*Table
          of Contents*





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


______________





**FORM
      10-Q**





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




For
      the
      Quarterly Period Ended September 30, 2007




OR




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




For
      the
      transition period from
      _____________________to______________________





Commission
      File Number: 000-51572




**PokerTek,
      Inc.**


(Exact
      name of registrant as specified in its charter)




**North
                Carolina**
            
            **61-1455265**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)




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




**(704)
      849-0860**





(Registrant’s
                telephone number, including area
                code)




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 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





As
      of
      October 31, 2007, there were 10,934,464 shares outstanding of the registrant’s
      common stock.







*Table
        of Contents*


**POKERTEK,
      INC.**


**QUARTERLY
      REPORT ON FORM 10-Q**




**Table
      of Contents**




**PART
                I - FINANCIAL INFORMATION**
            **Page**Item
                1.
            Financial
                Statements
            1Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            12Item
                3.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            17Item
                4.
            Controls
                and Procedures
            18**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            18Item
                6.
            Exhibits
            20SIGNATURES
            21EXHIBIT
                INDEX
            22










-i-
 *Table
            of Contents*




**PART
      I. - FINANCIAL INFORMATION**




**Item
      1. Financial Statements**




**PokerTek,
      Inc.**


**Balance
      Sheets**





September
                30, 2007
            
            December
                31, 2006**Assets**
            
            (unaudited)Current
                AssetsCash
                and cash equivalents
            
            $
            11,102,795
            
            $
            9,353,501Trade
                receivables, net of allowance of $21,062 and $19,301,respectively
            
            
            505,492
            
            
            272,389Prepaid
                expenses and other assets (Note 2)
            
            
            168,193
            
            
            204,217Inventory
                (Note 3)
            
            
            2,137,313
            
            
            1,900,996**Total
                current assets**
            
            
            13,913,793
            
            
            11,731,103Other
                AssetsOther
                assets (Note 2)
            
            
            388,553
            
            
            345,638Property
                and equipment, net of accumulated depreciation (Note 4)
            
            
            4,891,805
            
            
            3,046,056**Total
                assets**
            
            $
            19,194,151
            
            $
            15,122,797**Liabilities
                and Shareholders’ Equity**Current
                LiabilitiesAccounts
                payable and accrued liabilities
            
            $
            1,436,727
            
            $
            1,003,186Commitments
                (Notes 5 and 6)
            
            
            —
            
            
            —Shareholder's
                Equity (Note 7)Preferred
                stock, no par value per share; authorized 5,000,000, noneissued
                and outstanding
            
            
            —
            
            
            —Common
                stock, no par value per share; authorized 100,000,000shares,
                issued and outstanding 10,934,464 and 9,472,020 atSeptember
                30, 2007 and December 31, 2006, respectively
            
            
            —
            
            
            —Additional
                Paid-in-capital
            
            
            41,122,253
            
            
            27,956,685Accumulated
                deficit
            
            
            (23,364,829
            )
            
            (13,837,074
            )**Total
                shareholders’ equity**
            
            
            17,757,424
            
            
            14,119,611**Total
                liabilities and shareholders’ equity**
            
            $
            19,194,151
            
            $
            15,122,797


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


-1-
 *Table
          of Contents*




**PokerTek,
      Inc.**


**Statements
      of Operations**


**(Unaudited)**





Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2007
            
            2006
            
            2007
            
            2006Revenues:License
                Fees
            
            $
            621,413
            
            $
            135,424
            
            $
            1,731,515
            
            $
            628,602Product
                Sales
            
            
            455,439
            
            
            104,018
            
            
            852,609
            
            
            397,620**Total
                revenues**
            
            
            1,076,852
            
            
            239,442
            
            
            2,584,124
            
            
            1,026,222Costs
                and operating expenses:Cost
                of product sales
            
            
            379,715
            
            
            98,153
            
            
            697,167
            
            
            380,454Selling,
                general and administrative
            
            
            3,257,939
            
            
            1,596,041
            
            
            7,181,482
            
            
            4,106,433Research
                and development
            
            
            1,144,586
            
            
            872,241
            
            
            3,274,665
            
            
            2,823,662Depreciation
            
            
            563,477
            
            
            182,019
            
            
            1,396,728
            
            
            449,949**Total
                costs and operating expenses**
            
            
            5,345,717
            
            
            2,748,454
            
            
            12,550,042
            
            
            7,760,498**Operating
                loss**
            
            
            (4,268,865
            )
            
            (2,509,012
            )
            
            (9,965,918
            )
            
            (6,734,276
            )Non-operating
                income:Interest
                income, net
            
            
            178,909
            
            
            192,647
            
            
            438,163
            
            
            595,191**Net
                loss**
            
            $
            (4,089,956
            )
            $
            (2,316,365
            )
            $
            (9,527,755
            )
            $
            (6,139,085
            )Net
                loss per common share - basic and diluted:
            
            $
            (0.37
            )
            $
            (0.24
            )
            $
            (0.92
            )
            $
            (0.65
            )Weighted
                average common shares outstanding - basic and diluted:
            
            
            10,920,257
            
            
            9,472,020
            
            
            10,304,001
            
            
            9,471,221


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


-2-
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          of Contents*




**PokerTek,
      Inc.**


**Statements
      of Cash Flows**


**(Unaudited)**




Nine
                Months Ended September 30,2007
            
            2006Cash
                Flows from Operating Activities:Net
                loss
            
            $
            (9,527,755
            )
            $
            (6,139,085
            )Adjustments
                to reconcile net loss to net cash used inoperating
                activities:Depreciation
            
            
            1,396,728
            
            
            449,949Stock-based
                compensation expense
            
            
            588,036
            
            
            605,144Provision
                for uncollectible trade receivables
            
            
            47,129
            
            
            —Changes
                in assets and liabilities:Trade
                receivables
            
