accounting for Stock-Based Compensation. The Company adopted SFAS No. 123R
      using
      the modified-prospective transition method, which requires the Company,
      beginning January 1, 2006 and thereafter, to expense the grant date fair value
      of all share-based awards over their remaining vesting periods to the extent
      the
      awards were not fully vested as of the date of adoption and to expense the
      fair
      value of all share-based awards granted subsequent to December 31, 2005 over
      their requisite service periods. Share-based compensation expense for all
      share-based payment awards granted after January 1, 2006 is based on the
      grant-date fair value estimated in accordance with the provisions of SFAS No.
      123R. The Company recognizes compensation cost net of a forfeiture rate and
      recognizes the compensation cost for only those awards expected to vest on
      a
      straight-line basis over the requisite service period of the award, which is
      generally the vesting term. The Company estimated the forfeiture rate based
      on
      its expectations about future forfeitures. As required under the
      modified-prospective transition method, prior periods have not been restated.
      In
      March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding
      the SEC's interpretation of SFAS No. 123R and the valuation of share-based
      payments for public companies. The Company has applied the provisions of SAB
      107
      in its adoption of SFAS No. 123R. The Company allocates share-based payment
      expense between selling, general and administrative (“SG&A”) and research
      and development (“R&D”) expenses based on the same factors as cash
      compensation.





F-14


For
      stock
      options issued both before and after adoption of SFAS No. 123R, the fair value
      is estimated at the date of grant using a Black-Scholes option pricing model.
      As
      part of its adoption of SFAS No. 123R, for stock options issued after December
      31, 2005, the Company reevaluated its assumptions in estimating the fair value
      of stock options granted. Principal assumptions used are as follows: (a)
      expected volatility for the Company's stock price is based on comparable
      companies’ volatility and implied market volatility, (b) exercise data is used
      to estimate the options' expected term, which represents the period of time
      that
      the options granted are expected to be outstanding, and (c) the risk-free
      interest rate is the rate on zero-coupon U.S. government issues with a remaining
      term equal to the expected life of the options. Options
      granted under the plans generally vest over periods ranging from date of grant
      to four years and expire in ten years. The value of the options granted is
      being
      charged to expense over the service period or vesting period, as
      appropriate.





At
      December 31, 2006 and December 31, 2005, options to purchase 1,600,650 and
      1,053,650 shares of common stock, respectively, had been granted to 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 2006, 2005 and 2004 was $813,316, $280,212, and $11,271,
      respectively.





On
      the
      date of grant using the Black-Scholes option-pricing model, the following
      assumptions were used to estimate the grant-date fair value of the options
      in
      the periods indicated:





2006
            
            2005Risk-free
                interest rate (weighted average)
            
            
            4.78
            %
            
            3.80
            %Expected
                volatility
            
            
            30-45
            %
            
            0-30
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %Expected
                life (years) (weighted average)
            
            
            5.0
            
            
            5.0




The
      resulting weighted average fair value per option applied to the options granted
      were $4.21 and $1.31 per share for the years ended December 31, 2006 and
      December 31, 2005, respectively.





F-15


A
      summary
      of the stock option activity and weighted average exercise price for the years
      ended December 31, 2006 and December 31, 2005 is as follows:




Shares
            
            Weighted
                Average
              Exercise
                Price
            
            Weighted
                Average
              Contractual
                Term (Years)
            
            Aggregate
                Intrinsic ValueOutstanding
                at December 31, 2004
            
            
            471,500
            
            $
            2.65Granted
            
            
            617,150
            
            
            6.34Exercised
            
            
            (8,750
            )
            
            2.67Forfeited
            
            
            (26,250
            )
            
            2.67Outstanding
                at December 31, 2005
            
            
            1,053,650
            
            
            4.81Granted
            
            
            570,000
            
            
            11.76Exercised
            
            
            (4,000
            )
            
            0.01Forfeited
            
            
            (19,000
            )
            
            9.11Outstanding
                at December 31, 2006
            
            
            1,600,650
            
            
            7.25
            
            
            8.6
            
            $
            1,648,670Exercisable
                at December 31, 2006
            
            
            551,154
            
            $
            4.62
            
            
            8.1
            
            $
            2,017,224Available
                for grant
            
            
            11,600





There
      was
      no tax benefit related to the options exercised during the years ended December
      31, 2006 and 2005, respectively.





