UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q





x     QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended September 30, 2010





OR





 ̈    TRANSITION
REPORT UNDER SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period from _______ to _______





Commission
File Number 0-16686





POKER
MAGIC, INC.





(Exact
name of registrant as specified in its charter)





Minnesota
            
            20-4709758(State or other jurisdiction of incorporation or organization)
            
            (I.R.S. Employer Identification No.)





130 West
Lake Street, Suite 300, Wayzata, MN


(Address
of Principal Executive Offices)





(952)
473-3442


(Registrant’s
telephone number, including area code)





(Former
name, former address and former fiscal year, if changed from last
report)





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.  Yesx   No ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).    Yes  ̈No
 ̈





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





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





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





As of
October 27, 2010 there were 10,433,224 shares of the issuer’s common stock,
$0.001 par value, outstanding.





Table of
Contents





Index





PagePART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements
              
              1Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              
              9Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              
              15Item
      4T. Controls and Procedures
              
              15PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
              
              16Item
      1A. Risk Factors
              
              16Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              
              16Item
      3. Defaults Upon Senior Securities
              
              16Item
      4. Reserved
              
              16Item
      5. Other Information
              
              16Item
      6. Exhibits
              
              16SIGNATURES
              
              17





PART
I – FINANCIAL INFORMATION





Item
1.  Financial Statements.





Poker
Magic, Inc.


(A
Development Stage Company)


Balance
Sheets





September 30, 2010
                  (unaudited)
                
                
                December 31, 2009
                  (audited)ASSETSCurrent
      AssetsCash
                
                $
                4,606
                
                
                $
                5,464Inventory
                
                
                1,621
                
                
                
                1,621Total
      Current Assets
                
                
                6,227
                
                
                
                7,085Intangible
      assets, net of amortization
                
                
                4,136
                
                
                
                10,340Total
      Assets
                
                $
                10,363
                
                
                $
                17,425Liabilities
      and Shareholders’ DeficitCurrent
      LiabilitiesAccounts
      payable
                
                $
                10,695
                
                
                $
                13,446Accrued
      royalty
                
                
                240
                
                
                
                120Note
      payable related party – short-term
                
                
                91,200
                
                
                
                40,000Interest
      payable
                
                
                5,930
                
                
                
                873Deferred
      revenue
                
                
                -
                
                
                
                975Total
      Current Liabilities
                
                
                108,065
                
                
                
                55,414Total
      Liabilities
                
                
                108,065
                
                
                
                55,414Commitments
      and contingencies:Shareholders’
      DeficitCommon
      Stock, $.001 par value: Authorized 250,000,000 shares:
                  Issued
      and outstanding 10,433,224 and 9,963,224 shares on September 30, 2010 and
      December 31, 2009, respectively.
                
                
                10,433
                
                
                
                9,963Additional
      paid-in capital
                
                
                680,407
                
                
                
                644,877Deficit
      accumulated during the development stage
                
                
                (788,542
                )
                
                
                (692,829
                )Total
      Shareholders’ Deficit
                
                
                (97,702
                )
                
                
                (37,989
                )Total
      Liabilities and Shareholders’ Deficit
                
                $
                10,363
                
                
                $
                17,425





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


1





Poker
Magic, Inc.


(A
Development Stage Company)


Statements
of Operations


(unaudited)





Three months ended
                      
                      
                      Three months ended
                      
                      
                      Nine months ended
                      
                      
                      Nine months ended
                      
                      
                      Period from
                        January 10, 2006
                        (inception)
                        throughSeptember 30, 2010
                      
                      
                      September 30, 2009
                      
                      
                      September 30, 2010
                      
                      
                      September 30, 2009
                      
                      
                      September 30, 2010Revenues
                      
                      $
                      600
                      
                      
                      $
                      2,025
                      
                      
                      $
                      2,400
                      
                      
                      $
                      5,675
                      
                      
                      $
                      11,775Cost
      of Revenues
                      
                      
                      2,098
                      
                      
                      
                      2,587
                      
                      
                      
                      6,324
                      
                      
                      
                      10,829
                      
                      
                      
                      56,013Gross
      Loss
                      
                      
                      (1,498
                      )
                      
                      
                      (562
                      )
                      
                      
                      (3,924
                      )
                      
                      
                      (5,154
                      )
                      
                      
                      (44,238
                      )Operating
      Expenses:Selling,
      General and Administrative
                      
                      
                      23,202
                      
                      
                      
                      28,240
                      
                      
                      
                      85,532
                      
                      
                      
                      120,830
                      
                      
                      
                      739,377Operating
      Loss:
                      
                      
                      (24,700
                      )
                      
                      
                      (28,802
                      )
                      
                      
                      (89,456
                      )
                      
                      
                      (125,984
                      )
                      
                      
                      (783,615
                      )Other
      Income (Expense)Interest
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      192
                      
                      
                      
                      2,203Interest
      expense
                      
                      
                      (2,624
                      )
                      
                      
                      (200
                      )
                      
                      
                      (6,257
                      )
                      
                      
                      (200
                      )
                      
                      
                      (7,130
                      )Total
      Other Income (Expense)
                      
                      
                      (2,624
                      )
                      
                      
                      (200
                      )
                      
                      
                      (6,257
                      )
                      
                      
                      (8
                      )
                      
                      
                      (4,927
                      )Net
      Loss
                      
                      $
                      (27,324
                      )
                      
                      $
                      (29,002
                      )
                      
                      $
                      (95,713
                      )
                      
                      $
                      (125,992
                      )
                      
                      $
                      (788,542
                      )Basic
      and diluted net loss per common share
                      
                      $
                      (0.00
                      )
                      
                      $
                      (0.00
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.10
                      )Weighted-average
      number of common shares outstanding
                      
                      
                      10,233,224
                      
                      
                      
                      9,565,398
                      
                      
                      
                      10,094,213
                      
                      
                      
                      9,201,014
                      
                      
                      
                      8,023,351





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


2





Poker
Magic, Inc.


