**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


______________





**FORM
      10-Q**





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





For
      the
      Quarterly Period Ended June 30, 2007


OR


oTRANSITION
      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) (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
      July 31, 2007, there were 10,919,964 shares outstanding of the registrant’s
      common stock.








**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
              14Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              20Item
                  4.
              Controls
                  and Procedures
              20**PART
                  II - OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              21Item
                  1A.
              Risk
                  Factors
              21Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              35Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              35Item
                  6.
              Exhibits
              37SIGNATURES
              38EXHIBIT
                  INDEX
              39






**PART
        I. - FINANCIAL INFORMATION**
  **Item
        1. Financial Statements**
  **PokerTek,
        Inc.**
 **Balance
        Sheets**
 
 June
                  30, 2007
              
              December
                  31, 2006**Assets**
              
              (unaudited)Current
                  AssetsCash
                  and cash equivalents
              
              $
              14,741,227
              
              $
              9,353,501Trade
                  receivables, net of allowance of $19,301
              
              
              708,646
              
              
              272,389Prepaid
                  expenses and other assets (Note 4)
              
              
              191,046
              
              
              204,217Inventory
                  (Note 3)
              
              
              1,892,341
              
              
              1,900,996**Total
                  current assets**
              
              
              17,533,260
              
              
              11,731,103Other
                  AssetsOther
                  assets (Note 4)
              
              
              430,167
              
              
              345,638Property
                  and equipment, net of accumulated depreciation (Note 2)
              
              
              4,533,250
              
              
              3,046,056**Total
                  assets**
              
              $
              22,496,677
              
              $
              15,122,797**Liabilities
                  and Shareholder's Equity**Current
                  LiabilitiesAccounts
                  payable and accrued expenses
              
              $
              887,852
              
              $
              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 10,918,964 and 9,472,020 at June 30,2007
                  and December 31, 2006, respectively
              
              
              -
              
              
              -Capital
              
              
              40,883,698
              
              
              27,956,685Accumulated
                  deficit
              
              
              (19,274,873
              )
              
              (13,837,074
              )**Total
                  shareholder's equity**
              
              
              21,608,825
              
              
              14,119,611**Total
                  liabilities and shareholder's equity**
              
              $
              22,496,677
              
              $
              15,122,797
 
 See
        Notes
        to Interim Financial Statements.
  1
  **PokerTek,
        Inc.**
 **Statements
        of Operations**
 **(Unaudited)**
 
 Three
                  Months Ended June 30,2007
              
              2006Revenues:License
                  Fees
              
              $
              601,991
              
              $
              133,178Product
                  Sales
              
              
              313,705
              
              
              181,086**Total
                  revenues**
              
              
              915,696
              
              
              314,264Costs
                  and operating expenses:Cost
                  of product sales
              
              
              243,865
              
              
              172,613Selling,
                  general and administrative
              
              
              2,060,840
              
              
              1,517,816Research
                  and development
              
              
              1,122,791
              
              
              910,662Depreciation
              
              
              467,443
              
              
              152,007**Total
                  costs and operating expenses**
              
              
              3,894,939
              
              
              2,753,098**Operating
                  loss**
              
              
              (2,979,243
              )
              
              (2,438,834
              )Non-operating
                  income:Interest
                  income, net
              
              
              168,422
              
              
              206,849**Net
                  loss**
              
              $
              (2,810,821
              )
              $
              (2,231,985
              )Net
                  loss per common share - basic and diluted:
              
              $
              (0.27
              )
              $
              (0.24
              )Weighted
                  average common shares outstanding - basic and diluted:
              
              
              10,503,810
              
              
              9,472,020
 
 See
        Notes to Interim Financial Statements.
  2
  **PokerTek,
        Inc.**
 **Statements
        of Operations**
 **(Unaudited)**
 
 Six
                  Months Ended June 30,2007
              
              2006Revenues:License
                  Fees
              
              $
              1,110,102
              
              $
              493,178Product
                  Sales
              
              
              397,170
              
              
              293,602**Total
                  revenues**
              
              
              1,507,272
              
              
              786,780Costs
                  and operating expenses:Cost
                  of product sales
              
              
              317,452
              
              
              282,301Selling,
                  general and administrative
              
              
              3,923,543
              
              
              2,510,392Research
                  and development
              
              
              2,130,079
              
              
              1,951,421Depreciation
              
              
              833,251
              
              
              267,930**Total
                  costs and operating expenses**
              
              
              7,204,325
              
              
              5,012,044**Operating
                  loss**
              
              
              (5,697,053
              )
              
              (4,225,264
              )Non-operating
                  income:Interest
                  income, net
              
              
              259,254
              
              
              402,544**Net
                  loss**
              
              $
              (5,437,799
              )
              $
              (3,822,720
              )Net
                  loss per common share - basic and diluted:
              
              $
              (0.54
              )
              $
              (0.40
              )Weighted
                  average common shares outstanding - basic and diluted:
              
              
              9,990,765
              
              
              9,470,816
 
 See
        Notes to Interim Financial Statements.
  3
  **PokerTek,
        Inc.**
 **Statements
        of Cash Flows**
 **(Unaudited)**
 
 Six
                  Months Ended June 30,2007
              
              2006Cash
                  Flows from Operating ActivitiesNet
                  loss
              
              $
              (5,437,799
              )
              $
              (3,822,720
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              833,251
              
              
              267,930Stock-based
                  compensation expense
              
              
              363,081
              
              
              364,373Changes
                  in assets and liabilities:Decrease
                  (increase) in trade and other receivables
              
              
              (436,257
              )
              
              6,915Decrease
                  (increase) in prepaid expenses and other assets
              
              
              (71,358
              )
              
              49,103Decrease
                  (increase) in inventory
              
              
              8,655
              
              
              (358,797
              )Increase
                  (decrease) in accounts payable and accruedexpenses
              
              
              (115,334
              )
              
              44,266**Net
                  cash used in operating activities**
              
              
              (4,855,761
              )
              
              (3,448,930
              )Cash
                  flows from investing activitiesPurchases
                  of property and equipment
              
              
              (2,320,445
              )
              
              (648,384
              )**Net
                  cash used in investing activities**
              
              
              (2,320,445
              )
              
              (648,384
              )Cash
                  flows from financing activitiesProceeds
                  (expenses) from issuance of common stock andcommon
                  stock options exercised, net of expenses
              
              
              12,563,932
              
              
              (36,671
              )**Net
                  cash provided by (used in) financing activities**
              
              
              12,563,932
              
              
              (36,671
              )**Net
                  increase (decrease) in cash and cash****equivalents**
              
              
              5,387,726
              
              
              (4,133,985
              )Cash
                  and cash equivalents:Beginning
              
              
              9,353,501
              
              
              20,373,900Ending
              
              $
              14,741,227
              
              $
              16,239,915
 
 See
        Notes
        to Interim Financial Statements.
   4
  **POKERTEK,
        INC.**
  **NOTES
        TO UNAUDITED FINANCIAL STATEMENTS**
 **June
        30, 2007**
 
 **Note
        1.** **Nature
        of Business and Interim Basis of Presentation**
 
 ***Basis
        of Presentation.*** ******  These
        interim financial statements have been prepared in accordance with instructions
        to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
        not include all of the information and notes required by accounting principles
        generally accepted in the United States of America for complete audited
        financial statements, as permitted by such rules and regulations. These
        statements should be read in conjunction with the audited financial statements
        and notes thereto included in the Company’s Annual Report on Form 10-K for the
        year ended December 31, 2006. In the opinion of the Company, the accompanying
        interim financial statements contain all adjustments (consisting of normal
        accruals and charges) necessary to present fairly the financial position
        of the
        Company at June 30, 2007, and the results of its operations for the three
        and
        six months ended June 30, 2007 and 2006, and cash flows for the six months
        ended
        June 30, 2007 and 2006. The results of operations for the three and six months
        ended June 30, 2007 are not necessarily indicative of the results to be expected
        for the entire year.
 