The
      following table summarizes information concerning options outstanding and
      options exercisable as of December 31, 2006:




Outstanding
            
            ExercisableWeighted
                averageRange
                of exercise
            
            
            
            remaining
              contractual
            
            Weighted
                average
            
            
            
            Weighted
                averageprices
            
            Shares
            
            life
                (years)
            
            exercise
                price
            
            Shares
            
            exercise
                price$
            2.67
            
            
            745,000
            
            
            7.9
            
            $
            2.67
            
            
            415,138
            
            $
            2.67$
            5.58
            
            
            33,500
            
            
            8.3
            
            $
            5.58
            
            
            12,563
            
            $
            5.58$
            8.28
            
            
            16,000
            
            
            10.0
            
            $
            8.28
            
            
            -
            
            $
            8.28$
            9.84
            
            
            76,650
            
            
            9.0
            
            $
            9.84
            
            
            19,162
            
            $
            9.84$
            10.14
            
            
            73,000
            
            
            9.5
            
            $
            10.14
            
            
            9,875
            
            $
            10.14$
            11.00
            
            
            191,500
            
            
            8.6
            
            $
            11.00
            
            
            50,875
            
            $
            11.00$
            11.96
            
            
            281,500
            
            
            9.3
            
            $
            11.96
            
            
            43,104
            
            $
            11.96$
            12.65
            
            
            183,500
            
            
            9.8
            
            $
            12.65
            
            
            437
            
            $
            12.651,600,650
            
            
            8.6
            
            $
            7.25
            
            
            551,154
            
            $
            4.62





The
      weighted-average grant-date fair value of options granted during the years
      ended
      December 31, 2006 and 2005 was $4.21 and $1.31, respectively. The total
      intrinsic value of options exercised during the years ended December 31, 2006
      was $46,920 and $69,300, respectively. The total fair value of options vested
      during the years ended December 31, 2006 and 2005 was $1,386,346 and $1,021,382,
      respectively.





F-16


A
      summary
      of the status of nonvested shares as of December 31, 2006, and changes during
      the year ended December 31, 2006 is presented below:





Weighted
                AverageNonvested
                Shares:
            
            Shares
            
            Grant-Date
                Fair ValueBalance
                at December 31, 2005
            
            
            790,675
            
            $
            1.05Granted
            
            
            534,396
            
            
            3.27Forfeited
            
            
            (19,000
            )
            
            3.69Vested
            
            
            (256,575
            )
            
            1.64Balance
                at December 31, 2006
            
            
            1,049,496
            
            $
            2.61





As
      of
      December 31, 2006, there was $1,559,108 of total unrecognized compensation
      cost
      related to nonvested stock options, which will be recognized from fiscal 2007
      through fiscal year 2011 in the amounts of $644,190, $427,149, $310,113,
      $177,342, and $314, respectively.





*Common
      Stock* : As
      noted
      in the preceding stock option activity table, the number of shares outstanding
      of our common stock increased by 4,000 shares during the year ended December
      31,
      2006 from 9,468,020 to 9,472,020, due to the exercise of certain stock options
      by consultants.





*Warrant:* As
      part
      of our IPO, we issued to the underwriter, for a purchase price of $50.00, a
      warrant (the “Underwriter’s Warrant”) to purchase up to a total of 200,000
      shares of our common stock. The Underwriter’s Warrant is not exercisable during
      the first year after October 13, 2005 (the date of our initial prospectus)
      and
      thereafter 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 our common stock. The
      Underwriter’s Warrant may not be sold, transferred, assigned or hypothecated for
      a period of one year from October 13, 2005, except to officers or partners
      of
      the Underwriter and members of the selling group and/or their officers or
      partners. The fair value of the warrant was computed at the time of issue and
      was nominal.





**Note
      11. Capitalized Software**




The
      Company capitalizes internally developed software costs in accordance with
      SFAS
      No. 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. The PokerPro system achieved technological
      feasibility concurrently with the system’s general release at the Seminole
      Hardrock Casino. Accordingly, for the years ended December 31, 2006, 2005 and
      2004, no internal software development costs have been capitalized.