(A
Development Stage Company)


Statements
of Cash Flows


(unaudited)





Nine Months Ended
                  September 30, 2010
                
                
                Nine Months Ended
                  September 30, 2009
                
                
                Period from
                  January 10, 2006
                  (inception) to
                  September 30, 2010Cash
      flows from operating activities:Net
      loss
                
                $
                (95,713
                )
                
                $
                (125,992
                )
                
                $
                (788,542
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Amortization
      of intangible asset
                
                
                6,204
                
                
                
                6,204
                
                
                
                37,221Common
      stock issued for services
                
                
                -
                
                
                
                -
                
                
                
                6,500Consulting
      service expense paid in stock
                
                
                -
                
                
                
                4,791
                
                
                
                123,841Officers
      compensation expense paid in stock
                
                
                36,000
                
                
                
                30,000
                
                
                
                134,000Officers
      compensation expense as contributed capital
                
                
                -
                
                
                
                12,000
                
                
                
                50,000Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                -
                
                
                
                -
                
                
                
                -Inventory
                
                
                -
                
                
                
                (871
                )
                
                
                (871
                )Prepaid
      expense
                
                
                -
                
                
                
                -
                
                
                
                5,434Accounts
      payable
                
                
                (2,751
                )
                
                
                13,356
                
                
                
                10,695Accrued
      royalty
                
                
                120
                
                
                
                (65
                )
                
                
                240Interest
      payable
                
                
                6,257
                
                
                
                -
                
                
                
                7,130Deferred
      revenue
                
                
                (975
                )
                
                
                -
                
                
                
                -Net
      cash used in operating activities
                
                
                (50,858
                )
                
                
                (60,577
                )
                
                
                (414,352
                )Cash
      flows from investing activities:Acquisition
      of Select Video assets
                
                
                -
                
                
                
                -
                
                
                
                (17,000
                )Net
      cash used in investing activities
                
                
                -
                
                
                
                -
                
                
                
                (17,000
                )Cash
      flows from financing activities:Proceeds
      from subscription receivable
                
                
                -
                
                
                
                -
                
                
                
                14,000Proceeds
      from issuance of common stock
                
                
                -
                
                
                
                -
                
                
                
                426,000Redemption
      of common stock
                
                
                -
                
                
                
                (91,667
                )
                
                
                (91,667
                )Proceeds
      from note payable related party
                
                
                50,000
                
                
                
                10,000
                
                
                
                90,000Payment
      of short-term debt
                
                
                -
                
                
                
                -
                
                
                
                (2,375
                )Net
      cash provided by (used in) financing activities
                
                
                50,000
                
                
                
                (81,667
                )
                
                
                435,958Net
      increase (decrease) in cash
                
                
                (858
                )
                
                
                (142,244
                )
                
                
                4,606Cash,
      beginning of the period
                
                
                5,464
                
                
                
                145,117
                
                
                
                -Cash,
      end of the period
                
                $
                4,606
                
                
                $
                2,873
                
                
                $
                4,606Non-cash
      investing and financing activities:Acquisition
      of certain assets and liabilities ofSelect
      Video in exchange for common stockInventory
                
                $
                -
                
                
                $
                -
                
                
                $
                750Intangible
      Asset
                
                
                -
                
                
                
                -
                
                
                
                24,357Accounts
      Payable
                
                
                -
                
                
                
                -
                
                
                
                (32,000
                )Note
      Payable
                
                
                -
                
                
                
                -
                
                
                
                (7,084
                )Accrued
      interest converted into note payable
                
                
                1,200
                
                
                
                -
                
                
                
                1,200Stock
      issued in lieu of cash for note payable
                
                
                -
                
                
                
                -
                
                
                
                19,709Stock
      issued in lieu of cash for prepaid services
                
                
                -
                
                
                
                -
                
                
                
                175,400Stock
      subscriptions received for common stock
                
                
                -
                
                
                
                -
                
                
                
                14,000





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


3


Poker
Magic, Inc.


(A
Development Stage Company)


Notes to
Financial Statements


September
30, 2010





NOTE
1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Description
of operations and basis of presentation





Poker
Magic, Inc. (the “Company”) is a development stage company that was incorporated
in the State of Minnesota on January 10, 2006.  Our business consists
primarily of marketing and licensing a new form of poker-based table game to
casinos and on-line gaming facilities in the United States.





Interim
financial information





The
following condensed balance sheet as of December 31, 2009, which has been
derived from audited financial statements, and the unaudited interim condensed
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States and pursuant to the rules and
regulations of the Securities and Exchange Commission (the “SEC”) for interim
financial information. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted pursuant to
such rules and regulations. Operating results for the three and nine months
ended September 30, 2010 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2010 or any other period. The
accompanying financial statements and related notes should be read in
conjunction with the audited Financial Statements of the Company, and notes
thereto, contained in this filing for the year ended December 31,
2009.  The financial information furnished in this report is unaudited
and reflects all adjustments which are normal recurring adjustments and, which
in the opinion of management, are necessary to fairly present the results of the
interim periods presented in order to make the financial statements not
misleading.





Liquidity




The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern that contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. For the period
from January 10, 2006 (inception) to September 30, 2010, the Company incurred a
net loss of $788,542. The Company's ability to continue as a going concern is
dependent on it ultimately achieving profitability, producing additional
revenues and/or raising additional capital. Management intends to obtain
additional debt or equity capital to meet all of its existing cash obligations
and to support the revenue generating process; however, there can be no
assurance that the sources will be available or available on terms favorable to
the Company.





Fair
value of financial instruments




The
carrying amounts of certain of the Company’s financial instruments, including
cash, accounts payable, and notes payable approximate fair value due to their
relatively short maturities.





Intangible
assets





On March
10, 2006, the Company purchased certain assets and assumed certain liabilities
of Select Video, Inc. (Select Video). Three patents were acquired as a part of
the March 10, 2006 purchase. The patents are stated at cost and are amortized on
a straight-line basis over 60 months. Amortization expense was $2,068 for both
of the three months ended September 30, 2010 and 2009, $6,204 for both of the
nine months ended September 30, 2010 and 2009 and $37,221 for the period from
January 10, 2006 (inception) to September 30, 2010. Estimated amortization
expense for the next two years of patents issued as of September 30, 2010 is as
follows:





Remainder
      of 2010
                      
                      $
                      2,0682011
                      
                      
                      2,068Total
                      
                      $
                      4,136


4


Impairment
of long-lived assets




Management
reviews the Company’s long-lived assets for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment indicators are present and the estimated future
undiscounted cash flows are less than the carrying value of the assets, the
asset’s value will be adjusted appropriately. No impairment indicators were
present as of September 30, 2010 or December 31, 2009.





NOTE
2—NET LOSS PER COMMON SHARE





Basic net
loss per common share is computed by dividing net loss attributable to common
shareholders by the weighted average number of vested common shares outstanding
during the period. A reconciliation of the numerator and denominator used in the
calculation of basic and diluted net loss per common share follows:





Three Months Ended
                        September 30, 2010
                      
                      
                      Three Months Ended
                        September 30, 2009Numerator:  Net
      Loss
                      
                      $
                      (27,324
                      )
                      
                      $
                      (29,002
                      )Denominator:  Weighted-average
      number of common shares outstanding
                      
                      
                      10,233,224
                      
                      
                      
                      9,565,398Basic
      and diluted net loss per common share
                      
                      $
                      (0.00
                      )
                      
                      $
                      (0.00
                      )





Nine Months Ended
                          September 30, 2010
                        
                        
                        Nine Months Ended
                          September 30, 2009
                        
                        
                        Period from
                          January 10, 2006
                          (inception) to
                          September 30, 2010Numerator:  Net
      Loss
                        
                        $
                        (95,713
                        )
                        
                        $
                        (125,992
                        )
                        
                        $
                        (788,542
                        )Denominator:  Weighted-average
      number of common shares outstanding
                        
                        
                        10,094,213
                        
                        
                        
                        9,201,014
                        
                        
                        
                        8,023,351Basic
      and diluted net loss per common share
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.10
                        )





The
1,000,000 outstanding warrants at September 30, 2009 were excluded from the
calculation of diluted loss per share as their effects were anti-dilutive due to
the Company’s net losses for that period.