            
            (280,232
            )
            
            (109,448
            )Prepaid
                expenses and other assets
            
            
            (6,891
            )
            
            (114,431
            )Inventory
            
            
            (236,317
            )
            
            (1,166,958
            )Accounts
                payable and accrued liabilities
            
            
            433,541
            
            
            321,533**Net
                cash used in operating activities**
            
            
            (7,585,761
            )
            
            (6,153,296
            )Cash
                flows from investing activitiesPurchases
                of property and equipment
            
            
            (3,242,477
            )
            
            (1,235,958
            )**Net
                cash used in investing activities**
            
            
            (3,242,477
            )
            
            (1,235,958
            )Cash
                flows from financing activitiesProceeds
                from common stock options exercised
            
            
            65,273
            
            
            —Proceeds
                (expenses) from issuance of common stock, netof
                expenses
            
            
            12,512,259
            
            
            (36,672
            )**Net
                cash provided by (used in) financing activities**
            
            
            12,577,532
            
            
            (36,672
            )**Net
                change in cash and cash****equivalents**
            
            
            1,749,294
            
            
            (7,425,926
            )Cash
                and cash equivalents:Beginning
            
            
            9,353,501
            
            
            20,373,900Ending
            
            $
            11,102,795
            
            $
            12,947,974


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


-3-
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          of Contents*


**POKERTEK,
      INC.**




**NOTES
      TO UNAUDITED FINANCIAL STATEMENTS**


**September
      30, 2007**





**Note
      1.** **Nature
      of Business and Interim Basis of Presentation**





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





The
      PokerPro® system is an electronic poker table that provides a fully-automated
      poker-room environment to tribal casinos, commercial casinos, cruise ships
      and
      card clubs. The Company’s first product was a 10-seat table developed in 2003.
      In November 2006, the Company introduced PokerPro® Heads-UpTM as a 2-seat version
      of the PokerPro® system.





In
      June
      2007, the Company entered the amusement category, introducing Heads-Up
      ChallengeTM World Series of Poker® edition. The Heads-Up ChallengeTM World Series
      of Poker® edition is an innovative heads-up poker table that enables two players
      to compete against each other in a game of Texas Hold’em poker for entertainment
      purposes in bars, restaurants and similar venues.





***Basis
      of Presentation.*** ******  The
      unaudited interim financial statements contained herein should be read in
      conjunction with the Company’s annual report on Form 10-K for the year ended
      December 31, 2006 and quarterly reports on Form 10-Q filed subsequent to
      December 31, 2006. The accompanying interim financial statements are presented
      in accordance with the requirements of Article 10 of Regulation S-X and,
      accordingly, do not include all the disclosures required by generally accepted
      accounting principles with respect to annual financial statements. The interim
      consolidated financial statements have been prepared in accordance with the
      Company’s accounting practices described in such Annual Report, but have not
      been audited. In management’s opinion, the financial statements include all
      adjustments which consist only of normal recurring adjustments, necessary for
      a
      fair statement of the Company’s results of operations for the periods presented.
      The balance sheet data as of December 31, 2006 were derived from the Company’s
      audited financial statements, but do not include all disclosures required by
      GAAP. The results of operations for the three and nine months ended September
      30, 2007 are not necessarily indicative of the results to be expected for the
      entire year.





There
      were no material changes during the most recent fiscal quarter in the
      Company’s significant accounting policies described
      in the Company’s Annual Report on Form 10-K for the year ended December 31,
      2006.





***Recent
      accounting pronouncements:***





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 adoption of this standard did not have a
      material impact on the financial statements.


-4-
 *Table
          of Contents*


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 the financial statements upon adoption.





In
      February 2007, the Financial Accounting Standards Board (“ FASB”)
      issued SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      Amendment of FASB Statement No. 115”* (“SFAS
      159”), which permits entities to choose to measure many financial instruments
      and certain other items at fair value. SFAS 159 permits entities to choose
      to measure certain financial assets and liabilities and other eligible items
      at
      fair value that are not otherwise currently required to be measured at fair
      value. Under SFAS 159, the decision to measure items at fair value is made
      at specified election dates on an irrevocable instrument-by-instrument basis.
      Entities electing the fair value option would be required to recognize changes
      in fair value in earnings and to expense upfront costs and fees associated
      with
      the item for which the fair value option is elected. Entities electing the
      fair
      value option are required to distinguish on the face of the statement of
      financial position, the fair value of assets and liabilities for which the
      fair
      value option has been elected and similar assets and liabilities measured using
      another measurement attribute. SFAS 159 is effective as of the beginning of
      the first fiscal year that begins after November 15, 2007, with earlier
      adoption permitted provided that the entity early adopts all of the requirements
      of SFAS 159. The Company is currently reviewing
      SFAS No. 159 to determine its impact on the financial statements upon
      adoption.





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





Prepaid
      expenses and other assets consist of the following at September 30, 2007 and
      December 31, 2006:





Prepaid
                expenses and other assets, current:
            
            September
                30,
              2007
            
            December
                31,
              2006Prepaid
                expenses
            
            $
            144,225
            
            $
            188,590Interest
                income receivable
            
            
            23,968
            
            
            15,627Total
                prepaid expenses and other assets, current
            
            $
            168,193
            
            $
            204,217Other
                assets, non-current:Deferred
                licensing fees, net
            
            $
            340,753
            
            $
            342,838Deposits
            
            
            47,800
            
            
            2,800Total
                other assets, non-current
            
            $
            388,553
            
            $
            345,638





Deferred
      licensing fees, net consists of license fees paid in advance to various
      regulatory agencies. When the Company or product receives approval in a
      jurisdiction, the Company expenses the fee paid over the estimated term of
      the
      license. If the Company were to be rejected for approval, all unreturned fees
      related to that jurisdiction would be expensed in that
      period.