 ***Description
        of Business.*** 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. In June 2007 we introduced Heads-Up ChallengeTM
World Series of Poker® edition, an innovative new heads-up poker table that
        enables two players to compete against each other in a game of Texas Hold’em
        poker for entertainment purposes. This marks our first venture into the
        amusement category. 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.
 
 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
        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
        impact of the Company’s adoption of SFAS No. 156 for fiscal year 2007 did not
        have a material impact on the results of operations, financial condition
        or
        liquidity.
  5
  
 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 opening balance of retained earnings for 2007 and
        had no
        impact on 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. The impact of
        the Company’s adoption of SAB 108 did not have a material impact on our
        financial position, results of operations or cash flows.
 
 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 evaluating whether to
        elect the option provided for in this standard.
 
 **Note
        2. Property and Equipment**
 
 Property
        and equipment consists of the following at June 30, 2007 and December 31,
        2006:
  Useful
                  life (years)
              
              June
                  30, 2007
              
              December
                  31, 2006PokerPro
                  systems
              
              
              3
              
              $
              5,231,986
              
              $
              2,933,901Temporarily
                  idle PokerPro systems (a)
              
              
              3
              
              
              435,583
              
              
              431,805Equipment
              
              
              5
              
              
              424,970
              
              
              407,873Leasehold
                  improvements
              
              
              4
              
              
              102,360
              
              
              100,8756,194,899
              
              
              3,874,454Less:
                  accumulated depreciation (a)
              
              
              
              
              
              (1,661,649
              )
              
              (828,398
              )Property
                  and equipment, net
              
              
              
              
              $
              4,533,250
              
              $
              3,046,056
 
  6
  
 (a)
            The
                systems are ready for customer and regulatory use and will be installed
                as
                agreements are signed and scheduling allows. Included in the $1,661,649
                and $828,398 accumulated depreciation above is $243,041 and $170,558,
                respectively, related to the temporarily idle PokerPro
                systems. 
 **Note
        3. Inventory**
  Inventory
        consists of the following at June 30, 2007 and December 31, 2006:
  June
                  30, 2007
              
              December
                  31, 2006Raw
                  Materials
              
              $
              1,272,361
              
              $
              859,945Tables
                  in process
              
              
              619,980
              
              
              1,041,051Total
                  Inventory
              
              $
              1,892,341
              
              $
              1,900,996
 
 **Note
        4. Prepaid Expenses and Other Assets**
 
 Prepaid
        expenses and other assets consist of the following at June 30, 2007 and December
        31, 2006:
 
 Prepaid
                  expenses and other assets, current:
              
              June
                  30, 2007
              
              December
                  31, 2006Prepaid
                  expenses
              
              $
              168,368
              
              $
              188,590Interest
                  income receivable
              
              
              22,678
              
              
              15,627Total
                  prepaid expenses and other assets, current
              
              $
              191,046
              
              $
              204,217Other
                  assets, non-current:Intangible
                  assets, net
              
              $
              382,367
              
              $
              342,838Deposits
              
              
              47,800
              
              
              2,800Total
                  other assets, non-current
              
              $
              430,167
              
              $
              345,638
 
 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
        5. 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 and computer 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
                  EndingJune
                  30,
              
              Amount2008
              
              $
              208,2152009
              
              
              206,4022010
              
              
              200,1352011
              
              
              47,300Thereafter
              
              
              6,000$
              668,052
 
  7
  Rent
        expense for the three months ended June 30, 2007 and June 30, 2006 was $43,220
        and $34,934, respectively, and for the six months ended June 30, 2007 and
        June
        30, 2006 was $78,548 and $69,663, 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
        6. 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 three months ended June 30, 2007 and June 30,
        2006 was $23,480 and $9,416, respectively, and for the six months ended June
        30,
        2007 and June 30, 2006 was $51,594 and $18,943, respectively.
 
 **Note
        7. Shareholder’s Equity**
 
 *Common
        Stock* : The
        following is a schedule of the Company’s Common Stock issued and outstanding
        during the three months ended June 30, 2007:
 
 Shares
                  issued and outstanding:Balance
                  at December 31, 2006
              
              9,472,020Securities
                  Purchase Agreement noted below
              
              1,444,444Employee
                  stock option exercises
              
              2,500Balance
                  at June 30, 2007
              
              10,918,964
 
 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
        (the
“Common Stock”) 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 (together, the “Warrants”) to
        acquire additional shares of Common Stock (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.
 
 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.
  8
 
 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 us 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 Common
        Stock for the 30 consecutive trading day period prior to our 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 is 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 will pay 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 selling shareholders 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 selling shareholder in the private placement
        until such maintenance failure is cured. No allowable grace period is permitted
        during the first 30 business days after the Registration Statement has been
        declared effective by the SEC. 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
        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.
  9
  
 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 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
        June
        30, 2007 and December 31, 2006, options to purchase 1,794,650 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 Plan 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 June 30,
              
              Six
                  Months Ended June 30,2007
              
              2006
              
              2007
              
              2006Selling,
                  general, and administrative
              
              $
              87,245
              
              $
              115,712
              
              $
              199,744
              
              $
              182,900Research
                  and development
              
              
              73,337
              
              
              127,875
              
              
              163,337
              
              
              181,473Total
                  stock-based compensation expense
              
              $
              160,582
              
              $
              243,587
              
              $
              363,081
              
              $
              364,373
 
 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 June 30,
              
              Six
                  Months Ended June 30,2007
              
              2006
              
              2007
              
              2006Risk-free
                  interest rate
              
              
              4.92
              %
              
              5.10
              %
              
              4.92
              %
              
              4.88
              %Expected
                  volatility
              
              
              45
              %
              
              30
              %
              
              45
              %
              
              30
              %Expected
                  dividend yield
              
              
              0
              %
              
              0
              %
              
              0
              %
              
              0
              %Expected
                  life (years)
              
              
              5.0
              
              
              5.0
              
              
              5.0
              
              
              5.0
 
  10
  A
        summary
        of the stock option activity and weighted average exercise price for the
        three
        months ended June 30, 2007 is as follows:
  Shares
              
              
              Weighted
                  Average
                Exercise
                  Price
              
              
              Weighted
                    AverageContractual
                  Term (Years)
              
              
              Aggregate
                Intrinsic
                  ValueOutstanding
                  at December 31, 2006
              
              
              1,600,650
              
              $
              7.25Granted
              
              
              2,000
              
              
              9.92Outstanding
                  at March 31, 2007
              
              
              1,602,650
              
              
              7.25Granted
              
              
              209,500
              
              
              12.54Exercised
              
              
              (2,500
              )
              
              10.09Forfeited
              
              
              (15,000
              )
              
              10.61Outstanding
                  at June 30, 2007
              
              
              1,794,650
              
              
              7.83
              
              
              8.3
              
              $
              8,444,890Exercisable
                  at June 30, 2007
              
              
              735,194
              
              $
              5.23
              
              
              7.7
              
              $
              5,377,361Available
                  for grant
              
              
              315,100
  The
        weighted-average grant-date fair value of options granted during the three
        and
        six months ended June 30, 2007 was $5.79 and $5.77, respectively. The
        weighted-average grant-date fair value of options granted during the three
        and
        six months ended June 30, 2006 was $3.67 and $4.13, respectively. The total
        intrinsic value of options exercised during the three months ended June 30,
        2007
        was $5,618 (no options were exercised in the first three months of 2007).
        The
        total intrinsic value of options exercised during the six months ended June
        30,
        2006 was $46,920 (no options were exercised in the three months ended June
        30,
        2006). The total fair value of options granted during the three and six months
        ended June 30, 2007 was $1,213,005 and $1,222,045, respectively. The total
        fair
        value of options granted during the three and six months ended June 30, 2006
        was
        $289,650 and $1,488,840, respectively.
 