NOTE
3—COMMITMENTS AND CONTINGENCIES




The asset
purchase agreement with Select Video dated March 10, 2006, provides that when
the Company receives any revenue generated by Winner’s Pot Poker and other
similar games, Select Video will be entitled to receive an amount equal to five
percent (5%) of all gross proceeds generated by these games.





As of
September 30, 2010 and December 31, 2009, $240 and $120 were owed to Select
Video under this agreement.





NOTE
4—SHAREHOLDERS’ EQUITY




Common
stock





On
January 10, 2006, the founders of the Company purchased 2,500,000 shares of
common stock for $2,500.





On March
10, 2006, the Company purchased certain assets and assumed certain liabilities
of Select Video in exchange for 3,022,991 shares of common stock issued at the
deemed fair market value of $.001 per share or $3,023.





On May
23, 2006, the Company issued 60,000 shares of common stock at $0.25 per share in
lieu of cash for liabilities assumed.





During
2006, the Company raised additional cash of $87,500 at $0.25 per share through
the issuance of 350,000 shares of common stock.





During
2006, the Company issued 22,000 shares to various consultants at $0.25 per share
for services rendered.


5





During
2006, the Company issued 100,000 shares valued at $4,000 (value of the services
to be provided) for services rendered and to be rendered.





On
January 15, 2007, the Company issued 600,000 shares of common stock to two
consultants for services to be provided over a 12 month period commencing on
January 15, 2007.  These services were valued at $50,000.





On
January 15, 2007, the Company issued 500,000 shares of common stock to the two
founders for their services to be provided over a 12 month period commencing
January 15, 2007.  These services were valued at $48,000.





On July
26, 2007, the Company settled the note payable of $7,084 for a cash payment of
$2,375 and the issuance of 20,000 shares of common stock valued at $4,709 for
payment in full on the note.





In July
2007, the Company raised cash of $20,000 at $0.25 per share through the issuance
of 80,000 shares of common stock.





On August
1, 2007, the Company issued 65,000 shares of common stock for services to be
provided over a 12 month period commencing retroactively on June 1,
2007.  These services were valued at $5,000.





On August
1, 2007, the Company issued 100,000 shares of common stock to a consultant for
services to be provided over a 12 month period commencing on August 1,
2007.  These services were valued at $8,300.





On August
1, 2007, the Company issued 25,000 shares of common stock for
services.  These services were valued at $1,000.





On
November 26, 2007, the Company issued 50,000 shares of common stock to a
consultant for services to be provided over a 12 month period commencing on
November 26, 2007.  These services were valued at
$12,500.





In
December 2007, the Company raised cash of $30,000 at $0.25 per share through the
issuance of 120,000 shares of common stock.





In
January 2008, the Company raised cash of $25,000 at $0.25 per share through the
issuance of 100,000 shares of common stock.





On May
28, 2008, the Company raised cash of $250,000 at $0.25 per share through the
issuance of 1,000,000 shares of common stock together with a warrant, classified
as permanent equity, to purchase up to 1,000,000 shares of common stock, which
was immediately exercisable.  The warrants do not possess any embedded
derivative features.  The exercise price was $0.25 per share if
purchased within six months of issuance.  The exercise price increased
to $0.425 for months seven through twelve (after the date of issuance) and to
$0.50 after twelve months.  The warrant expired on May 27,
2010.





In May
2008, the Company raised cash of $12,500 at $0.25 per share through the issuance
of 50,000 shares of common stock.





On August
26, 2008, the Company issued 200,000 shares of common stock to a consultant for
services to be provided over a five month period commencing on August 1,
2008.  These services were valued at $20,000.





On August
26, 2008, the Company issued 60,000 shares of common stock for services to be
provided over a five month period commencing retroactively on August 1,
2008.  These services were valued at $5,000.





On August
26, 2008, the Company issued 60,000 shares of common stock for services to be
provided over a twelve month period commencing retroactively on August 1,
2008.  These services were valued at $5,000.





On August
26, 2008, the Company issued 10,000 shares of common stock for
services.  These services were valued at $2,500.





On August
26, 2008, the Company issued 50,000 shares of common stock for
services.  These services were valued at $5,000.





On
December 16, 2008, the Company issued 40,400 shares of common stock for
services.  These services were valued at $10,100.





On
December 31, 2008, the Company issued 32,000 shares of common stock for officer
compensation.  These services were valued at $8,000.


6





On
February 25, 2009, the Company redeemed, at the request of a non-affiliate
shareholder, 366,667 shares of common stock held by a single shareholder at a
price of $.25 per share, for a total amount of $91,667, which was the price
originally paid for the redeemed shares.





On June
30, 2009, the Company issued 400,000 shares of common stock for officer
compensation with a fair value of $12,000.





On June
30, 2009, the Company issued 200,000 shares of common stock for officer bonus
compensation with a fair value of $6,000.





On June
30, 2009, the Company issued 50,000 shares of common stock for consultant
service bonus with a fair value of $1,500.





On June
30, 2009, the Company issued 5,000 shares of common stock for services with a
fair value of $150.





On June
30, 2009, the Company issued 7,500 shares of common stock for services with a
fair value of $225.





On
September 30, 2009, the Company issued 200,000 shares of common stock for
officer compensation with a fair value of $12,000.





On
December 31, 2009, the Company issued 200,000 shares of common stock for officer
compensation with a fair value of $12,000.





On March
31, 2010, the Company issued 120,000 shares of common stock for officer
compensation with a fair value of $12,000.





On June
30, 2010, the Company issued 150,000 shares of common stock for officer
compensation with a fair value of $12,000.





On
September 30, 2010, the Company issued 200,000 shares of common stock for
officer compensation with a fair value of $12,000.





At
September 30, 2010, a total of 10,433,224 shares of common stock were issued and
outstanding.





NOTE
5—INCOME TAXES





The
Company applies the guidance for accounting for uncertainty in income tax
provisions.  As such, the Company is required to recognize in the
financial statements only those tax positions determined to be more likely than
not of being sustained upon examination, based on the technical merits of the
positions. Interest and penalties are expensed as incurred as operating
expenses.   There are no uncertain tax positions at September 30,
2010 and December 31, 2009.





At
September 30, 2010, the Company had federal and state net operating loss
carryforward of approximately $726,000 available to offset future taxable
income. The Company’s federal and state net operating loss carryforwards will
begin to expire in 2027 if not used before such time to offset future taxable
income or tax liabilities. Current and future changes in the stock ownership of
the Company may place limitations on the use of these net operating loss
carryforwards.