-5-
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          of Contents*




**Note
      3. Inventory**




Inventory
      consists of the following at September 30, 2007 and December 31,
      2006:




September
                30,
              2007
            
            December
                31,
              2006Raw
                Materials
            
            $
            1,421,293
            
            $
            859,945Work
                in process
            
            
            716,020
            
            
            1,041,051Total
                Inventory
            
            $
            2,137,313
            
            $
            1,900,996





**Note
      4. Property and Equipment**





Property
      and equipment consists of the following at September 30, 2007 and December
      31,
      2006:




Estimated
                Useful life
              (years)
            
            September
                30,
              2007
            
            December
                31,
              2006PokerPro
                systems
            
            
            3
            
            $
            6,061,364
            
            $
            2,933,901Temporarily
                idle PokerPro systems (a)
            
            
            3
            
            
            223,416
            
            
            431,805Equipment
            
            
            5
            
            
            647,374
            
            
            407,873Leasehold
                improvements
            
            
            4
            
            
            182,785
            
            
            100,8757,114,939
            
            
            3,874,454Less:
                accumulated depreciation (a)
            
            
            
            
            
            (2,223,134
            )
            
            (828,398
            )Property
                and equipment, net
            
            
            
            
            $
            4,891,805
            
            $
            3,046,056





(a)
            The
                systems are ready for customer and regulatory use and will be installed
                as
                agreements are signed and scheduling allows. Included in the $2,223,134
                and $828,398 accumulated depreciation above is $148,004 and $170,558,
                respectively, related to the temporarily idle PokerPro systems.




**Note
      5. Employee Benefit Plan**




The
      Company maintains 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 three months ended September 30, 2007 and September 30,
      2006 was $24,817 and $13,032, respectively, and for the nine months ended
      September 30, 2007 and September 30, 2006 was $76,411 and $31,975,
      respectively.





**Note
      6. Commitments and Contingencies**





On
      February 5, 2007, Tellis Software, Inc. (“Tellis”) filed a Complaint against the
      Company and Lou White, the Company’s Vice Chairman and former Chief Executive
      Officer, in the United States District Court for the Southern District of Texas.
      The Complaint alleges that the Company breached a Software Development Agreement
      (the “Development Agreement”), that the Company and Mr. White committed fraud in
      connection with the
      Development Agreement, and that the Company 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 the Company 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, the Company and
      Mr.
      White filed a motion to dismiss the


-6-
 *Table
          of Contents*


entire
      case for lack of personal jurisdiction or, alternatively, a transfer of venue
      to
      the United States District Court for the Western District of North Carolina.





On
      April
      1, 2007, Tellis filed its First Amended Complaint, adding the Company’s
      President, James Crawford, as an individual defendant, alleging that a Tellis
      employee was the rightful inventor of one of the Company’s pending patent
      applications, that Mr. Crawford committed fraud in connection with the filing
      of
      that patent application, and that Mr. Crawford and Mr. White converted software
      developed by Tellis that forms the basis of the patent application. On August
      10, 2007 the Court granted the Company’s motion to transfer venue to the United
      Stated District Court for the Western District of North Carolina, where the
      case
      is now pending. PokerTek, Mr. Crawford and Mr. White believe they have meritorious defenses
      to
      all claims that have been asserted by Tellis.





In
      accordance with SFAS No. 5, “Accounting for Contingencies,” the Company records
      a provision with respect to a claim, suit, investigation or proceeding when
      it
      is probable that a liability has been incurred and the amount of the loss can
      be
      reasonably estimated. Any provisions are reviewed at least quarterly and are
      adjusted to reflect the impact and status of settlements, rulings, advice of
      counsel and other information pertinent to a particular matter.  Based on
      the status of the Tellis claim and management’s judgment regarding possible
      outcomes, the Company determined that it was probable that a liability had
      been
      incurred as of September 30, 2007 in the amount of approximately $250,000. 
This anticipated loss has been reflected in selling, general and administrative
      expenses in the accompanying Statements of Operations and in accounts payable
      and accrued liabilities in the accompanying Balance Sheet.








**Note
      7.Shareholders’ Equity**





*Common
      Stock* : The
      following is a schedule of the Company’s common stock issued and outstanding
      during the three and nine months ended September 30, 2007:





Three
                Months Ended
              September
                30, 2007
            
            Nine
                Months Ended
              September
                30, 2007Balance
                at June 30, 2007 and December 31, 2006, respectively
            
            
            10,918,964
            
            
            9,472,020Securities
                Purchase Agreement,noted
                below
            
            
            —
            
            
            1,444,444Employee
                stock option exercises
            
            
            15,500
            
            
            18,000Balance
                at September 30, 2007
            
            
            10,934,464
            
            
            10,934,464





On
      April
      23, 2007, the Company entered into a Securities Purchase Agreement (the
“Purchase Agreement”) by and among the Company, Magnetar Capital Master Fund,
      Ltd., Janus Venture Fund (a series of Janus Investment Fund), Janus US Venture
      Fund (a series of Janus Capital Funds Plc), Small Cap Growth Portfolio (a series
      of Ohio National Fund Inc.), SRB Greenway Capital (QP), L.P., SRB Greenway
      Capital, L.P., and SRB Greenway Offshore Operating Fund, L.P. (together, the
      “Investors”). Pursuant to the Purchase Agreement, the Company issued and sold an
      aggregate of 1,444,444 shares of its common stock, no par value per share,
      in a
      private placement to the Investors for a purchase price of $9.00 per share
      (the
“Private Placement”). As part of the Private Placement, the Company also issued
      each Investor a warrant (the “Warrants”) to acquire additional shares of the
      Company’s common stock (together, the “Warrant Shares”). The Warrants, which
      expire on April 26, 2012, are currently convertible into an aggregate of 439,541
      Warrant Shares at an exercise price of $10.80 per Warrant
      Share.