 A
        summary
        of the status of nonvested shares as of June 30, 2007, and changes during
        the
        three and six months ended June 30, 2007 is presented below:
 
 Weighted
                  AverageNonvested
                  Shares:
              
              Shares
              
              Grant-Date
                  Fair ValueBalance
                  at December 31, 2006
              
              
              1,049,496
              
              $
              2.61Granted
              
              
              2,000
              
              
              4.52Vested
              
              
              (121,046
              )
              
              2.40Balance
                  at March 31, 2007
              
              
              930,450
              
              
              2.64Granted
              
              
              209,500
              
              
              5.79Forfeited
              
              
              (15,000
              )
              
              3.76Vested
              
              
              (65,494
              )
              
              1.11Balance
                  at June 30, 2007
              
              
              1,059,456
              
              $
              3.34
 
 As
        of
        June 30, 2007, there was $2,181,154 of total unrecognized compensation cost
        related to nonvested stock options, of which $424,545 will be recognized
        during
        the remainder of fiscal 2007 and the remainder through the second quarter
        of
        fiscal year 2011.
  11
  
 **Note
        8. 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 the Company’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. All parties
        have subsequently filed additional motions relating to PokerTek’s March 2007
        motion to dismiss. As of August 13, 2007, the Court has not ruled on the
        motion.
 
 PokerTek,
        Mr. Crawford and Mr. White believe they have meritorious defenses to all
        claims
        that have been asserted by Tellis.
  **Note
        9. 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.
 
 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 June 30, 2007 owns approximately 17% of our common
        stock.
        For the three months ended June 30, 2007 and 2006, we recorded $92,005 and
        $0 of
        license fees, respectively, and $302,743 and $181,072 of equipment sales,
        respectively. For the six months ended June 30, 2007 and 2006, we recorded
        $173,281 and $0 of license fees, respectively, and $374,126 and $292,560
        of
        equipment sales, respectively. At June 30, 2007, Aristocrat owed the Company
        $280,509.
 
 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 three and six months ended June 30, 2007 was $35,978 and $70,367,
        respectively, of which $42,900 and $80,200, respectively, was paid to the
        related party. The amount paid is slightly higher than the expense because
        a
        portion of our rent expense is allocated to inventory.
  12
  
 
 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.
 
 **Note
        10. Subsequent Events**
 
 On
        August
        2, 2007, the Company announced that Four Winds Casino Resort, in New Buffalo,
        Michigan, opened the world’s largest automated poker room running exclusively on
        PokerTek poker tables. The Four Winds Poker Room features fifteen PokerPro
        10-seat tables and four PokerPro Heads-Up tables.
 
 On
        August
        6, 2007, the Company announced the installation of five PokerPro tables in
        the
        Galaxy StarWorld Hotel and Casino in Macau, the world’s largest gaming market.
        The installations were performed by Aristocrat, PokerTek’s international
        distribution partner, and include four PokerPro 10-seat tables and one PokerPro
        Heads-Up table.
 
 **Note
        11. Segment Information**
  The
        Company has identified one business segment for reporting purposes:
        Manufacturing and Distributing PokerPro Syste ms **.**
 
  13
  **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 filed with the Securities and Exchange Commission and supplemented
        herein.* *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.*
 
 Specific
        factors that may cause actual results to differ from our expectations or
        that
        may affect the value of our common stock include, but are not limited
        to:
  ·
            our
                lack of operating history;  ·
            the
                market’s failure to accept thePokerPro
                system or the Heads-Up Challenge product;  ·
            our
                inability to obtain regulatory approval for use of the PokerPro system
                in
                casinos or card clubs;  ·
            claims
                that our technology infringes the intellectual property of
                others;  ·
            our
                inability to compete successfully with current or future competitors
                within the gaming and/or amusement
                industries;  ·
            product
                liability claims regarding thePokerPro
                system or the Heads-Up Challenge product;  ·
            our
                inability to retain our key employees;  ·
            the
                termination or impairment of our relationships with key manufacturers
                or
                suppliers; and  ·
            a
                decline in general economic conditions or an adverse change in the
                political or social climate regarding gaming in general and poker
                specifically.   14
  Other
        factors that could cause actual results to differ from those expressed or
        implied by the forward-looking statements in this prospectus are more fully
        described in the “Risk Factors” section and elsewhere in this
        prospectus. Any
        forward-looking statements in this prospectus or in any of the documents
        that we
        file or have filed with the SEC that are incorporated herein by reference,
        however, represent our views only as of the respective dates of those documents
        and should not be relied upon as representing our views as of any subsequent
        date. We anticipate that subsequent events and developments may cause our
        views
        to change. Although we may elect to update these forward-looking statements
        publicly at some point in the future, whether as a result of new information,
        future events or otherwise, we specifically disclaim any obligation to do
        so,
        except as required by applicable law.
  **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. We refer generally to the PokerPro system and
        the PokerPro Heads-Up as our gaming products. In June 2007 we introduced
        Heads-Up ChallengeTM, an innovative new heads-up poker table that enables two
        players to compete against each other in a game of Texas Hold’em poker for
        entertainment purposes. This marks our first venture into the amusement
        category. 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.
 
 **Executive
        Summary - Significant events for the three months ended June 30,
        2007**
 
 On
        April
        19, 2007, we announced the signing of a multi-year
        agreement with Harrah’s Operating Company, Inc, a subsidiary of Harrah’s
        Entertainment, Inc. (NYSE: HET), which made PokerTek its exclusive provider
        for
        live, player-banked, automated poker tables. Under the agreement, Harrah’s,
        which operates 50 casinos in 13 states and six countries and runs the annual
        World Series of Poker®, may install PokerPro tables concurrently with
        appropriate regulatory approvals. With more than 450 manual poker tables,
        Harrah’s is one of the largest operators of poker in the world.
 
 On
        April
        23, 2007, we entered into a Securities Purchase Agreement (the “Purchase
        Agreement”) by and among PokerTek, 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, we issued and sold an
        aggregate of 1,444,444 shares of our common stock, no par value per share
        (the
“Common Stock”) 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, we
        also issued each Investor a warrant (together, the “Warrants”) to acquire
        additional shares of Common Stock (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.
  15
  
 
 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 us of approximately $13 million and net proceeds of approximately
        $12.5 million us 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 Common
        Stock for the 30 consecutive trading day period prior to our 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.
 
 Concurrently
        with the execution of the Purchase Agreement, we entered into a Registration
        Rights Agreement with the Investors (the “Rights Agreement”). Pursuant to the
        Rights Agreement, we are 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”). We will pay all expenses
        incurred in connection with the filing of the Registration
        Statement.
 