NOTE
6—NOTES PAYABLE RELATED PARTY





On July
30, 2009, Lantern Advisers, LLC, a Minnesota limited liability company owned
equally by Douglas Polinsky and Joseph A. Geraci, II (each of whom is an officer
and director of the Company), loaned the Company $10,000 under terms and
conditions set forth in a related unsecured term promissory note.  The
promissory note provides for simple interest to accrue on the unpaid principal
balance of the promissory note at the rate of twelve percent (12.0%) per annum,
and requires that accrued interest be paid on a monthly basis until July 29,
2010, at which time the entire unpaid principal balance of the promissory note
will become due.  This promissory note, with an unpaid principal
balance of $10,000 together with the unpaid accrued interest of $1,200 (accrued
at 12% per annum) became due and payable on July 29, 2010.  Lantern
Advisers, LLC agreed to renew the unsecured term promissory note and interest
payable for a term of one year under the terms of the original promissory note
which will become due on July 29, 2011.





On
October 13, 2009, Lantern Advisers loaned the Company $10,000 under terms and
conditions set forth in a related unsecured term promissory note.  The
promissory note provides for simple interest to accrue on the unpaid principal
balance of the promissory note at the rate of twelve percent (12.0%) per annum,
and requires that accrued interest be paid on a monthly basis until October 12,
2010, at which time the entire unpaid principal balance of the promissory will
become due.  This promissory note, with an unpaid principal balance of
$10,000 together with the unpaid accrued interest of $1,200 (accrued at 12% per
annum) became due and payable on October 12, 2010.  Lantern Advisers,
LLC agreed to renew the unsecured term promissory note and interest payable for
a term of one year under the terms of the original promissory note which will
become due on October 11, 2011.


7


On
December 14, 2009, Lantern Advisers, LLC loaned the Company $20,000 under terms
and conditions set forth in a related unsecured term promissory
note.  The promissory note provides for simple interest to accrue on
the unpaid principal balance of the promissory note at the rate of twelve
percent (12.0%) per annum, and requires that accrued interest be paid on a
monthly basis until December 13, 2010, at which time the entire unpaid principal
balance of the promissory note will become due.  The loan was made to
provide working capital to the Company.





On
January 21, 2010, Lantern Advisers, LLC loaned the Company $10,000 under terms
and conditions set forth in a related unsecured term promissory
note.  The promissory note provides for simple interest to accrue on
the unpaid principal balance of the promissory note at the rate of twelve
percent (12.0%) per annum, and requires that accrued interest be paid on a
monthly basis until January 20, 2011, at which time the entire unpaid principal
balance of the promissory note will become due.  The loan was made to
provide working capital to the Company.





On April
1, 2010, Lantern Advisers, LLC loaned the Company $10,000 under terms and
conditions set forth in a related unsecured term promissory note.  The
promissory note provides for simple interest to accrue on the unpaid principal
balance of the promissory note at the rate of 12% per annum, and requires that
accrued interest be paid on a monthly basis until March 31, 2011, at which time
the entire unpaid principal balance of the promissory note will become
due.  The loan was made to provide working capital to the
Company.





On May 1,
2010, Lantern Advisers, LLC loaned the Company $20,000 under terms and
conditions set forth in a related unsecured term promissory note.  The
promissory note provides for simple interest to accrue on the unpaid principal
balance of the promissory note at the rate of 12% per annum, and requires that
accrued interest be paid on a monthly basis until April 30, 2011, at which time
the entire unpaid principal balance of the promissory note will become
due.  The loan was made to provide working capital to the
Company.





On August
1, 2010, Lantern Advisers, LLC loaned the Company $10,000 under terms and
conditions set forth in a related unsecured term promissory note.  The
promissory note provides for simple interest to accrue on the unpaid principal
balance of the promissory note at the rate of 12% per annum, and requires that
accrued interest be paid on a monthly basis until July 31, 2011, at which time
the entire unpaid principal balance of the promissory note will become
due.  The loan was made to provide working capital to the
Company.





The
Company has accrued interest and interest expense of $2,624 and $6,257 for the
three and nine months ended September 30, 2010, respectively, $200 for each of
the three and nine months ended September 30, 2009, and $7,130 for the period
from January 10, 2006 (inception) to September 30, 2010 related to the notes
payable with a related party.





NOTE
7—SUBSEQUENT EVENT





On
October 19, 2010, Douglas Polinsky and Joseph A. Geraci, II, both officers of
the Company, each loaned the Company $5,000 under terms and conditions set forth
in a related unsecured term promissory note.  The promissory notes
provide for simple interest to accrue on the unpaid principal balance of the
promissory notes at the rate of 12% per annum, and require that accrued interest
be paid on a monthly basis until October 18, 2011, at which time the entire
unpaid principal balance of the promissory notes will become due.  The
loans were made to provide working capital to the Company.


8


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





Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations set forth below should be read in conjunction with our
audited financial statements, and notes thereto, contained in our Form 10-K
filed with the SEC on February 26, 2010 and related to our year ended December
31, 2009, and the period from January 10, 2006 (inception) to December 31,
2009.




Forward-Looking
Statements




Some of
the statements made in this section of our report are forward-looking
statements. These forward-looking statements generally relate to and are based
upon our current plans, expectations, assumptions and projections about future
events.  Our management currently believes that the various plans,
expectations, and assumptions reflected in or suggested by these forward-looking
statements are reasonable.  Nevertheless, all forward-looking
statements involve risks and uncertainties and our actual actions or future
results may be materially different from the plans, objectives or expectations,
or our assumptions and projections underlying our present plans, objectives and
expectations, which are expressed in this report.  Examples of
specific factors that might cause our actual results to differ from our current
expectations include but are not limited to:





·
            Our lack of a significant prior
      operating history to provide our management with a basis to better
      evaluate certain likelihoods





·
            Our need for additional
      financing





·
            The significant risk that our
      game may not be accepted by casinos or gaming establishments or,
      ultimately, by gaming consumers and
  enthusiasts





·
            Our inability to obtain required
      registrations, licenses and approvals with or from appropriate state
      gaming authorities





·
            Changes in legal and regulatory
      regimes applicable to our business or our
  games





·
            Our inability to effectively
      protect our intellectual property,
or





·
            Our inability, for any reason, to
      retain our executive management
  personnel.





The
foregoing list is not exhaustive.  In light of the foregoing,
prospective investors are cautioned that the forward-looking statements included
in this filing may ultimately prove to be inaccurate—even materially
inaccurate.  Because of the significant uncertainties inherent in such
forward-looking statements, the inclusion of such information should not be
regarded as a representation or warranty by Poker Magic, Inc. or any other
person that our objectives, plans, expectations or projections that are
contained in this filing will be achieved in any specified time frame, if
ever.