-7-
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          of Contents*


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





The
      Private Placement, which was completed on April 26, 2007, resulted in gross
      proceeds to the Company of approximately $13 million and net proceeds of
      approximately $12.5 million after fees and expenses associated with the Private
      Placement, including a cash placement agent fee. The $9.00 per share purchase
      price was negotiated as an 8.5% discount from the average closing price of
      the
      the Company’s common stock for the 30 consecutive trading day period prior to
      the Company’s execution of a letter of intent with respect to the Private
      Placement with one of the Investors. Pursuant to the Purchase Agreement, the
      exercise price for the Warrant Shares was negotiated to be 120% of the $9.00
      per
      share purchase price for the common stock. The gross proceeds of approximately
      $13 million were recorded as equity and allocated between the Company’s common
      stock and Warrants in accordance with SFAS No. 150 and Emerging Issues Task
      Force No. 00-19. The Company, using the Black-Scholes option pricing model,
      calculated the fair value of the Warrants to be approximately $4.3 million
      and
      allocated the remaining approximately $8.7 million to common stock.





Concurrently
      with the execution of the Purchase Agreement, the Company entered into a
      Registration Rights Agreement with the Investors (the “Rights Agreement”).
      Pursuant to the Rights Agreement, the Company was required to file a
      registration statement under the Securities Act of 1933, as amended, covering
      the resale of the Common Stock and the Warrant Shares (the “Registration
      Statement”). The Company file the Registration Statement with the SEC on August
      1, 2007, and the Registration Statement was declared effective by the SEC on
      August 10, 2007. The Company paid all expenses incurred in connection with
      the
      filing of the Registration Statement. In accordance with the restrictive
      covenants contained in the Rights Agreement, the Company (i) timely filed the
      Registration Statement with the SEC, (ii) caused it to become effective, and
      (iii) timely filed the final prospectus with the SEC. The Company is generally
      expected to maintain the effectiveness of the Registration Statement in
      accordance with the terms of the Rights Agreement. However, subject to certain
      allowable grace periods of not more than 15 consecutive days or an aggregate
      of
      45 days in any 365-day period, if the Company does not maintain the
      effectiveness of the Registration Statement, then on every 30-day anniversary
      of
      such maintenance failure the Company will be required to pay to
      each
      of the Investors who purchased the Company’s shares of common stock in the
      Private Placement certain liquidated damages equal to 2% of the aggregate
      investment amount paid by each such Investor in the Private Placement until
      such
      maintenance failure is cured. The total amount of liquidated damages payable
      by
      the Company pursuant to such a maintenance failure is capped at an aggregate
      of
      $1 million. In addition, partial liquidated damages shall apply on a daily
      pro-rata basis for any portion of a month prior to the cure of the maintenance
      failure, and late payments shall bear interest at the rate of 1.0% per month
      on
      a pro-rata basis until paid in full.





*Stock
      Incentive Plan* :  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, the Company accounted for its stock-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 required the Company, beginning January 1, 2006 and thereafter, to expense
      the grant date fair value of all share-based awards over their
      remaining


-8-
 *Table
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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.
      Stock-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 historical experience and
      its
      expectations about future forfeitures. As required under the
      modified-prospective transition method, prior periods have not been restated.
      In
      March 2005, the Securities and Exchange Commission (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.





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.
      Principal assumptions used are as follows: (a) expected volatility for the
      Company's stock price is based on historical volatility and implied market
      volatility, (b) historical 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. The Company recognizes compensation expense for the fair
      value of stock options, which have graded vesting, on the straight-line basis
      over the requisite service period of the awards.





At
      September 30, 2007 and December 31, 2006, options to purchase 1,939,400 and
      1,600,650 shares of common stock, respectively, had been granted to certain
      directors, officers, employees and independent contractors of the Company.
      Options granted under the 2005 and 2007 Plans generally vest over periods
      ranging from two 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. The amount of related expense calculated using the Black-Scholes
      option pricing model and recognized is as follows:





Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2007
            
            2006
            
            2007
            
            2006Selling,
                general, and administrative
            
            $
            123,725
            
            $
            114,928
            
            $
            323,469
            
            $
            297,827Research
                and development
            
            
            101,230
            
            
            125,843
            
            
            264,567
            
            
            307,317Total
                stock-based compensation expense
            
            $
            224,955
            
            $
            240,771
            
            $
            588,036
            
            $
            605,144





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





Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2007
            
            2006
            
            2007
            
            2006Risk-free
                interest rate
            
            
            4.23
            %
            
            4.59
            %
            
            4.49
            %
            
            4.78
            %Expected
                volatility
            
            
            45
            %
            
            30
            %
            
            45
            %
            
            30
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %Expected
                life (years)
            
            
            5.0
            
            
            5.0
            
            
            5.0
            
            
            5.0





-9-
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A
      summary
      of the stock option activity and weighted average exercise price for the nine
      months ended September 30, 2007 is as follows:




Weighted
                Average
            
            Weighted
                Average
            
            AggregateShares
            
            Exercise
                Price
            
            Contractual
                Term (Years)
            
            Intrinsic
                ValueOutstanding
                at December 31, 2006
            
            
            1,600,650
            
            $
            7.25Granted
            
            
            552,000
            
            
            10.73Exercised
            
            
            (18,000
            )
            
            3.70Forfeited
            
            
            (195,250
            )
            
            4.80Outstanding
                at September 30, 2007
            
            
            1,939,400
            
            
            8.48
            
            
            8.2
            
            $
            2,218,062Exercisable
                at September 30, 2007
            
            
            695,550
            
            $
            6.14
            
            
            7.7
            
            $
            2,423,454Available
                for grant
            
            
            154,850




The
      weighted-average grant-date fair value of options granted during the three
      and
      nine months ended September 30, 2007 was $4.34 and $4.89, respectively. The
      weighted-average grant-date fair value of options granted during the three
      and
      nine months ended September 30, 2006 was $4.44 and $4.23, respectively. The
      total intrinsic value of options exercised during the three and nine months
      ended September 30, 2007 was $108,240 and $113,858, respectively. The total
      intrinsic value of options exercised during the nine months ended September
      30,
      2006 was $46,920 (no options were exercised in the three months ended September
      30, 2006). The total fair value of options granted during the three and nine
      months ended September 30, 2007 was $1,477,770 and $2,699,815, respectively.
      The
      total fair value of options granted during the three and nine months ended
      September 30, 2006 was $814,740 and $2,303,580, respectively.