 On
        June
        13, 2007, we announced the launch of a new product, the “Heads-Up ChallengeTM
World Series of Poker® Edition.” The Heads-Up Challenge is a coin- or
        cash-operated arcade-style electronic amusement device that allows two people
        to
        compete directly against one another in a game of Texas Hold’em poker. The
        Heads-Up Challenge is designed solely for entertainment purposes, unlike
        the
        PokerPro system, which is a regulated gaming device.  The Heads-Up
        Challenge product will allow us to enter a new, non-gaming market.
  We
        anticipate placing Heads-Up Challenge units in appropriate bars and restaurants
        around the world. We are leveraging our existing partnership with Harrah’s
        License Company, LLC to co-brand this new product with the World Series of
        Poker® logo and brand.
 
 We
        expect
        that most of the sales of Heads-Up Challenge will be made indirectly through
        amusement and video game distributors. We will seek to secure distribution
        relationships with various amusement and video game distributors and have
        already entered into a number of distribution relationships with domestic
        distributors. We are pursuing similar distribution arrangements with other
        distributors throughout the United States and abroad. We expect that our
        distributors will have primary responsibility for support of Heads-Up Challenge
        units after delivery.
 
 **** **Recent
        Events**
 
 On
        August
        2, 2007, we announced that Four Winds Casino Resort, in New Buffalo, Michigan,
        opened the world’s largest automated poker room running exclusively on PokerTek
        poker tables. The Four Winds Poker Room features fifteen PokerPro 10-seat
        tables
        and four PokerPro Heads-Up tables.
 
 On
        August
        6, 2007, we announced the installation of five PokerPro tables in the Galaxy
        StarWorld Hotel and Casino in Macau, the world’s largest gaming market. The
        installations were performed by Aristocrat, PokerTek’s international
        distribution partner, and include four PokerPro 10-seat tables and one PokerPro
        Heads-Up table.
  16
  
 
 **Results
        of Operations for the Three Months Ended June 30, 2007 Compared to the Three
        Months Ended June 30, 2006**
 
 *Revenues.* Revenues
        increased from $314,264 during the three months ended June 30, 2006 to $915,696
        for the three months ended June 30, 2007. The increase in license fees related
        to our ongoing expansion of our customer base, including cruise ships,
        international casinos (through Aristocrat International Pty. Limited and
        its
        affiliates, our international distributor), and domestic casinos. The increase
        in equipment sales of the PokerPro
        system was related primarily to
        sales
        to Aristocrat for its use in international casinos, and for demonstrations
        to
        licensing bodies and potential customers.
 
 *Selling,
        General and Administrative Expenses.* Selling,
        general and administrative expenses (“SG&A”) increased from $1,517,816
        during the three months ended June 30, 2006 to $2,060,840 for the three months
        ended June 30, 2007. This increase was primarily the result of an increase
        of
        $261,888 related to the addition of personnel and infrastructure to support
        our
        growth strategy; an increase of $249,253 related to expenses for sales efforts
        and to regulatory bodies; and an increase of $80,543 related to legal and
        professional fees.
 
 *Research
        and Development Expenses.* Research
        and development expenses (“R&D”) increased from $910,662 for the three
        months ended June 30, 2006 to $1,122,791 for the three months ended June
        30,
        2007. The increase was primarily the result of an increase in R&D related to
        our Heads-Up Challenge product.
 
 *Depreciation* .
        Depreciation increased from $152,007 for the three months ended June 30,
        2006 to
        $467,443 for the three months ended June 30, 2007. The depreciation primarily
        relates to the PokerPro systems we have installed from our inception through
        June 30, 2007.
 
 *Net
        Interest Income* .
        Net
        interest income decreased from $206,849 for the three months ended June 30,
        2006
        to $168,422 for the three months ended June 30, 2007. The interest income
        relates to the interest earned from our cash and cash equivalents, which
        has
        been decreasing as we fund our operations.
 
 **Results
        of Operations for the Six Months Ended June 30, 2007 Compared to the Six
        Months
        Ended June 30, 2006**
 
 *Revenues.* Revenues
        increased from $786,780 during the six months ended June 30, 2006 to $1,507,272
        for the six months ended June 30, 2007. The increase in license fees related
        to
        our ongoing expansion of our customer base, including cruise ships,
        international casinos (through Aristocrat International Pty. Limited and
        its
        affiliates, our international distributor), and domestic casinos. The increase
        in equipment sales of the PokerPro
        system was related primarily to
        sales
        to Aristocrat for its use in international casinos, and for demonstrations
        to
        licensing bodies and potential customers.
  *Selling,
        General and Administrative Expenses.* SG&A
        increased from $2,510,392 during the six months ended June 30, 2006 to
        $3,923,543 for the six months ended June 30, 2007. This increase was primarily
        the result of an increase of $720,353 related to the addition of personnel
        and
        infrastructure to support our growth strategy; an increase of $471,811 related
        to expenses for sales efforts and fees to regulatory bodies; an increase
        of
        $66,736 related to advertising and marketing the PokerPro system; and an
        increase of $100,668 related to legal and professional fees.
 
 *Research
        and Development Expenses.* R&D
        increased slightly from $1,951,421 for the six months ended June 30, 2006
        to
        $2,130,079 for the six months ended June 30, 2007. The increase was primarily
        the result of an increase in R&D related to our Heads-Up Challenge
        product.
  17
  
 
 *Depreciation* .
        Depreciation increased from $267,930 for the six months ended June 30, 2006
        to
        $833,251 for the six months ended June 30, 2007. The depreciation primarily
        relates to the PokerPro systems we have installed during the period from
        our
        inception through June 30, 2007.
 
 *Net
        Interest Income* .
        Net
        interest income decreased from $402,544 for the six months ended June 30,
        2006
        to $259,254 for the six months ended June 30, 2007. The interest income relates
        to the interest earned from our cash and cash equivalents, which has been
        decreasing as we fund our operations.
 
 **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 loans from our principals and
        have
        not entered into any additional loans with our principals.
 
 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 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. For further details of this
        transaction, see the “Executive Summary” section of this Item 2 and Note 7 to
        our financial statements contained in this quarterly report on Form
        10-Q.
 
 For
        the
        six months ended June 30, 2007, we incurred a net loss of $5,437,799 and
        used
        $4,855,761 of cash in operating activities. At June 30, 2007, we had an
        accumulated deficit of $19,274,873. 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.
 
 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 through the end of fiscal year
        2007.
 
 Based
        on
        our cash flow projections, we expect that the proceeds from our initial public
        offering in October 2005, the private placement in April 2007 and anticipated
        revenues will be sufficient to support our operations into fiscal year 2008.
        If
        sales of the PokerPro system do not meet our projections or our expenses
        exceed
        our expectations, then we may need to raise additional funds through additional
        public or private offerings of our securities, through a sale/leaseback
        arrangement or through a credit facility.
 
 **Contractual
        Obligations**
 
 Contractual
        obligations associated with our ongoing business and financing activities
        will
        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 six months
        of fiscal 2007, there were no material changes outside the ordinary course
        of
        business in the company’s contractual obligations or the estimated timing of the
        future cash payments.
  18
  
 
 **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 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 six months of fiscal 2007, there were no material changes
        to
        the accounting policies and assumptions previously disclosed.
 
 **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
        impact of the Company’s adoption of SFAS No. 156 for fiscal year 2007 did not
        have a material impact on the results of operations, financial condition
        or
        liquidity.
 
 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, our adjustment under
        FIN 48
        resulted in a reduction of gross deferred tax assets with a corresponding
        decrease in the required valuation allowance. The adoption of this standard
        did
        not have a material impact on the opening balance of retained earnings for
        2007
        and had no impact on 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. The impact of
        the Company’s adoption of SAB 108 did not have a material impact on our
        financial position, results of operations or cash flows.
 