General
Overview





Poker
Magic Inc. is a Minnesota corporation formed in January 2006.  In this
report, we refer to Poker Magic, Inc. as “we,” “us,” “Poker Magic” or the
“Company.”  We are a development-stage company focused on promoting
and placing our Winner’s Pot Poker game into casinos and entertainment
facilities country-wide, including those located in Native American tribal
lands.  We believe that the long-term success of our operations will
be determined by our ability to bring new and innovative products, game play and
services to the market.





Our
current gaming product is “Winner’s Pot Poker,” which is a table game form of
five-card stud poker.  In the Winner’s Pot Poker game, the dealer
deals each player, and the dealer himself, two cards face down and three cards
face up.  Each player “antes” before the deal to be eligible to
receive cards in the game.  After each player has received his or her
first three cards from the dealer, each player may either fold or place a first
bet equal to the ante.  The first bet may not be any more or less than
the ante.  After the next card is dealt, each of the remaining players
has a choice between folding or placing a second bet that must be equal to twice
the ante.  The dealer may not fold.  After the last card is
dealt, the hands are compared and the winning hand (determined by using standard
poker rankings) takes a predetermined percentage of the total bets and antes
made in the course of the game.  In addition, players are entitled to
make certain optional “bonus bets.”


9





For the
three and nine months ended September 30, 2010, we generated $600 and $2,400 in
revenues, respectively. For the three and nine months ended September 30,
2010, we incurred $2,098 and $6,324 in revenue-related costs, respectively, and
$23,202 and $85,532 in operating expenses, respectively.  Our expenses
related primarily to our efforts to market our Winner’s Pot Poker game to
casinos and gaming establishments, generate revenues and expand our revenue
base, as well as other selling, general and administrative
expenses.  The most significant components of these other selling,
general and administrative expenses were (i) compensation expense attributable
to share issuances to executive management for services rendered, and (ii)
expenses for professional services such as legal and accounting
services.





As of
September 30, 2010, we had $4,606 in cash on hand and current liabilities of
$108,065.  As of the date of this filing, we had approximately $4,825
in cash on hand, and our management presently believes this cash will be
sufficient to continue operations through December 2010.  Thereafter,
we expect we will require additional capital.  If our present
expectations relating to our expenses prove inaccurate and we incur more
expenses than anticipated, we will be required to seek additional financing
prior to the end of December 2010.





Management
believes that the most significant uncertainties facing the Company relate to
our ability to increase our revenues, the accuracy of our expense forecast, our
ability to acquire necessary licenses, registrations and approvals, and our
ability to obtain financing when and as needed and on terms acceptable to
us.  These uncertainties are discussed in greater detail under the
caption “Trends and Uncertainties.”





Results
of Operations for the Three Months Ended September 30, 2010 Compared to the
Three Months Ended September 30, 2009





Three Months EndedItem
                
                9/30/10
                
                
                9/30/09
                
                
                % Change
                  (YearOverYear)
                
                
                % of 2010
                  NetLoss
                
                
                % of 2009
                  NetLossRevenues
                
                $
                600
                
                
                $
                2,025
                
                
                
                (70.4
                )%
                
                
                (2.2
                )%
                
                
                (7.0
                )%Cost
      of Revenues
                
                
                2,098
                
                
                
                2,587
                
                
                
                (18.9
                )%
                
                
                7.7
                %
                
                
                8.9
                %Operating
      Expenses:
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                %General
      Operating Expenses
                
                
                951
                
                
                
                2,667
                
                
                
                (64.3
                )%
                
                
                3.5
                %
                
                
                9.2
                %Legal
      and Accounting Expenses
                
                
                10,251
                
                
                
                13,573
                
                
                
                (24.5
                )%
                
                
                37.5
                %
                
                
                46.8
                %Executive
      Management Compensation in Stock
                
                
                12,000
                
                
                
                12,000
                
                
                
                0
                %
                
                
                43.9
                %
                
                
                41.4
                %Other
      Income (Expense)
                
                
                (2,624
                )
                
                
                (200
                )
                
                
                (1,212
                )%
                
                
                9.6
                %
                
                
                0.7
                %Net
      Loss
                
                $
                (27,324
                )
                
                $
                (29,002
                )
                
                
                (5.8
                )%
                
                
                100
                %
                
                
                100
                %





As the
table above demonstrates, during the three months ended September 30, 2010 and
2009, we had revenues of $600 and $2,025, respectively and incurred $2,098 and
$2,587, respectively, in revenue-related costs.  We currently have one
contract with one client and have had that contract with that one client since
August 2008.  During the three months ended September 30, 2010, our
one client utilized one weekend-only game compared to their use of one
seven-day-per-week game and one weekend-only game for the three months ended
September 30, 2009.





Our
operating expenses decreased 17.8% in the three months ended September 30, 2010
compared to the three months ended September 30, 2009 due to reductions in
operating and legal, accounting and general operating expenses.  We
expect these expenses will remain stable throughout the remainder of
2010.





Our legal
and accounting expenses decreased 24.5% for the three months ended September 30,
2010 compared to the three months ended September 30, 2009.  As we
continue to seek gaming regulatory compliance and licenses, prepare and file
periodic reports with the SEC under the Securities and Exchange Act of 1934, and
generally seek to comply with the various legal, accounting and governance rules
and regulations applicable to public reporting companies, we anticipate our
professional fees expenses will continue to be significant, but will be less
than the amounts spent during fiscal 2009.


10


Results
of Operations for the Nine Months Ended September 30, 2010 Compared to the Nine
Months Ended September 30, 2009





Nine Months EndedItem
                
                9/30/10
                
                
                9/30/09
                
                
                % Change
                  (YearOverYear)
                
                
                % of 2010
                  NetLoss
                
                
                % of 2009
                  NetLossRevenues
                
                $
                2,400
                
                
                $
                5,675
                
                
                
                (57.5
                )%
                
                
                (2.5
                )%
                
                
                (4.5
                )%Cost
      of Revenues
                
                
                6,324
                
                
                
                10,829
                
                
                
                (41.6
                )%
                
                
                6.6
                %
                
                
                8.6
                %Operating
      Expenses:General
      Operating Expenses
                
                
                2,189
                
                
                
                9,395
                
                
                
                (76.7
                )%
                
                
                2.3
                %
                
                
                7.5
                %Legal
      and Accounting Expenses
                
                
                47,343
                
                
                
                69,435
                
                
                
                (31.8
                )%
                
                
                49.5
                %
                
                
                55.1
                %Executive
      Management Compensation in Stock
                
                
                36,000
                
                
                
                42,000
                
                
                
                (14.3
                )%
                
                
                37.6
                %
                
                
                33.3
                %Other
      Income (Expense)
                
                
                (6,257
                )
                
                
                (8
                )
                
                
                78,113
                %
                
                
                6.5
                %
                
                
                (0.0
                )%Net
      Loss
                
                $
                (95,713
                )
                
                $
                (125,992
                )
                
                
                (24
                )%
                
                
                100
                %
                
                
                100
                %





As the
table above demonstrates, during the nine months ended September 30, 2010 and
2009, we had revenues of $2,400 and $5,675, respectively, and incurred $6,324
and $10,829, respectively, in revenue-related costs.  We currently
have one contract with one client and have had that contract with that one
client since August 2008.  During the nine months ended September 30,
2010, our one client utilized two weekend-only games for two months and one
weekend-only game for four months compared to their use of one
seven-day-per-week game and one weekend-only game for the nine months ended
September 30, 2009.





