UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q





[X]
            Quarterly
      Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For the quarterly period ended September 30,
      2008[ 
        ]
            Transition
      Report pursuant to 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition period __________ 
  to __________Commission
      File Number:000-52575





Lightning Gaming,
Inc.


(Exact
name of registrant as specified in its charter)





Nevada
            20-8583866(State
      or other jurisdiction of incorporation or
    organization)
            (IRS
      Employer Identification No.)




106
      Chelsea Parkway , Boothwyn, Pa 19061(Address
      of principal executive offices)





(610)
      494 5534(Registrant’s
      telephone number)(Former
      name, former address and former fiscal year, if changed since 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. Yes  xNo   ̈




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




Large
accelerated filer   ̈                                                                        Accelerated
filer   ̈




Non-accelerated
filer     ̈                                                            Small
reporting company  x










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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 4,647,474 common shares as
of November 1, 2008










1









TABLE OF
      CONTENTS
            PagePART I - FINANCIAL INFORMATIONItem
      1.
            Financial
      Statements
            3Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            15Item
      3.
            Quantitative
      and Qualitative  Disclosures About Market Risk
            19Item
      4T.
            Controls
      and Procedures
            19PART II - OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            20Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            20Item
      3.
            Defaults
      Upon Senior Securities
            20Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            20Item
      5.
            Other
      Information
            20Item
      6.
            Exhibits
            20







2











PART
I - FINANCIAL INFORMATION





Item
1. Financial
Statements





The
      Company’s unaudited financial statements included in this Form 10-Q are as
      follows:1
            Balance
      Sheet as  Balance Sheets as of  September 30, 2008 and
      December 31, 2007;2
            Statements
      of Operations for the three months  and nine months ended
      September 30, 2008 and  2007;3
            Statements
      of Cash Flows for the nine months ended September 30, 2008 and
      2007;4
            Notes
      to Consolidated Condensed Financial Statements.










3













Item
1. Financial Statements.





LIGHTNING
GAMING, INC. AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


September
      30, 2008
            
            
            December
      31, 2007(unaudited)AssetsCurrent
      AssetsCash
            
            $
            3,428,474
            
            
            $
            2,638,266Accounts
      receivable, net
            
            
            371,441
            
            
            
            411,615Inventory
            
            
            667,776
            
            
            
            768,553Prepaid
      expenses and notes receivable
            
            
            169,332
            
            
            
            73,552Total
      Current Assets
            
            
            4,637,023
            
            
            
            3,891,986Property,
      Plant and Equipment, net
            
            
            1,689,476
            
            
            
            982,570Intangible
      Assets net
            
            
            211,150
            
            
            
            521,991Other
      Assets
            
            
            151,389
            
            
            
            36,082Total
      Assets
            
            $
            6,689,038
            
            
            $
            5,432,629Liabilities
      and Stockholders' DeficitCurrent
      LiabilitiesCurrent
      portion of  long term debt
            
            $
            2,015,879
            
            
            $
            -Accounts
      payable
            
            
            514,076
            
            
            
            433,390Accrued
      interest
            
            
            326,466
            
            
            
            -Accrued
      expenses
            
            
            732,295
            
            
            
            579,042Total
      Current Liabilities
            
            
            3,588,71616
            
            
            
            1,012,432Long
      Term DebtLong
      term debt
            
            
            10,167,025
            
            
            
            8,124,235Accrued
      interest and other long term liabilities
            
            
            728,593
            
            
            
            514,006Total
      Long Term  Liabilities
            
            
            10,895,618
            
            
            
            8,638,241CommitmentsStockholders'
      DeficitP         Preferred
      stock: $0.001 par value; authorized 10,000,000 shares, no shares
      issued and outstanding
            
            
            -
            
            
            
            -Common
      stock: $0.001 par value; authorized 90,000,000 shares,
              4,648,985  shares
      issued and 4,641,174 outstanding at September 30,
2008
            
            
            4,648
            
            
            
            -Capital
      stock, authorized 50,000,000 shares, no par value,
              4,644,785  shares
      issued and outstanding at December 31, 2007
            
            
            -
            
            
            
            2,950,496Additional
      Paid in Capital
            
            
            3,221,721
            
            
            
            -Accumulated
      deficit
            
            
            (11,013,854)
            
            
            
            (7,168,540
            )Treasury
      stock, 7,811 shares at cost
            
            
            (7,811)
            
            
            
            -Total
      Stockholders’ Deficit
            
            
            (7,795,296)
            
            
            
            (4,218,044
            )Total
      Liabilities and Stockholders’ Deficit
            
            $
            6,689,038
            
            
            $
            5,432,629See Notes to Consolidated
      Financial Statements






4












LIGHTNING GAMING, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


Three Months
Ended September 30, 2008 and 2007


Three
      Months EndedSeptember  30,2008
            
            
            2007RevenuesSales
      of systems and parts
            
            $
            602,775
            
            
            $
            368,048License
      and service  fees
            
            
            130,970
            
            
            
            106,679Total
      revenues
            
            
            
            733,745
            
            
            
            474,727Costs
      and operating expensesCost
      of products sold
            
            311,736
            
            
            
            158,846Operating
      expenses
            
            52,992
            
            
            