**Note
      12. Related Party Transactions**




In January
      2006, the Company entered into an international distribution rights agreement
      with Aristocrat International Pty. Limited and its affiliates. Aristocrat
      International Pty. Limited 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. 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 our PokerPro
      system, in return for Aristocrat’s payment to us of a portion of the license
      fees received by Aristocrat from each customer in connection with Aristocrat’s
      licensing of the PokerPro system. Aristocrat also purchased our common stock
      during 2006, and as of December 31, 2006 owns approximately 19% of our common
      stock. During 2006 we recorded approximately $13,735 and $1,144,829 of license
      fees and equipment sales, respectively. At December 31, 2006, Aristocrat owed
      the Company $169,344 and the amount was paid in full during January
      2007.





F-17


In
      September 2006, an entity owned and controlled by the Company’s Chief Executive
      Officer and President purchased one of the buildings in which the Company leases
      one of its two spaces. During February 2007, the entity purchased the other
      building in which the Company leases space. The initial terms were negotiated
      at
      arms’ length and the terms of the Company’s existing leases were not modified
      upon this change in building ownership. Rent expense recorded for the leased
      space for the year ended December 31, 2006 was $147,090, of which $45,490 was
      paid to the related party.





**Note
      13. Legal Proceedings**





Litigation
      is inherently unpredictable. The Company’s assessment of each matter may change
      based on future unknown or unexpected events. If any litigation were to have
      an
      adverse result that we did not expect, there could be a material impact on
      our
      results of operations or financial position. The Company believes costs
      associated with litigation will not have a material impact on our financial
      position or liquidity, but may be material to the results of operations in
      any
      given period. The Company assumes no obligation to update the status of pending
      litigation, except as may be required by applicable law, statute or
      regulation.





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 TM. 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. The Company believes the lawsuit lacked any legal merit.





On
      February 5, 2007, Tellis Software, Inc. (“Tellis”) filed a Complaint against
      PokerTek and Lou White, the Company’s Chief Executive Officer, in the United
      States District Court for the Southern District of Texas. The Complaint alleges
      that PokerTek breached a Software Development Agreement (the “Agreement”), that
      PokerTek and Mr. White committed fraud in connection with alleged statements
      about the Agreement or its purported terms, and that PokerTek has been unjustly
      enriched and/or that Tellis is entitled to a quantum meruit recovery. As to
      all
      counts, Tellis seeks damages that it alleges are equivalent to a 2% equity
      interest in PokerTek and bonuses that could eventually total $730,000, plus
      attorneys’ fees, costs, and interest. For the fraud count, Tellis also seeks
      unspecified exemplary damages. On March 27, 2007, PokerTek and Mr. White filed
      a
      motion to dismiss the entire case for lack of personal jurisdiction or,
      alternatively, for a transfer of venue to the United States District Court
      for the Western District of North Carolina.  The motion also seeks
      to dismiss the fraud count for failure to state a claim against Mr. White.
      PokerTek and Mr. White believe they have meritorious defenses.





F-18


**Note
      14. Subsequent Events**




On
      January 24, 2007, the Company announced five new customer installations. The
      latest installations were:




·
            Crown
                Casino, Melbourne, Australia;


·
            Carnival
                City, Johannesburg, South Africa;


·
            Greektown
                Casino, Detroit, Michigan;


·
            MotorCity
                Casino, Detroit, Michigan; and


·
            FLB
                Sports Bar & Casino, Folsom,
                California.





On
      February 16, 2007, the Company announced that after a successful trial period,
      Princess Cruises has agreed to have 22 PokerPro tables installed by the end
      of
      fiscal 2007.




F-19


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




**2006**Q1
            
            Q2
            
            Q3
            
            Q4
            
            TotalRevenues:License
                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 - Basic and Diluted:
            
            
            9,469,598
            
            
            9,472,020
            
            
            9,472,020
            
            
            9,472,020
            
            
            9,471,423








**2005**Q1
            
            Q2
            
            Q3
            
            Q4
            
            TotalRevenues:License
                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
            
            
            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 - Basic and Diluted:
            
            
            6,695,576
            
            
            7,080,357
            
            
            7,234,270
            
            
            9,036,294
            
            
            7,517,278





F-20





**Note
      16. Segment Information**




The
      Company has identified one business segment for reporting purposes:
      Manufacturing and Distributing PokerPro Syste m.