Our
operating expenses decreased 29.2% in the nine months ended September 30, 2010
compared to the nine months ended September 30, 2009 due to reductions in
operating and legal, accounting and general operating expenses.  We
expect these expenses will remain stable throughout the remainder of
2010.





Our legal
and accounting expenses decreased 31.8% for the nine months ended September 30,
2010 compared to the nine months ended September 30, 2009.  As we
continue to seek gaming regulatory compliance and licenses, prepare and file
periodic reports with the SEC under the Securities and Exchange Act of 1934, and
generally seek to comply with the various legal, accounting and governance rules
and regulations applicable to public reporting companies, we anticipate our
professional fees expenses will continue to be significant, but will be less
than the amounts spent during fiscal 2009.





We
presently expect that compensation expense arising from share issuances to our
executive management will remain materially consistent with fiscal
2009.   We issue shares to executive management for services
rendered in lieu of cash payment.  We expect that we will continue to
issue shares to executive management and consultants to compensate them for
services rendered, primarily as a means to reduce our cash
resources.  In this regard, we do not anticipate hiring employees in
the near future and expect instead, where necessary or appropriate, to rely on
services provided by consultants through at least fiscal 2010.





Finally,
we anticipate that the portion of our selling, general and administrative
expenses relating to the general operations and the marketing of our Winner’s
Pot Poker game to casinos and gaming establishments will increase during the
remainder of fiscal 2010.





Liquidity
and Capital Resources





Summary
cash flow data is as follows:




Nine Months Ended September 30,2010
                  
                  
                  2009Cash
      flows provided (used) by :Operating
      activities
                  
                  $
                  (50,858
                  )
                  
                  $
                  (60,577
                  )Investing
      activities
                  
                  
                  -
                  
                  
                  
                  -Financing
      activities
                  
                  
                  50,000
                  
                  
                  
                  (81,667
                  )Net
      decrease in cash
                  
                  
                  (858
                  )
                  
                  
                  (142,244
                  )Cash,
      beginning of period
                  
                  
                  5,464
                  
                  
                  
                  145,117Cash,
      end of period
                  
                  $
                  4,606
                  
                  
                  $
                  2,873


11


The
decrease in cash used in operating activities was primarily the result of a
reduction in consulting service expense paid in stock, a reduction in routine
professional services fees and overall reduction in operating expenses offset in
part by an increase in interest expense.  As of September 30,
2010, we had $4,606 cash on hand and current liabilities of $108,065 which
primarily consists of accounts payable, short-term notes payable and interest
payable.  As of the date of this filing, our management believes we
have sufficient capital to continue operations through December 2010 due to
additional capital raised through execution of short-term
notes.  Thereafter, we expect we will require additional
capital.  The Company has currently raised capital through loan with
related parties and we expect this trend to continue.  If we are
unable to obtain additional financing from the related parties when needed or
are unable to secure financing from other sources, we may be required to abandon
our business or our status as a public reporting company.





Presently,
we anticipate that additional financing could be sought from a number of
sources, including but not limited to additional sales of equity or debt
securities, or loans from banks, other financial institutions or affiliates of
the Company. We cannot, however, be certain that any such financing will be
available on terms favorable to us if at all. If additional funds are raised by
the issuance of our equity securities, such as through the issuance of stock,
convertible securities, or the issuance and exercise of warrants, then the
ownership interest of our existing shareholders will be diluted. If additional
funds are raised by the issuance of debt or other equity instruments, we may
become subject to certain operational limitations, and such securities may have
rights senior to the rights of our common shareholders. If we are unable to
obtain additional financing when needed, we may be required to abandon our
business or our status as a public reporting company.





Our
primary non-cash asset at September 30, 2010 was intellectual property rights
and trademarks, which are the foundation for our product
offerings.  We currently own the rights to United States Patent Number
5,839,732, issued on November 24, 1998, that relates to our current Winner’s Pot
Poker table game.  This patent was acquired from Select Video, Inc., a
Delaware corporation, pursuant to an Asset Purchase Agreement dated March 10,
2006.  In addition, we own a federally registered trademark for
“WINNER’S POT POKER,” Registration Number 2,172,043, issued on July 7, 1998,
which was acquired pursuant to that same agreement. Finally, we also own
registered trademarks for “POKER MAGIC” and to “AC (ATLANTIC CITY) STUD POKER,”
which we similarly acquired pursuant to the Asset Purchase Agreement with Select
Video.  Other than the trademark “Poker Magic” which we have adopted
as our corporate name, we do not have any current plans for the sale or license
of such other trademarks.  We do not have any currently pending
applications for un-issued patents, trademarks or copyrights.  The
expiration dates of our patent rights vary based on their filing and issuance
dates.  We intend to continue to actively file for patent protection,
where reasonable, within the United States.  We expect also to seek
protection for our future products by filing for copyrights and trademarks in
the United States.





Currently,
we do not have any employees. Mr. Douglas M. Polinsky, the Chief Executive
Officer and Chairman of our Board of Directors, and Joseph A. Geraci, II, our
Chief Financial Officer and a director of the Company, both serve as consultants
to the Company in their officer capacities.  We rely on sales and
marketing agents and outside professional services on an as-needed
basis.  We believe that using consultants to perform necessary
operational functions is currently more cost effective than hiring full-time
employees, and such practice affords us flexibility in directing our resources
during our development stage.   We plan to develop new gaming
products primarily by utilizing the services of outside developers, sales agents
and regulatory and compliance service providers in an effort to minimize capital
expenditures and corporate expenses.  We presently do not expect to
incur any material capital expenditures in the near future or during the
remainder of fiscal year 2010.  At this time, we do not anticipate
purchasing or selling any significant equipment or other assets in the near
term.





Trends
and Uncertainties





As a
development-stage company involved in the gaming business, we believe we can
identify certain broad trends in our revenues and expenses, and components
thereof.  We also believe that the most significant risks and
uncertainties surrounding our business relate to revenues and expenses, and
regulatory and financing matters.  These trends and uncertainties are
discussed below.





Revenues





From
inception through September 30, 2010 (and presently), the Company has been
primarily focused sequentially on the acquisition of the intellectual property
forming the basis for its Winner’s Pot Poker table game and, thereafter, efforts
to ensure at least temporary regulatory compliance of the game and obtain the
agreement of casinos and gaming establishments to provide gaming table space to
the Winner’s Pot Poker game.