 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. If elected,
        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 evaluating whether to elect the option provided for
        in this
        standard.
  19
  
 
 **Off-Balance
        Sheet Arrangements**
 
 We
        have
        no off-balance sheet arrangements.
 
 **Item
        3.**  **Quantitative
        and Qualitative Disclosures about Market Risk.**
 
 The
        Company’s interest rate risk has not changed significantly from the disclosure
        in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year
        ended
        December 31, 2006.
 
 **Item
        4.**  **Controls
        and Procedures.**
  *Evaluation
        of disclosure controls and procedures*
  As
        of
        June 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 implementing internal control 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. There
        have
        not been any changes to our internal control over financial reporting processes
        and procedures that occurred during the fiscal quarter ended June 30, 2007
        that
        materially affected, or are reasonably likely to materially affect, our internal
        control over financial reporting.
   20
  
  **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 the Company’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. All parties
        have subsequently filed additional motions relating to PokerTek’s March 2007
        motion to dismiss. As of August 13, 2007, the Court has not ruled on the
        motion.
 
 PokerTek,
        Mr. Crawford and Mr. White believe they have meritorious defenses to all
        claims
        that have been asserted by Tellis.
 
 **Item
        1A.**  **Risk
        Factors.**
 
 The
        Company is subject to a variety of risks, including component supply risk,
        reliance on supply chain, competition, political and economic risks, business
        risks, risks that operating results and net earnings may not meet expectations,
        regulatory risks, acquisition risks, protection of intellectual property,
        product liability and other litigation risks, marketing distributor
        relationships and natural disasters. These risk factors, among others, are
        discussed in detail below .
 
 ***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 gaming products have not yet been introduced to the market
        on a
        wide scale and our non-gaming product, the Heads-Up Challenge, was only recently
        announced. 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 cannot ensure that any of our products will ever produce a
        significant amount of revenue.
  21
  
 ***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 June 30, 2007, we had an accumulated deficit of $19,274,873. 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 both it and the Heads-Up Challenge product 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.
 
 ***Our
        success depends primarily 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 at least 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 relatively short-term 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 longer-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
        it is determined that the PokerPro system is not a Class II gaming device,
        such
        a determination will have a material adverse effect on our ability to operate
        our business.***
 
 The
        operation of gaming devices is highly regulated. Gaming devices are regulated
        at
        the federal level by the Federal Gambling Devices Act of 1962, which we refer
        to
        as the Johnson Act. Gaming on Native American lands is also governed by the
        Indian Gaming Regulatory Act of 1988, which we refer to as the IGRA, and
        the
        National Indian Gaming Commission, which promulgates regulations to enforce
        certain aspects of the IGRA and which we refer to as the NIGC. In addition,
        gaming on tribal lands is governed by 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.
  22
  
 
 Based
        on
        our understanding of classification under the 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.
 
 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 gaming device, 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.
 
 ***If
        we fail to obtain or maintain gaming licenses and regulatory approvals, we
        will
        be unable to operate our primary business and license or sell our gaming
        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, many states that license commercial
        casinos 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, Connecticut,
        Nevada, Michigan, Arkansas, New Jersey, Louisiana, Mississippi, British
        Columbia, and various tribal gaming jurisdictions. 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.
  23
  
 
 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. 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.
        While we believe the PokerPro system to be outside the scope of the Johnson
        Act,
        we have filed under the Johnson Act and expect to maintain the required
        documentation under the Johnson Act to attempt to avoid any possible rulings
        prohibiting the installation of the PokerPro system. 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 sale of our gaming products in that
        jurisdiction.***
 
 Gaming
        authorities in some jurisdictions may investigate any individual who has
        a
        material relationship with us and any of our shareholders to determine whether
        the individual or shareholder is suitable to those gaming authorities. Certain
        of our executive officers, key employees, directors and significant shareholders
        have been found suitable in multiple jurisdictions by various gaming
        authorities. If a gaming authority in any jurisdiction fails to find any
        of our
        executive officers, key employees, directors or significant shareholders
        suitable, we may be prohibited from leasing, licensing or selling our gaming
        products in that jurisdiction.
  A
        finding
        of suitability is generally determined based upon numerous facts and
        circumstances surrounding the entity or individual in question and many gaming
        authorities have broad discretion in determining whether a particular entity
        or
        individual is suitable. We are unaware of circumstances that would categorically
        prevent a gaming authority from finding any of our officers, key employees,
        directors or significant shareholders suitable.
  24
  
 Gehrig
        H.
“Lou” White, our Chief Executive Officer, a director and beneficial owner of
        approximately 20% of our common stock, has disclosed in applications for
        the
        determination of suitability filed with gaming authorities that the IRS has
        recently completed an examination of his 2000 and 2001 federal individual
        income
        tax returns. The IRS previously issued an examination report showing a proposed
        income tax deficiency for Mr. White’s 2000 federal income tax return of $410,215
        (plus additional interest and penalties attributable to that underpayment
        of
        tax) based on a disallowance of certain deductions for charitable contributions
        that Mr. White made to a foundation he established and mortgage interest
        that
        Mr. White paid to Legacy Capital, LLC, an affiliate of Merrill Scott. Merrill
        Scott is an investment advisor that was placed under receivership in 2002
        by the
        SEC for violations of a variety of federal securities laws in connection
        with
        fraud and misappropriations of client funds by the firm through a scheme
        in
        which it obtained funds from its clients seeking above-market returns and
        other
        benefits. Mr. White is currently appealing the IRS’s proposed income tax
        deficiency. The IRS examination of Mr. White’s 2001 federal tax return resulted
        in the issuance of a notice of deficiency for additional income tax in the
        amount of $75,445 (plus additional interest and penalties attributable to
        that
        underpayment of tax). In his original 2001 federal tax return, Mr. White
        claimed
        deductions relating to a partnership investment he made after receiving advice
        from a law firm. The law firm subsequently informed Mr. White that the IRS
        had
        challenged the tax treatment of the investment structure and that he should
        file
        an amended return. Mr. White then filed an amended federal income tax return
        for
        2001 eliminating the deductions relating to the partnership investment. He
        also
        paid the federal income taxes resulting from the elimination of such deductions.
        The IRS notice of deficiency assessed additional income taxes as the result
        of
        disallowing deductions for tax advice in connection with the partnership
        investment transaction and an accuracy penalty in connection with the losses
        claimed with respect to that investment. These amounts have been paid, which
        completes the audit process for Mr. White’s 2001 return. Due to the broad
        discretionary powers of gaming authorities, it is unknown what effect the
        IRS
        examinations of Mr. White’s federal income tax returns may have on Mr. White’s
        applications for a determination of suitability.
 
 If
        any of
        our executive officers, certain key employees, directors or significant
        shareholders is not found suitable in a jurisdiction requiring a finding
        of
        suitability, we would be prevented from leasing, licensing or selling our
        gaming
        products in that jurisdiction as long as the individual or entity in question
        remained an officer, key employee, director or a significant shareholder.
        Such
        an occurrence would likely delay introduction of our gaming products into
        such
        jurisdiction or
        prevent us from introducing our gaming products in such jurisdiction altogether.
        Depending on how material such jurisdiction is to our plan of operations,
        failure to obtain such findings of suitability could have a material adverse
        effect on our results of operations. In addition, a finding that one of our
        executive officers, certain key employees, directors or significant shareholders
        is not suitable in any jurisdiction may hinder our ability to obtain necessary
        regulatory approvals in other jurisdictions. Conversely, however, a finding
        of
        suitability by one or more gaming authorities does not ensure that similar
        suitability determinations will be obtained from any other gaming
        authorities.
 