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




**Years
      Ended December 31, 2006, 2005 and 2004**




**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 receivables:2004
            
            $
            —
            
            $
            8,000
            
            $
            —
            
            $
            —
            
            $
            8,0002005
            
            $
            8,000
            
            $
            —
            
            $
            —
            
            $
            8,000
            
            $
            —2006
            
            $
            —
            
            $
            19,301
            
            $
            —
            
            $
            —
            
            $
            19,301





F-21


**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 28, 2007
            By:
            /s/
              Gehrig
              H. WhiteGehrig
              H. WhiteChief
              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/
                Gehrig H. White
            
            March
                28, 2007Name:
            Gehrig H. WhiteTitle:
            Chief Executive Officer and
              Director(Principal
                Executive Officer)/s/
                Christopher Daniels
            
            March
                28, 2007Name:
            Christopher DanielsTitle:
            Chief Financial Officer(Principal
                Financial Officer andPrincipal
                Accounting Officer)/s/
                Lyle Berman
            
            March
                28, 2007Name:
            Lyle BermanTitle:
            Chairman of the Board of Directors/s/
                James T. Crawford, III
            
            March
                28, 2007Name:
            James T. Crawford, IIITitle:
            President, Secretary and Director/s/
                Joseph J. Lahti
            
            March
                28, 2007Name:
            Joseph J. LahtiTitle:
            Director/s/
                Arthur Lee Lomax
            
            March
                28, 2007Name:
            Arthur Lee LomaxTitle:
            Director





35


**Exhibit
      Index**





Exhibit
              No.
            Description





2.1
            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 our
                Registration Statement on Form S-1/A filed on October 5, 2005 (No.
                333-127181)).





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
            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)).





10.4
            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)).





10.5
            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)).





10.6
            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)).*





10.7
            Form
                of Stock Option Agreement for PokerTek, Inc. 2005 Stock Incentive
                Plan
                (incorporated by reference to Exhibit 10.7 to our Registration Statement
                on Form S-1/A filed on September 13, 2005 (No.
                333-127181)).*





10.8
            Form
                of Non-Employee Director Stock Option Agreement for PokerTek,
                Inc.(incorporated by reference to Exhibit 99.2 to our Form 8-K filed
                on March
                6, 2006).*





10.9
            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)).*





36


10.10
            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)).*





10.11
            Key
                Employee Agreement between PokerTek, Inc. and Christopher Daniels
                dated as
                of July 15, 2004 (incorporated by reference to Exhibit 10.10 to our
                Registration Statement on Form S-1 filed on August 4, 2005 (No.
                333-127181)).*





10.12
            Amendment
                to Key Employee Agreement between PokerTek, Inc. and Christopher
                Daniels
                effective as of July 1, 2005 (incorporated by reference to Exhibit
                10.11
                to our Registration Statement on Form S-1 filed on August 4, 2005
                (No.
                333-127181)).*





10.13
            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)).*





10.14
            Amendment
                to Key Employee Agreement between the 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)).*





10.15
            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)).*





10.16
            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)).





10.17
            Form
                of Warrant Agreement between PokerTek, Inc. and Feltl and Company
                (incorporated by reference to Exhibit A to Exhibit 1.1 to our Registration
                Statement on Form S-1/A filed on September 13, 2005 (No.
                333-127181)).





10.18
            PokerPro
                Software Licensing Agreement between PokerTek, Inc. and Seminole
                Tribe of
                Florida dated September 1, 2005 (incorporated by reference to Exhibit
                10.19 to our Registration Statement on Form S-1/A filed on October
                5, 2005
                (No. 333-127181)).





10.19
            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 Form 8-K filed on January 26,
                2006).





10.20
            Board
                Member Agreement between PokerTek, Inc. and Lyle Berman, dated January
                31,
                2005 (incorporated by reference to our Form 10-K for the fiscal year
                ended
                December 31, 2005 filed on March 16,
                2006).*





10.21
            Board
                Member Agreement between PokerTek, Inc. and Joe Lahti, dated March
                2, 2006
                (incorporated by reference to Exhibit 99.1 to our Form 8-K filed
                on March
                6, 2006).*





23.1
            Consent
                of McGladrey & Pullen, LLP.





31.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange
                Act.





37


31.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange
                Act.





32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.





*
            Compensatory
                plan or arrangement or management
                contract




Our
      SEC
      file number reference for documents filed with the SEC pursuant to the
      Securities Exchange Act of 1934, as amended, is 000-51572.




38