12





These
efforts culminated in our license agreement with Bally’s Park Place, Inc. d/b/a/
Bally’s Atlantic City, permitting Bally’s, on a non-exclusive basis, to use one
unit of the Winner’s Pot Poker game on a trial basis at no charge until such
time that the New Jersey Casino Control Commission ended the test period for the
game. We entered into that license agreement on December 26, 2007. We had
earlier (on August 22, 2007) secured the issuance of temporary rules and
amendments governing the implementation of Winner’s Pot Poker in Atlantic City
casinos. The amendments and rules added Winner’s Pot Poker to the list of
authorized table games in New Jersey, governed the physical characteristics of
the Winner’s Pot Poker game layout, defined the card deck for use with the
Winner’s Pot Poker game, specified the terms of the use of the cards during
Winner’s Pot Poker game play, and contained technical proposals governing the
operation of Winner’s Pot Poker. We had also earlier obtained a transactional
waiver from the New Jersey Casino Control Commission for the licensure
requirement applicable to casino service industry (CSI), which waiver permitted
us to legally license to Bally’s Park Place, Inc. the play of our Winner’s Pot
Poker game in Bally’s Atlantic City casinos.





After a
successful trial period, we amended our license agreement with Bally’s Park
Place, Inc. on June 26, 2008. Under the amended license agreement, Bally’s Park
Place, Inc. pays the Company a license fee in the amount of (i) $475 per month
for the right to use our Winner’s Pot Poker game in the Atlantic City casinos
for up to seven days per week, and (ii) $200 per month for the right to use of
our Winner’s Pot Poker game in the Atlantic City casinos on weekends only during
that month. The amendment currently contemplates the licensure of only two
Winner’s Pot Poker game units—one for the seven days per week use and the other
for the weekend-only use. This amendment was entered into after the adoption by
the New Jersey Casino Control Commission of temporary regulations governing the
rules of the Winner’s Pot Poker game. The amended license agreement is a
month-to-month agreement that may be cancelled by either party at any
time.  The month-to-month character of this licensing arrangement,
which is currently our only revenue-generating license, presents a material
uncertainty in our ability to accurately forecast revenues for
2010.





Since
approximately May 2006, we have also been focused on securing Winner’s Pot Poker
licensing arrangements with various other casinos and gaming establishments. In
particular, our management has met with the management or representatives of
over ten different casinos or gaming establishments during the past year in an
effort to secure additional licensing arrangements.  To date, our
licensing efforts have been focused on entering into such agreements with
casinos and gaming establishments in Minnesota, New Jersey, and
Nevada.





Based on
our recent amendment of the license agreement with Bally’s Park Place, Inc., we
began to recognize revenue from operations during fiscal 2008. Given that the
present terms of the license agreement, as amended, provide only that Bally’s
Park Place, Inc. will license the right to use two game units of our Winner’s
Pot Poker product, we do not expect that our initial revenues will be
significant. Instead, we expect that we must continue to market our game to
casinos and gaming establishments that present suitable opportunities for us,
and that the most efficient way for us to begin generating more significant
revenues will be to consummate a definitive license agreement with Harrah’s
Entertainment or some other enterprise that involves a wider group of
gaming-related affiliates and establishments. For example, Harrah’s
Entertainment, indirectly (through subsidiaries and other affiliates) operates
approximately 40 casinos across the United States.  It is extremely
difficult to anticipate, however, how much success we will have in our efforts
to license our games to establishments other than Bally’s Park Place, Inc., if
any at all, and thereby generate additional revenues.





Expenses





As
indicated above under the caption “Results of Operations,” our selling, general
and administrative expenses overall decreased in the three and nine months ended
September 30, 2010 compared to the three and nine months ended September 30,
2009 and are expected to remain stable throughout the remainder of
2010.  However, we expect to make applications and seek gaming
regulatory compliance and licenses that will increase that component of our
selling, general and administrative expenses for 2010.  Because our
business has a short operating history and our present revenues are limited, in
general it is difficult to accurately forecast our expenses and impact of those
expenses on our operating results.





Regulation





To date,
our licensing efforts have been focused on entering into such agreements with
casinos and gaming establishments in New Jersey, Nevada and Minnesota. On August
22, 2007, the New Jersey Casino Control Commission (the “Commission”) adopted
temporary regulations governing the Winner’s Pot Poker game.  On July 16,
2010, the Commission approved our petition to conduct business as a licensed
casino service industry supplier with Bally’s Park Place.  It is, however,
extremely difficult to anticipate how much success we will have in our
efforts to license our games to establishments other than Bally’s Park Place, if
any at all, and thereby generate additional revenues.  It is also difficult
to assess how long we will be able to maintain our present arrangement with
Bally’s Park Place in light of the fact that our amended license agreement has a
month-to-month term.





We have
yet to obtain the final licensure required in the states of Nevada and
Minnesota, which jurisdictions have been the focus of our marketing efforts thus
far.  We anticipate expansion of our marketing efforts into tribal nations
in Oklahoma during 2010. In particular, we expect that we will require at least
the following licenses, registrations and approvals in the near future to permit
us to license our gaming products to casinos and gaming establishments in the
relevant jurisdictions:


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·
            Casino service industry (CSI)
      supplier license issued by the New Jersey Casino Control Commission
      (obtained in July 2010)





·
            Distribution licenses permitting
      us to distribute Winner’s Pot Poker game units (i.e., table layouts) to
      casinos and gaming establishments in Nevada, issued by the Nevada State
      Gaming Control Board





·
            Registration with the Nevada
      Gaming Commission as a publicly traded
  company





·
            Distribution licenses permitting
      us to distribute Winner’s Pot Poker game units to casinos and gaming
      establishments in Minnesota





·
            Approval from the applicable
      Tribal Councils permitting us to distribute Winner’s Pot Poker game units
      to casinos and gaming establishments located in tribal lands in Minnesota;
      and





·
            Approval from the applicable
      Tribal Councils permitting us to distribute Winner’s Pot Poker game units
      to casinos and gaming establishments located in tribal lands in
      Oklahoma.





As we
seek to begin operations in other states and, where applicable, Native American
tribal lands, we will be subject to additional state and Native American laws
and regulations that affect both our general commercial relationships with our
customers as well as the products and services provided to them. The material
aspects of these laws and regulations may be found in our Annual Report on Form
10-K filed with the SEC on February 26, 2010.





Financing





As
discussed above under the caption “Liquidity and Capital Resources,” our
management believes we have sufficient capital to continue operations through
December 2010.  Thereafter, we expect we will require additional
capital.  Our current forecast for financing needs is largely based on
our understanding of the expenses we anticipate incurring in our efforts to
comply with gaming regulatory and public reporting company disclosure
requirements.  In this regard, we note that our current forecasts are
largely based on our past experience with other enterprises and proposed budgets
proposed by our professional consultants.  If our actual expenses
significantly exceed our present expectations we will likely require additional
financing prior to December 2010.