A
      summary
      of the status of nonvested shares as of September 30, 2007, and changes during
      the nine months ended September 30, 2007 is presented below:





Weighted
                AverageNonvested
                Shares:
            
            Shares
            
            Grant-Date
                Fair ValueBalance
                at December 31, 2006
            
            
            1,049,496
            
            $
            2.61Granted
            
            
            552,000
            
            
            4.89Forfeited
            
            
            (100,750
            )
            
            1.33Vested
            
            
            (256,896
            )
            
            2.29Balance
                at September 30, 2007
            
            
            1,243,850
            
            $
            3.71





As
      of
      September 30, 2007, there was $3,133,140 of total unrecognized compensation
      cost
      related to nonvested stock options, of which $276,372 will be recognized during
      the remainder of fiscal 2007 and the remainder through the third quarter of
      fiscal year 2011.





**Note
      8. Related Party Transactions**





In
      January 2005, the Company entered into an indemnification agreement with the
      Chairman of the Company’s Board of Directors, Lyle Berman, which provides for
      indemnification for related expenses including attorneys’ fees, judgments, fines
      and settlement amounts incurred by Mr. Berman in any action or
      proceeding.


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In January
      2006, the Company entered into an international distribution rights agreement
      with Aristocrat International Pty. Limited and its affiliates (“Aristocrat”).
      Aristocrat is on of the Company’s largest shareholders and 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. As of September 30, 2007, Aristocrat owns
      approximately 17% of our common stock. For the three months ended September
      30,
      2007 and 2006, we recorded to Aristocrat $93,670 and $0 of license fees,
      respectively, and $428,912 and $102,304 of equipment sales, respectively. For
      the nine months ended September 30, 2007 and 2006, we recorded to Aristocrat
      $266,951 and $0 of license fees, respectively, and $803,038 and $394,864 of
      equipment sales, respectively. At September 30, 2007, Aristocrat had an accounts
      receivable balance of $164,741.





In
      September 2006, an entity owned and controlled by the Company’s then current
      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 three and nine months ended September
      30,
      2007 was $45,843 and $116,211, respectively, of which $51,900 and $132,100,
      respectively, was paid to the related party. Rent expense recorded for the
      leased space for the three months ended September 30, 2006 was $36,900, of
      which
      $11,500 was paid to the related party. The amount paid is slightly higher than
      the expense recognized in the statements of operations because a portion of
      our
      rent expense is allocated to inventory. See Note 9 for further
      information.





In
      August
      2007, the Company installed 19 PokerPro tables at the Four Winds Casino Resort.
      Lakes Entertainment, Inc. developed and manages the property. Lyle Berman,
      the
      Chairman of the Company’s Board of Directors, is Chairman and Chief Executive
      Officer of Lakes Entertainment. Mr. Berman and Lakes Entertainment did not
      receive any direct compensation from the Company in connection with this
      transaction.





**Note
      9. Subsequent Events**





On
      October 18, 2007, the Company entered into a four year lease with an entity
      owned and controlled by the Company’s Vice Chairman and President. This is the
      same entity with which the Company had previously entered into leases for the
      Company’s existing space. The terms were negotiated at arms’ length and
      supercede our previous leases.


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




**Forward-Looking
      Statements**




*This
      Quarterly Report on Form 10-Q contains forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933, as amended, and Section
      21E of the Securities Exchange Act of 1934, as amended. 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 and are made under the Private Securities
      Litigation Reform Act of 1995. These forward-looking statements include, but
      are
      not limited to, statements about our plans, objectives, representations and
      contentions and are not historical facts and typically are identified by use
      of
      terms such as "may," "will," "should," "could," "expect," "plan," "anticipate,"
      "believe," "estimate," "predict," "potential," "continue" and similar words,
      although some forward-looking statements are expressed
      differently.*




*All
      forward-looking statements are subject to the risks and uncertainties inherent
      in predicting the future. You should be aware that although the forward-looking
      statements included herein represent management's current judgment and
      expectations, 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. These and other risks and
      uncertainties are described in more detail in our most recent annual report
      on
      Form 10-K as well as other reports that we file with the Securities and Exchange
      Commission.* *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 except as required by the federal securities
      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.*





**Overview**




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





The
      PokerPro® system is an electronic poker table that provides a fully-automated
      poker-room environment to tribal casinos, commercial casinos, cruise ships
      and
      card clubs. The Company’s first product was a 10-seat table developed in 2003.
      In November 2006, the Company introduced PokerPro® Heads-UpTM as a 2-seat version
      of the PokerPro® system. We refer generally to the PokerPro system and the
      PokerPro Heads-Up as our gaming products.





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.


-12-
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Accordingly,
      poker generally generates lower relative profits for the casino operator than
      slots and other table games. Our gaming products seek to improve the
      profitability of poker by enhancing the operator’s revenue opportunities while
      decreasing the labor burden.