 Although
        we have the ability to terminate the employment of an executive officer or
        key
        employee in the event that such executive officer or key employee fails to
        be
        found suitable, such termination would disrupt the management of our company,
        may trigger severance provisions under certain employment agreements and
        would
        likely have an adverse effect on our business and results of operations.
        In
        addition, the removal of a director under the provisions of our Amended and
        Restated Bylaws requires action on the part of our shareholders at a
        shareholders’ meeting. Our Amended and Restated Articles of Incorporation
        provide that we may redeem at fair market value any or all shares of our
        capital
        stock held by any person or entity whose status as a shareholder, in the
        opinion
        of our Board of Directors, jeopardizes the approval, continued existence,
        or
        renewal of any federal, state, local or tribal license we hold. However,
        we may
        not have the funds available for such a redemption, especially if the
        shareholder in question holds a significant amount of our common stock. We
        have
        not determined what action we would take in such event. We will also be
        prevented from effecting such a redemption if it would violate North Carolina
        law.
  25
  
 
 ***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 do. 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 with respect to our gaming products, 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. 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. The primary barriers to entry with respect
        to our
        Heads-Up Challenge product, some of which we are still in the process of
        overcoming, are the establishment of relationships with amusement device
        distributors and end users and the development of the technology necessary
        to
        create an amusement version of an automated poker table. We anticipate that
        our
        potential competitors will include manufacturers of amusement devices that
        have
        already established relationships with distributors and end users of amusement
        devices. We believe that most of our competitors in both the gaming and
        amusement businesses 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.
 
 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 and the
        Heads-Up Challenge product, 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 primarily in a single industry, and our business would suffer if
        demand
        for gaming in general, or poker in particular,
        decreases.***
 
 We
        expect
        to derive a substantial portion of our revenues from the leasing, licensing,
        and
        sale of the PokerPro system and from providing related maintenance and support
        services, and the substantial remainder of our revenues from the leasing,
        licensing and sale of our Heads-Up Challenge amusement game. **** 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 our core 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.
        Similarly, though the potential market for our Heads-Up Challenge amusement
        game
        is broader, it too may face both competitive and regulatory threats that
        would
        force us to sell or license the game at lower prices than we intend, or limit
        our ability to sell the entertainment product in certain
        markets.
  26
  
 ***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 our products. **** 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 our products or using some or all of the processes that are the
        subject of such patent applications. Even if our pending patents are issued,
        our
        intellectual property rights may not be sufficiently comprehensive to prevent
        our competitors from developing similar competitive products and technologies.
        Although we intend to aggressively pursue anyone we reasonably believe is
        infringing upon our intellectual property rights, initiating and maintaining
        suits against third parties that may infringe upon our intellectual property
        rights will require substantial financial resources. We may not have the
        financial resources to bring such suits and if we do bring such suits, we
        may
        not prevail. Regardless of our success in any such actions, we could incur
        significant expenses in connection with such suits.
 
 ***Third
        party claims of infringement against us could adversely affect our ability
        to
        market our products and require us to redesign our products or seek licenses
        from third parties.***
 
 We
        are
        susceptible to intellectual property lawsuits that could cause us to incur
        substantial costs, pay substantial damages or prohibit us from distributing
        one
        or more of our products. 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 any of our products infringe
        a
        valid patent, we could be prevented from distributing such product 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 product 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.
 
 For
        example, on February 5, 2007, Tellis Software, Inc. filed a complaint against
        us
        and Lou White, our Chief Executive Officer, in the United States District
        Court
        for the Southern District of Texas. The complaint, which was amended on April
        1,
        2007, alleges that we breached a software development agreement with Tellis
        Software, that we and Mr. White committed fraud in connection with the software
        development agreement, that our President, James Crawford, committed fraud
        in
        connection with the filing of a patent application, that Mr. Crawford and
        Mr.
        White converted software developed by Tellis that forms the basis of the
        patent
        application, and that we have been unjustly enriched and/or that Tellis Software
        is entitled to a *quantum
        meruit* recovery. We, Mr. Crawford and Mr. White believe we each have meritorious
        defenses to all claims that have been asserted by Tellis Software, but there
        is
        no assurance that we will be successful in our defense of this or similar
        lawsuits or that such lawsuits will not have a material adverse effect on
        our
        business, financial condition or results of operations.
  27
  
 ***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 primarily 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 our products 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 our products fail to work properly and cause monetary or physical
        damage to our customers or end users. In addition, defects in the design
        or
        manufacture of our products might require us to recall such products. 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 our products, the
        pursuit of regulatory approvals and other working capital needs in order
        to
        satisfy such claims.
 
 ***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, III, 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 the Heads-Up Challenge and to market or arrange for the
        marketing of these products throughout the United States.
  28
  
 
 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 and stock ownership, but these components of compensation may not
        be
        sufficient to allow us to retain key employees or hire new
        employees.
 
 ***Our
        management team’s limited experience in our product markets 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 to date, 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 and the Heads-Up Challenge
        product 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.
  29
  
 
 ***Our
        success will depend on the reliability and performance of third-party
        distributors, manufacturers and suppliers.***
 
 Although
        we currently manufacture our products from component parts obtained from
        third-party suppliers, we expect to ultimately 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 the PokerPro
        system on a widespread basis 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.
 
 Similarly,
        we expect to rely on a network of third-party distributors to market and
        distribute our Heads-Up Challenge amusement product. We cannot predict the
        timing or acceptance of the Heads-Up Challenge product on a widespread basis
        at
        this time. If those distributors are unsuccessful in marketing and distributing
        the Heads-Up Challenge product, we may miss revenue-generating opportunities
        that might have been recognized by different third-party distributors or
        by
        direct sales. 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. Changing distributors
        will be made more difficult in those jurisdictions where we have entered
        into
        exclusive distribution agreements with third-party distributors. ****
 
 ***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 the PokerPro system 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 further develop our products, further protect our
        intellectual property sufficiently, meet customer demand for our products
        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.
 
 ***A
        decline in general economic conditions would have a greater material adverse
        effect on our business than on other businesses.***
  30
  
 
 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;  31
  
 ·
            increases
                in gaming taxes or fees; ·
            legal
                and regulatory issues affecting the development, operation and licensing
                of casinos; ·
            the
                availability and cost of capital to construct, expand or renovate
                new and
                existing casinos; ·
            the
                level of new casino construction and renovation schedules of existing
                casinos; and ·
            competitive
                conditions in the gaming industry and in particular gaming markets,
                including the effect of such conditions on the pricing of our games
                and
                products. 
 These
        factors significantly impact the demand for our products and
        technologies.
 
 ***We
        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.
 
 ***The
        success of our Heads-Up Challenge product is substantially dependent on our
        ability to maintain and leverage our relationship with Harrah’s License
        Company.***
 
 Our
        Heads-Up Challenge product is branded with the World Series of Poker brand
        and
        logo, which is owned by Harrah’s License Company, LLC and licensed to us for use
        with this product. The World Series of Poker is a well-known series of annual
        poker tournaments. We hope to develop business relationships and credibility
        through our partnership with Harrah’s and our ability to market the Heads-Up
        Challenge as the “World Series of Poker Edition.” If our relationship with
        Harrah’s is terminated or impaired, we may not be able to develop such
        relationships and credibility, which could delay or prevent market acceptance
        of
        the Heads-Up Challenge product and otherwise have a material adverse effect
        on
        our business.
 