Once
needed, we cannot be certain that any required additional financing will be
available on terms favorable to us, if at all.  This is especially
true in light of the current poor state of the U.S. capital markets and the
general economic downturn that has occurred.  If, however, we are able
to raise additional funds by the issuance of our equity or equity-linked
securities, including through the issuance and exercise of warrants, our
existing shareholders will experience dilution of their ownership
interest.  If additional funds are instead raised by the issuance of
debt or other senior or preferred equity instruments such as preferred stock, we
may be subject to certain limitations in our operations, and such securities may
have rights senior to those of our holders of common stock.  If
adequate funds are not available on acceptable terms, we may be unable to
expand, develop or enhance products or to respond to competitive
pressures.  If we are unable to obtain additional financing when
needed, we may be required to abandon our business or our status as a public
reporting company.





Going
Concern





We have
incurred operating losses, accumulated deficit and negative cash flows from
operations since January 10, 2006 (inception). As of September 30, 2010, we had
an accumulated deficit of approximately $788,542. These factors, among others,
raise substantial doubt about our ability to continue as a going concern. Our
financial statements included in this filing do not include any adjustments
related to recoverability and classification of asset carrying amounts, or the
amount and classification of liabilities that might result, should we be unable
to continue as a going concern. Our ability to continue as a going concern
ultimately depends on achieving profitability, producing revenues or raising
additional capital to sustain operations. Although we intend to obtain
additional financing to meet our cash needs and to support the
revenue-generating process, we may be unable to secure any additional financing
on terms that are favorable or acceptable to us, if at
all.


14


Critical
Accounting Policies





Our
policy for the recognition of revenue is a critical accounting
policy.  The Company recognizes revenue from sales under a license
agreement when the following four criteria are met:  (1) there exists
persuasive evidence of an arrangement (e.g., a fully executed license
agreement); (2) delivery of the Winner’s Pot Poker game, felt and instructions
has been made and the licensee thereafter becomes responsible to replace such
materials in the event of damage or normal wear and tear; (3) the price is fixed
or determinable; and (4) the ability of the Company to collect amounts owed is
reasonably assured.





Our
policy regarding the determination of impairment of long-lived and intangible
assets is another critical accounting policy.  In this regard, our
management reviews the Company’s long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of a
long-lived or intangible asset may not be recoverable.  If indications
of impairment are present and the estimated future undiscounted cash flows are
less than the carrying value of the asset under scrutiny, the value of that
asset will be adjusted appropriately.  No impairment indicators were
present as of September 30, 2010 or December 31, 2009.





Further
information on our critical accounting policies and estimates can be found in
our financial statements and notes thereto included in this report and in our
Annual Report on Form 10-K filed with the SEC in February 2010.  There
have been no material changes to our critical accounting policies and estimates
from those disclosed in our Annual Report on Form 10-K.





Item 3. Quantitative and
Qualitative Disclosures About Market Risk





Not
applicable.





Item 4T.  Controls
and Procedures.





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in our reports filed
pursuant to the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, 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. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance the objectives of the control system are
met.





As of
September 30, 2010, our Chief Executive Officer and Chief Financial Officer
carried out an evaluation of the effectiveness of our disclosure controls and
procedures as such term is defined in Rule 13a-15(e) under the Securities and
Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer recognized the additional risks to an effective internal
control environment with a limited accounting staff and the inability to fully
segregate all duties within our accounting and financial functions, including
the financial reporting and quarterly close process. Management has concluded
that, with certain oversight controls that are in place and the duties we have
been able to successfully segregate, the remaining risks associated with the
lack of segregation of duties are not sufficient to justify the costs of
potential benefits to be gained by adding additional employees given our
development stage, the limited scope of our operations, and the number of
business transactions we currently process, nor do these remaining risks rise to
the level of a material weakness. Management intends to periodically reevaluate
this situation and continue to assess ways in which duties can be further
segregated as our business evolves. Based on these evaluations, our Chief
Executive Officer and Chief Financial Officer concluded our disclosure controls
and procedures are effective as of September 30, 2010.





Changes
in Internal Controls





There
were no changes in our internal control over financial reporting during the
quarter ended September 30, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.


15


PART
II – OTHER INFORMATION





Item 1.
Legal Proceedings





None.





Item 1A.  Risk
Factors.





There
have been no material changes to our risk factors and uncertainties during or
since the period covered by this report.  For a discussion of risk
factors applicable to Poker Magic and its business, please refer to the “Risk
Factors” section of our Annual Report on Form 10-K filed with the SEC on
February 26, 2010.





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds.





On
September 30, 2010, we issued a total of 200,000 shares of common stock to our
Chief Executive Officer (100,000 shares) and Chief Financial Officer (100,000
shares) for officer compensation.  The Company offered and sold the
shares in reliance on the exemptions from registration set forth in Sections
4(2) or 4(6) of the Securities Act of 1933 since the recipients of the shares
were “accredited investors” as defined in Rule 501 under the Securities
Act.  In addition, all certificates representing the shares offered
and sold contained a restrictive legend indicating that such shares constituted
“restricted securities” under the Securities Act of 1933.





Item 3. Defaults upon
Senior Securities.





None.





Item 4.
Reserved.








Item 5.  Other
Information.





On
October 12, 2010, Lantern Advisers, LLC and the Company agreed to extend through
October 11, 2011 the term of an unsecured promissory note, originally delivered
by the Company on October 13, 2009 and due on October 12,
2010.  Accrued but unpaid interest as of October 12, 2010, aggregating
to $1,200, was similarly included in the extended loan terms.  Other
than the new maturity date, the extended loan will have the same terms as those
contained in the October 13, 2009 promissory note.





On
October 19, 2010, Douglas Polinsky and Joseph A. Geraci, II, both officers of
the Company, each loaned the Company $5,000 under terms and conditions set forth
in a related unsecured term promissory note.  The promissory notes
provide for simple interest to accrue on the unpaid principal balance of the
promissory notes at the rate of 12% per annum, and require that accrued interest
be paid on a monthly basis until October 18, 2011, at which time the entire
unpaid principal balance of the promissory notes will become due.  The
loans were made to provide working capital to the Company.





Item
6.  Exhibits.





ExhibitNo.
              
              Description31.1
              
              Certification
      of Chief Executive Officer31.2
              
              Certification
      of Chief Financial Officer32
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002


16





SIGNATURES





In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.





POKER
      MAGIC, INC./s/ Douglas PolinskyDouglas
      PolinskyChief
      Executive OfficerDated:  November
      3, 2010/s/ Joseph A. Geraci, IIJoseph
      A. Geraci, IIChief
      Financial OfficerDated:  November
      3, 2010


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