In
      June
      2007, we entered the amusement category by introducing Heads-Up ChallengeTM World
      Series of Poker® edition. The Heads-Up ChallengeTM World Series of Poker® edition
      is an innovative heads-up poker table that enables two players to compete
      against each other in a game of Texas Hold’em poker for entertainment purposes
      in bars, restaurants and similar venues.





During
      the quarter, we made several announcements related to significant customer
      installations, including our announcement of the world’s largest automated poker
      room -- running exclusively on PokerTek poker tables - at Four Winds Casino
      Resort, and the installation of PokerPro tables in the Galaxy StarWorld Hotel
      and Casino in Macau, the world’s largest gaming market. Those and other
      installations during the quarter reflect management’s overall belief that our
      business is heading in a positive direction, about which we are optimistic.





As
      we
      have indicated previously, the number of tables installed at any particular
      location is fluid and may increase or decrease over time. For example, casinos
      remodel periodically and may expand or contract the amount of floor space
      allocated to poker. In addition, from time to time certain customers find that
      they license more tables from us than demand will support in their poker rooms,
      which itself is affected by factors ranging from seasonality (people tend to
      travel shorter distances in the winter months) to macroeconomic and competitive
      factors. In other cases, regulatory changes in a particular jurisdiction may
      result in a temporary delay or removal of tables. Sometimes, we may elect to
      redeploy tables to more productive venues maximize our return on investment.
      Frequently we install tables at new customer sites where we engage in trial
      periods of varying lengths with customers to satisfy regulatory requirements
      as
      well as to test demand, and educate customers. We view these fluctuations to
      be
      an expected and normal part of the growth phase of our business and an effective
      tool for managing the assets of the Company.




Significant
      Organizational Announcements :





On
      September 14, 2007, PokerTek, Inc. and Christopher Daniels, the Company’s former
      Chief Financial Officer, entered into a Severance Agreement and Full and Final
      Mutual Release (the “Separation Agreement”), pursuant to which Mr. Daniels'
      employment with the Company ceased effective September 14, 2007. The Separation
      Agreement was executed in connection with an independent investigation by the
      Audit Committee of the Company's Board of Directors into use of the Company's
      corporate credit cards. The Separation Agreement provides that the Company
      and
      Mr. Daniels have mutually agreed to terminate his employment relationship with
      the Company. On October 19, 2007, we announced that Mark Roberson joined the
      Company as Chief Financial Officer, replacing Mr. Daniels.





On
      September 17, 2007, Gehrig H. “Lou” White resigned as the Chief Executive
      Officer and Principal Executive Officer of PokerTek, effective September 24,
      2007. Mr. White remains on the Company’s Board of Directors and was appointed to
      serve as Vice Chairman of the Board, effective September 24, 2007. Mr. White’s
      resignation was part of a planned succession, transition, allowing for
      Christopher J.C Halligan, the Company’s former Vice President of Sales and
      Planning, to be appointed as the Company’s Chief Executive Officer and Principal
      Executive Officer, effective September 24, 2007.


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**Results
      of Operations for the Three Months Ended September 30, 2007 Compared to the
      Three Months Ended September 30, 2006**





*Revenues.* Revenues
      increased $837,410 or 349.7% to $1,076,852 for the three months ended September
      30, 2007 from $239,442 for the three months ended September 30, 2006. License
      fees increased $485,989 or 358.9% to $621,413 for the three months ended
      September 30, 2007 from $135,424 for the three months ended September 30, 2006.
      License fees increased due to the larger number of revenue producing PokerPro
      systems deployed in cruise ships, international casinos (through Aristocrat
      International Pty. Limited and its affiliates, our international distributor
      and
      a significant shareholder), and domestic casinos. Product sales increased
      $351,421 or 337.8% to $455,439 for the three months ended September 30, 2007
      from $104,018 for the three months ended September 30, 2006. The increase in
      product sales was
      related primarily to
      sales
      of Pokerpro systems to Aristocrat for its use in international casinos and
      to a
      lesser extent for demonstration purposes with licensing bodies and potential
      customers.





*Cost
      of Product Sales.* Cost
      of
      product sales increased $281,562 or 286.9% to $379,715 for the three months
      ended September 30, 2007 from $98,153 during the three months ended September
      30, 2006. This increase was primarily the result of increased sales of the
      PokerPro systems to Aristocrat. Cost of product sales as a percent of product
      sales decreased from 94.4% for the three months ended September 30, 2006 to
      83.4% for the three months ended September 30, 2007, reflecting margin
      improvements as product sales increased from a relatively low level in the
      prior
      year period.





*Selling,
      General and Administrative Expenses.* Selling,
      general and administrative expenses (“SGA”) increased $1,661,898 or 104.1% to
      $3,257,939 for the three months ended September 30, 2007 from $1,596,041 during
      the three months ended September 30, 2006. This increase was primarily the
      result of additional personnel and related expenses of $349,875 incurred to
      support our growth strategy; an increase of $159,293 related to expenses for
      marketing efforts, travel and obtaining regulatory approvals; and an increase
      of
      $966,953 in legal and professional fees. Legal and professional fees for the
      three months ended September 30, 2007 were negatively impacted by the
      independent investigation of matters related to our former Chief Financial
      Officer, accrual of anticipated costs related to the Tellis lawsuit, and heavier
      than normal level of patent-related expenses.





*Research
      and Development Expenses.* Research
      and development expenses (“R&D”) increased $272,345 or 31.2% to $1,144,586
      for the three months ended September 30, 2007 from $872,241 for the three months
      ended September 30, 2006. The increase from the prior year was primarily the
      result of incremental R&D costs related to our Heads-Up Challenge
      product.





*Depreciation* .
      Depreciation increased $381,458 or 209.6% to $563,477 for the three months
      ended
      September 30, 2007 from $182,019 for the three months ended September 30, 2006.
      The increase in depreciation expense is due to the higher installed base of
      PokerPro systems when compared with the comparable period of the prior
      year.