 ***Pursuant
        to the registration rights agreement, we may be required to pay liquidated
        damages to the selling shareholders who purchased shares in the private
        placement and the amount of such liquidated damages, if any, may adversely
        affect our results of operations.***
 
 In
        accordance with the restrictive covenants contained in the registration rights
        agreement, we (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. We are generally expected to maintain effectiveness of the registration
        statement in accordance with the terms of the registration 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 we
        do not
        maintain the effectiveness of the registration statement, then on every 30-day
        anniversary of such maintenance failure we will be required to pay to each
        of
        the selling shareholders who purchased our shares of common stock in the
        private
        placement certain liquidated damages equal to 2% of the aggregate investment
        amount paid by each such selling shareholder in the private placement until
        such
        maintenance failure is cured. No allowable grace period is permitted during
        the
        first 30 business days after the registration statement has been declared
        effective by the SEC. The total amount of liquidated damages payable by us
        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. If we are required to pay liquidated damages to
        any of
        the selling shareholders, payment of such liquidated damages may adversely
        affect our results of operations, particularly our earnings
        results.
  32
  
 
 **Risks
        Related to Our Common Stock**
  ***The
        concentration of our common stock ownership by our founders will limit your
        ability to influence corporate matters.***
  Gehrig
        H.
“Lou” White, James T. Crawford, III and Arthur Lee Lomax together own
        approximately 37% of our common stock. Messrs. White, Crawford and Lomax
        therefore have significant influence over our management and affairs and
        over
        all matters requiring shareholder approval, including the election of directors
        and significant corporate transactions, such as a merger or other sale of
        our
        company or our assets, for the foreseeable future. This concentrated control
        will limit your ability to influence corporate matters and, as a result,
        we may
        take actions that some of our shareholders do not view as beneficial. In
        addition, such concentrated control could discourage others from initiating
        changes of control. As a result, the market price of our common stock could
        be
        adversely affected.
  ***Our
        Board of Directors’ ability to issue “blank check” preferred stock and any
        anti-takeover provisions we adopt may depress the value of our common
        stock.***
  Our
        authorized capital includes 5,000,000 shares of “blank check” preferred stock.
        Our Board of Directors has the power to issue any or all of the shares of
        such
        preferred stock, including the authority to establish one or more series
        and to
        fix the powers, preferences, rights and limitations of such class or series,
        without seeking shareholder approval, subject to certain limitations on this
        power under the listing requirements of The NASDAQ Stock Market LLC. We may,
        in
        the future, consider adopting certain other anti-takeover measures. The
        authority of our Board of Directors to issue “blank check” preferred stock and
        any future anti-takeover measures we may adopt may in certain circumstances
        delay, deter or prevent takeover attempts and other changes in control of
        our
        company not approved by our Board of Directors. As a result, our shareholders
        may lose opportunities to dispose of their shares at favorable prices generally
        available in takeover attempts or that may be available under a merger proposal
        and the market price of our common stock and the voting and other rights
        of our
        shareholders may also be affected.
  ***The
        completion of the private placement, as well as any future financing
        transactions, had and will have a dilutive effect on our existing shareholders
        and may have other adverse effects on our results of
        operations.***
 
 In
        April
        2007, we completed the private placement of 1,444,444 shares of our common
        stock
        in the aggregate to the selling shareholders, as well as warrants that are
        currently exercisable for an aggregate of 439,541 shares of our common stock
        and
        which will increase to 505,555 shares of common stock if approved by our
        shareholders. This financing resulted in significant dilution to our current
        shareholders. In the future, we may issue additional equity, debt or convertible
        securities to raise capital. If we do so, the percentage ownership of PokerTek
        held by existing shareholders would be further reduced, and existing
        shareholders may experience significant further dilution. In addition, new
        investors in PokerTek may demand rights, preferences or privileges that differ
        from, or are senior to, those of our existing shareholders, such as the warrants
        and other protections against future dilutive transactions that were obtained
        by
        the selling shareholders in the private placement. The perceived risk associated
        with the sale of a large number of shares, including the recently completed
        private placement, could cause some of our shareholders to sell their stock,
        thus causing the price of our common stock to decline. Subsequent sales of
        our
        common stock in the open market could also have an adverse effect on the
        market
        price of our common stock. If our stock price declines, it may be more difficult
        or we may be unable to raise additional capital.
  33
  
 
 ***There
        are certain limitations on ownership of five percent or more of our common
        stock
        and we will have the right to redeem your shares of common stock if your
        ownership jeopardizes any regulatory certifications, licenses or approvals
        we
        hold.***
  Our
        Amended and Restated Articles of Incorporation provide that no person or
        entity
        may become the beneficial owner of 5% or more of our outstanding shares of
        common stock unless such person **** or
        entity
        agrees to provide personal background and financial information to, consent
        to a
        background investigation by, and respond to questions from the applicable
        gaming
        authorities in any jurisdiction in which we do business or desire to do
        business. Our Amended and Restated Articles of Incorporation also provides
        that
        we may redeem any or all shares of common 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 regulatory
        approval we hold. The amount that we will pay for such redeemed shares will
        equal the highest closing price of our common stock, as reported on The NASDAQ
        Global Market or other exchange or quotation service on which our common
        stock
        is then listed or quoted, during the 30 days immediately preceding the date
        on
        which notice of redemption is given. This provision may force you to sell
        your
        shares of common stock before you would choose to do so and may cause you
        to
        realize a loss on your investment.
  ***Our
        common stock price has been volatile. Fluctuations in our stock price could
        impair our ability to raise capital and make an investment in our securities
        undesirable.***
  Historically,
        the market price of our common stock has fluctuated significantly. We believe
        factors such as the market’s acceptance of our products and the performance of
        our business relative to market expectations, as well as general volatility
        in
        the securities markets, could cause the market price of our common stock
        to
        fluctuate substantially. In addition, the stock markets have experienced
        price
        and volume fluctuations, resulting in changes in the market prices of the
        stock
        of many companies, which may not have been directly related to the operating
        performance of those companies. Fluctuations in our stock price could impair
        our
        ability to raise capital and make an investment in our securities undesirable.
        During the one year period ending June 30, 2007, the closing price of our
        common
        stock as quoted on The NASDAQ Global Market ranged from a low of $8.17 to
        a high
        of $15.25.
  ***The
        exercise of outstanding warrants and options may adversely affect our stock
        price.***
  Our
        stock
        plans authorize the issuance of stock awards to purchase or acquire up to
        2,125,000 shares of our common stock. As of June 30, 2007, options and warrants
        to purchase 2,434,191 shares of our common stock were outstanding, which
        includes warrants to purchase 439,541 shares (which will increase to 505,555
        shares of common stock if approved by our shareholders) that were issued
        in
        connection with the private placement completed in April 2007. These options
        and
        warrants are likely to be exercised at a time when the market price for our
        common stock is higher than the exercise prices of the options and warrants.
        If
        holders of these outstanding options and warrants sell the common stock received
        upon exercise, it may have a negative effect on the market price of our common
        stock.
  ***We
        do not intend to pay dividends on our common stock.***
  We
        have
        never declared or paid any cash dividend on our common stock. We currently
        intend to retain any future earnings and do not expect to pay any dividends
        in
        the foreseeable future.
   34
  **Item
            2.** **Unregistered
            Sales of Equity Securities and Use of
            Proceeds.**
 
 *Unregistered
        Sales of Equity Securities*
 
 On
        April
        23, 2007, we entered into a Securities Purchase Agreement (the “Purchase
        Agreement”) by and among us, 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, we issued and sold an aggregate of 1,444,444 shares
        of
        our common stock, no par value per share (the “Common Stock”) in a private
        placement to the Investors for a purchase price of $9.00 per share (the “Private
        Placement”). The Private Placement was completed on April 26, 2007. As part of
        the Private Placement, we also issued each Investor a warrant (together,
        the
“Warrants”) to acquire additional shares of Common Stock (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.
 