*Net
      Interest Income* .
      Net
      interest income decreased $13,738 or 7.1% to $178,909 for the three months
      ended
      September 30, 2007 from $192,647 for the three months ended September 30, 2006.
      Interest income earned on cash and cash equivalents decreased with modestly
      lower average invested balances.


-14-
 *Table
          of Contents*


**Results
      of Operations for the Nine Months Ended September 30, 2007 Compared to the
      Nine
      Months Ended September 30, 2006**





*Revenues.* Revenues
      increased $1,557,902 or 151.8% to $2,584,124 for the nine months ended September
      30, 2007 from $1,026,222 during the nine months ended September 30, 2006.
      License fees increased $1,102,913 or 175.5% to $1,731,515 for the nine months
      ended September 30, 2007 from $628,602 during the nine months ended September
      30, 2006. License fees increased due to the larger number of revenue producing
      PokerPro systems deployed in cruise ships, international casinos (through
      Aristocrat International Pty. Limited and its affiliates, our international
      distributor and a significant shareholder), and domestic casinos. Product sales
      increased $454,989 or 114.4% to $852,609 for the three months ended September
      30, 2007 from $397,620 for the three months ended September 30, 2006. The
      increase in product sales was
      related primarily to
      sales
      of Pokerpro systems to Aristocrat for its use in international casinos and
      to a
      lesser extent for demonstration purposes with licensing bodies and potential
      customers.





*Cost
      of Product Sales.* Cost
      of
      product sales increased $316,713 or 83.2%% to $697,167 for the nine months
      ended
      September 30, 2007 from $380,454 during the nine months ended September 30,
      2006. This increase was primarily the result increased sales of the Pokerpro
      systems to Aristocrat. Cost of product sales as a percent of product sales
      decreased from 95.7% for the nine months ended September 30, 2006 to 81.8%
      for
      the nine months ended September 30, 2007, reflecting margin improvements as
      product sales increased from a relatively low level in the prior year
      period.





*Selling,
      General and Administrative Expenses.* SGA
      increased $3,075,049 or 74.9% to $7,181,482 for the nine months ended September
      30, 2007 from $4,106,433 during the nine months ended September 30, 2006. This
      increase was primarily the result of additional personnel and related costs
      of
      $1,070,227 incurred to support our growth strategy; an increase of $697,840
      related to expenses for marketing efforts, travel and obtaining regulatory
      approvals; and an increase of $1,067,621 related to legal and professional
      fees.
      Legal and professional fees for the nine months ended September 30, 2007 were
      negatively impacted by the independent investigation of matters related to
      our
      former Chief Financial Officer, accrual of anticipated costs related to the
      Tellis lawsuit and heavier than normal level of patent-related
      expenses.





*Research
      and Development Expenses.* R&D
      increased 451,003 or 16.0% to $3,274,665 for the nine months ended September
      30,
      2007 from $2,823,662 for the nine months ended September 30, 2006. The increase
      from the prior year was primarily the result of incremental R&D costs
      related to our Heads-Up Challenge product





*Depreciation* .
      Depreciation increased $946,779 or 210.4% to $1,396,728 for the nine months
      ended September 30, 2007 from $449,949 for the nine months ended September
      30,
      2006. The increase in depreciation expense is due to the higher installed base
      of PokerPro systems when compared with the comparable period of the prior
      year.





*Net
      Interest Income* .
      Net
      interest income decreased $157,028 or 26.4% to $438,163 for the nine months
      ended September 30, 2007 from $595,191 for the nine months ended September
      30,
      2006. Interest income earned on cash and cash equivalents decreased with
      modestly lower average invested balances.


-15-
 *Table
          of Contents*




**Liquidity
      and Capital Resources**





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





On
      April
      23, 2007, we entered into a Securities Purchase Agreement, in which we issued
      and sold an aggregate of 1,444,444 shares of our common stock in a private
      placement to certain investors for a purchase price of $9.00 per share. The
      private placement, which was completed on April 26, 2007, resulted in gross
      proceeds to us of approximately $13 million and net proceeds of approximately
      $12.5 million after fees and expenses associated with the private placement,
      including a cash placement agent fee. For further details of this transaction,
      see Note 7 to our financial statements contained in this quarterly report on
      Form 10-Q.





For
      the
      nine months ended September 30, 2007, net cash used in operating activities
      was
      $7,585,761, an increase of $1,432,465 from $6,153,296 from the comparable period
      of 2006. The increase in cash used in operating activities was primarily due
      to
      higher operating losses, partially offset by reduced inventory purchases during
      the period. Net cash used in investing activities increased $2,006,519 to
      $3,242,477 for the nine months ended September 30, 2007 from $1,235,958 from
      the
      comparable period of 2006, primarily due to the increased number of PokerPro
      systems. Net cash provided by financing activities was $12,577,532 for the
      nine
      months ended September 30, 2007, compared to $36,672 net cash used in financing
      activities for the comparable period of 2006, and was comprised of proceeds
      from
      the issuance of common stock in connection with the private placement discussed
      above and proceeds from employee stock option exercises.





At
      September 30, 2007, we had an accumulated deficit of $23,364,829 and cash and
      cash equivalents of $11,102,795. 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 and commercial casinos. Based on our
      cash flow projections, we expect that cash on hand and anticipated revenues
      will
      be sufficient to support our operations through the remainder of fiscal year
      2007 and into fiscal year 2008, however, we may need to raise additional funds
      through additional public or private offerings of our securities, a
      sale/leaseback arrangement, a credit facility or other available
      sources.