 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.
 
 For
        further information regarding the Private Placement, please see the Form
        8-K
        filed by PokerTek, including the exhibits thereto, filed with the Securities
        and
        Exchange Commission on April 27, 2007.
 
 *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 our common stock, no par value per share.
 
 During
        the quarter ended June 30, 2007, we spent the remainder of the net proceeds
        of
        our initial public offering, which consisted of approximately $21,800,000
        from
        the initial offering of 2,000,000 shares and the exercise of the underwriter’s
        over-allotment option of 225,000 shares. During the quarter, we spent
        approximately $1,311,000 on capital expenditures (approximately $5,946,000
        since
        the IPO), which consisted almost entirely of the purchase of components for
        the
        PokerPro system and related tables, and approximately $2,247,000 on working
        capital (approximately $15,865,000 since the IPO). All such payments were
        direct
        payments to others.
 
 **Item
            4.** **Submission
            of Matters to a Vote of Security Holders.**
 
 Our
        Annual Shareholders’ Meeting was held on May 23, 2007. At the meeting, our
        shareholders (i) elected five directors for
        one-year terms and until their successors are duly elected and qualified
        or
        until their prior death, resignation, removal or disqualification or until
        there
        is a decrease in the number of directors; (ii)
        ratified the appointment of McGladrey & Pullen, LLP as our independent
        registered public accounting firm for the fiscal year ending December 31,
        2007;
        and (iii) approved the 2007 Stock Incentive Plan.
 
  35
  The
        following matters were voted upon and approved by the margins
        indicated:
 
 Number
                  of SharesVoted
                  For
              Withheld1.
                  Election of DirectorsGehrig
                  H. "Lou" White
              7,464,434
              79,206Lyle
                  Berman
              7,534,668
              8,972James
                  T. Crawford, III
              7,472,184
              71,456Joseph
                  J. Lahti
              7,533,268
              1,445Arthur
                  Lee Lomax
              7,473,184
              70,456
 
 Number
                  of SharesVoted
                  For
              Voted
                  Against
              Abstain2.
                  Ratification of the selection of McGladrey & Pullen, LLP
                  as our independent registered public accounting firm for
                  the fiscal year ending December 31, 2007
              7,366,649
              9,772
              167,219
 
 Number
                  of SharesVoted
                  For
              Voted
                  Against
              Abstain
              Broker
                  Non-Vote3.
                  Approval of the 2007 Stock Incentive Plan
              5,067,395
              155,960
              173,608
              2,146,677
  36
  **Item
        6.**  **Exhibits.**
 
 Exhibit
                No.
              Description  4.1
              Securities
                  Purchase Agreement, dated as of April 23, 2007, by and among PokerTek,
                  Inc. and the investors listed on the Schedule of Buyers attached
                  thereto,
                  incorporated herein by reference to the Current Report on Form
                  8-K filed
                  on April 27, 2007.
 
 4.2
              Form
                  of Warrant to Purchase Common Stock, incorporated herein by reference
                  to
                  the Current Report on Form 8-K filed on April 27,
                  2007.  4.3
              Registration Rights Agreement, dated as of April
                26,
                2007, by and among PokerTek, Inc.and
                the Buyers listed therein, incorporated herein by reference to the
                Current
                Report on Form 8-K filed on April 27,
                2007.
  10.1
              Amendment
                  Two to Option Agreement between PokerTek, Inc. and WPT Enterprises,
                  Inc.,
                  dated as of April 23, 2007, incorporated herein by reference to
                  the
                  Current Report on Form 8-K filed on May 14,
                  2007.
 
 10.2
              PokerTek,
                  Inc. 2007 Stock Incentive Plan, incorporated herein by reference
                  to
                  Exhibit 99 to the Registration Statement on Form S-8 filed on June
                  6, 2007
                  (File No. 333-143552).*
 
 10.3
              Form
                  of Employee Incentive Stock Option Agreement for PokerTek, Inc.
                  2007 Stock
                  Incentive Plan.*
 
 10.4
              Form
                  of Employee Nonqualified Stock Option Agreement for PokerTek, Inc.
                  2007
                  Stock Incentive Plan.*
 
 10.5
              Form
                  of Non-Employee Director Nonqualified Stock Option Agreement for
                  PokerTek,
                  Inc. 2007 Stock Incentive Plan.*
 
 10.6
              Form
                  of Independent Contractor Nonqualified Stock Option Agreement for
                  PokerTek, Inc. 2007 Stock Incentive
                  Plan.*  10.7
              Form of Restricted Stock Award Agreement for PokerTek,
                Inc. 2007 Stock Incentive Plan.*  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.
 
 *
              Compensatory
                  plan or arrangement
  37
  **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:
                    August 14, 2007
                By:
                    /s/Gehrig
                    H. WhiteGehrig
                    H. White, Chief ExecutiveOfficer
                    (Principal ExecutiveOfficer)/s/Christopher
                    DanielsChristopher
                    Daniels, Chief FinancialOfficer
                    (Principal Financial Officerand
                    Principal Accounting
                    Officer)
 
  38
  **Exhibit
        Index**
 Exhibit No.
                Description  4.1
                Securities
                    Purchase Agreement, dated as of April 23, 2007, by and among
                    PokerTek,
                    Inc. and the investors listed on the Schedule of Buyers attached
                    thereto,
                    incorporated herein by reference to the Current Report on Form
                    8-K filed
                    on April 27, 2007.
 
 4.2
                Form
                    of Warrant to Purchase Common Stock, incorporated herein by reference
                    to
                    the Current Report on Form 8-K filed on April 27,
                    2007.  4.3
                Registration Rights Agreement, dated as of April
                  26,
                  2007, by and among PokerTek, Inc.and
                  the Buyers listed therein, incorporated herein by reference to
                  the Current
                  Report on Form 8-K filed on April 27,
                  2007.
  10.1
                Amendment
                    Two to Option Agreement between PokerTek, Inc. and WPT Enterprises,
                    Inc.,
                    dated as of April 23, 2007, incorporated herein by reference
                    to the
                    Current Report on Form 8-K filed on May 14,
                    2007.
 
 10.2
                PokerTek,
                    Inc. 2007 Stock Incentive Plan, incorporated herein by reference
                    to
                    Exhibit 99 to the Registration Statement on Form S-8 filed on
                    June 6, 2007
                    (File No. 333-143552).*
 
 10.3
                Form
                    of Employee Incentive Stock Option Agreement for PokerTek, Inc.
                    2007 Stock
                    Incentive Plan.*
 
 10.4
                Form
                    of Employee Nonqualified Stock Option Agreement for PokerTek,
                    Inc. 2007
                    Stock Incentive Plan.*
 
 10.5
                Form
                    of Non-Employee Director Nonqualified Stock Option Agreement
                    for PokerTek,
                    Inc. 2007 Stock Incentive Plan.*
 
 10.6
                Form
                    of Independent Contractor Nonqualified Stock Option Agreement
                    for
                    PokerTek, Inc. 2007 Stock Incentive
                    Plan.*  10.7
                  Form of Restricted Stock Award
                      Agreement for
                      PokerTek, Inc. 2007 Stock Incentive
                      Plan.*
  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.
 
 *
                Compensatory
                    plan or arrangement
 Our
        SEC
        file number reference for documents filed with the SEC pursuant to the
        Securities Exchange Act of 1934, as amended, is 000-51572.


39