**Contractual
      Obligations**





Contractual
      obligations associated with our ongoing business and financing activities are
      expected to result in cash payments in future periods. A table summarizing
      the
      amounts and estimated timing of these future cash payments was provided in
      our
      Annual Report on Form 10-K for the year ended December 31, 2006. During the
      first nine months of fiscal 2007, there were no material changes outside the
      ordinary course of business in our contractual obligations or the estimated
      timing of the future cash payments related to those obligations.





**Critical
      Accounting Policies**





We
      follow
      accounting principles generally accepted in the United States in preparing
      our
      financial statements, which require us to make certain estimates and apply
      judgments that affect our financial position and results of operations. We
      continually review our accounting policies and financial


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information
      disclosures. A summary of our significant accounting policies that require
      the
      use of estimates and judgments in preparing the financial statements was
      provided in our Annual Report on Form 10-K for the year ended December 31,
      2006.
      During the first nine months of fiscal 2007, there were no material changes
      to
      the accounting policies and assumptions previously disclosed.





**Recent
      Accounting Pronouncements**





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 adoption of this standard did not have a
      material impact on the 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 the financial statements upon adoption.





In
      February 2007, the Financial Accounting Standards Board (“ FASB”)
      issued SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      Amendment of FASB Statement No. 115”* (“SFAS
      159”), which permits entities to choose to measure many financial instruments
      and certain other items at fair value. SFAS 159 permits entities to choose
      to measure certain financial assets and liabilities and other eligible items
      at
      fair value that are not otherwise currently required to be measured at fair
      value. Under SFAS 159, the decision to measure items at fair value is made
      at specified election dates on an irrevocable instrument-by-instrument basis.
      Entities electing the fair value option would be required to recognize changes
      in fair value in earnings and to expense upfront costs and fees associated
      with
      the item for which the fair value option is elected. Entities electing the
      fair
      value option are required to distinguish on the face of the statement of
      financial position, the fair value of assets and liabilities for which the
      fair
      value option has been elected and similar assets and liabilities measured using
      another measurement attribute. SFAS 159 is effective as of the beginning of
      the first fiscal year that begins after November 15, 2007, with earlier
      adoption permitted provided that the entity also early adopts all of the
      requirements of SFAS 159. The Company is currently reviewing
      SFAS No. 159 to determine its impact on the financial statements upon
      adoption.





**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





**Item
      3.****Quantitative
      and Qualitative Disclosures About Market Risk.**





Our
      interest rate risk has not changed significantly from the disclosure in Item
      7A
      of our Annual Report on Form 10-K for the fiscal year ended December 31,
      2006.


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**Item
      4.****Controls
      and Procedures.**




*Evaluation
      of disclosure controls and procedures*




As
      of
      September 30, 2007, 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 evaluating the internal controls over
      financial reporting processes and procedures for our financial reporting so
      that
      our management can report on these processes and procedures when required to
      do
      so.




*Changes
      in internal control over financial reporting*




As
      a part
      of our normal operations, we regularly update and enhance our internal control
      over financial reporting processes and procedures as necessary to accommodate
      any modifications to our business processes or accounting procedures or
      otherwise. For example, as a result of the previously disclosed matters
      involving our former Chief Financial Officer, subsequent to September 30, 2007,
      we made changes to our travel and expense policies and procedures to strengthen
      controls in that area. Neither that change, nor any changes to our internal
      control over financial reporting processes and procedures that occurred during
      the fiscal quarter ended September 30, 2007 materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.




**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**





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 “Development
      Agreement”), that PokerTek and Mr. White committed fraud in connection with the
      Development Agreement, 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, a transfer of venue to the United States
      District Court for the Western District of North Carolina.





On
      April
      1, 2007, Tellis filed its First Amended Complaint, adding PokerTek’s President,
      James Crawford, as an individual defendant, alleging that a Tellis employee
      was
      the rightful inventor of one of PokerTek’s pending patent applications, that Mr.
      Crawford committed fraud in connection with the filing of that patent
      application, and that Mr. Crawford and Mr. White converted software developed
      by
      Tellis that forms the basis of the patent application. On August 10, 2007,
      the
      Court granted PokerTek’s motion to transfer venue to the United Stated District
      Court for the Western District of North Carolina, where the


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case
      is
      now pending. PokerTek,
      Mr. Crawford and Mr. White believe they have meritorious defenses to all claims
      that have been asserted by Tellis.





In
      accordance with SFAS No. 5, “Accounting for Contingencies,” the Company records
      a provision with respect to a claim, suit, investigation or proceeding when
      it
      is probable that a liability has been incurred and the amount of the loss can
      be
      reasonably estimated. Any provisions are reviewed at least quarterly and are
      adjusted to reflect the impact and status of settlements, rulings, advice of
      counsel and other information pertinent to a particular matter.  Based on
      the status of the Tellis claim and management’s judgment regarding possible
      outcomes, the Company determined that it was probable that a liability had
      been
      incurred as of September 30, 2007 in the amount of approximately $250,000. 
This anticipated loss has been reflected in selling, general and administrative
      expenses in the accompanying Statements of Operations and in accounts payable
      and accrued liabilities in the accompanying Balance Sheet.





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**Item
      6.****Exhibits.**




Exhibit
              No.
            Description  31.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange
                Act.





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.





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**SIGNATURES**





Pursuant
      to the requirements 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:
      November 14, 2007


By: 
      /s/ Christopher
      J.C. Halligan


Christopher
      J.C. Halligan, Chief
      Executive Officer


(Principal
      Executive Officer)






/s/ Mark
      D.
      Roberson


Mark
      D.
      Roberson, Chief
      Financial Officer


(Principal
      Financial Officer and
      Principal Accounting Officer)





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**Exhibit
      Index**




Exhibit
                No.
              Description  31.1
              Certification
                  of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange
                  Act.
 
 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.
  Our
        SEC
        file number reference for documents filed with the SEC pursuant to the
        Securities Exchange Act of 1934, as amended, is 000-51572.
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