            227,033Research
      and development
            
            291,871
            
            
            
            374,220Selling,
      general & administrative expenses
            
            
            387,684
            
            
            
            507,150Depreciation and amortization including
      impairment charges
            
            
            447,469
            
            
            
            80,045Total
      costs and operating expenses
            
            
            1,491,752
            
            
            
            1,347,294Operating
      loss
            
            
            
            (758,007)
            
            
            
            (872,567)Non-operating
      expenseNet
      interest expense
            
            
            (291,553)
            
            
            
            (243,585)Other
      income(expense)
            
            
            (2,809)
            
            
            
            15,945Net
      loss
            
            
            $
            (1,052,369)
            
            
            $
            (1,100,207)Net
      loss per common share-basic and diluted
            
            
            $
            (0.23)
            
            
            $
            (0.26)Weighted
      average common shares
      outstanding-        basic and
      diluted
            
            
            
            4,636,974
            
            
            
            4,217,394See
      Notes to Consolidated Financial Statements








5










LIGHTNING GAMING, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


Nine
Months Ended September 30, 2008 and 2007




Nine
        Months EndedSeptember
      30,2008
            
            
            2007RevenuesSales
      of systems and parts
            
            $
            1,065,067
            
            
            $
            1,257,014License
      and service fees
            
            
            275,096
            
            
            
            148,679Total
      revenues
            
            
            
            1,340,163
            
            
            
            1,405,693Costs
      and operating expensesCost
      of products sold
            
            507,025
            
            
            
            604,889Operating
      expenses
            
            410,987
            
            
            
            565,282Research
      and development
            
            1,136,962
            
            
            
            1,004,767Selling,
      general & administrative expenses
            
            
            1,558,355
            
            
            
            1,287,197Depreciation
      and amortization including impairment charges
            
            
            824,036
            
            
            
            164,195Total
      costs and operating expenses
            
            
            
            4,437,365
            
            
            
            3,626,330Operating
      loss
            
            
            
            (3,097,202)
            
            
            
            (2,220,637)Non-operating
      expenseNet
      interest expense
            
            
            (742,458)
            
            
            
            (454,706)Other
      income( expense)
            
            
            (5,654)
            
            
            
            15,945Net
      loss
            
            
            $
            (3,845,314)
            
            
            $
            (2,659,398)Net
      loss per common share-basic and diluted
            
            
            $
            (0.83)
            
            
            $
            (0.63)Weighted
      average common shares
      outstanding-        basic and
      diluted
            
            
            
            4,642,181
            
            
            
            4,206,283See
      Notes to Consolidated Financial Statements







6







LIGHTNING
GAMING, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Nine Months
Ended September 30, 2008 and 2007








Nine
      Months EndedSeptember  30,2008
            
            
            2007NET
      CASH USED IN OPERATING ACTIVITES
            
            $
            (2,174,308)
            
            
            $
            (2,652,620)CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of equipment
            
            
            (1,336,711)
            
            
            
            (710,819)Increase
      in other assets
            
            
            (136,251)
            
            
            
            -Proceeds
      from sale of  equipment
            
            
            356,162
            
            
            
            186,000NET
      CASH USED IN INVESTING ACTIVITIES
            
            
            (1,116,800)
            
            
            
            (524,819)CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of debt
            
            
            4,084,927
            
            
            
            6,500,000Proceeds
      from issuance of common stock
            
            
            4,200
            
            
            
            220,000Purchase
      of treasury stock
            
            
            (7,811)
            
            
            
            -NET
      CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            4,081,316
            
            
            
            6,720,000NET
      INCREASE  IN CASH
            
            
            790,208
            
            
            
            3,542,561CASH
      - Beginning of period
            
            
            2,638,266
            
            
            
            310,145CASH
      - End of period
            
            $
            3,428,474
            
            
            $
            3,852,706Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for interest
            
            $
            1,679
            
            
            $
            -Non
      cash financing activities:Issuance
      of capital stock warrants in connection with notes payable
            
            $
            221,000
            
            
            $
            223,264See
      Note to Consolidated Financial Statements










7










LIGHTNING
GAMING, INC. AND SUBSIDIARY


Notes
to Consolidated Condensed Financial Statements


September
30, 2008





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





Nature of
Business:





On
January 29, 2008, under the Agreement and Plan of Merger dated September 28,
2007 (the “Merger Agreement”), Lightning Gaming, Inc. (formerly known
as  Red Pearl Acquisition Corp.) (the “Company”) completed a merger
(the "Merger") with Lightning Poker, Inc. (“Lightning Poker”). As a result of
the Merger, LPI Acquisition Corp., a wholly-owned subsidiary of the Company,
merged with and into Lightning Poker and Lightning Poker became a wholly-owned
subsidiary of the Company.





Lightning
Poker was formed to manufacture and market fully automated, proprietary
electronic poker tables  (“Systems”) to commercial and tribal casinos,
card clubs, other gaming and lottery venues, bars and restaurants and the home
market.  Lightning Poker’s product is designed to improve
economics for casino operators while improving overall player
experience.





On
November 12, 2007 Lightning Poker acquired certain assets of Poker Automation
LLC ("Poker Automation"), pursuant to an Asset Purchase Agreement. In connection
with the acquisition and in consideration for the assets acquired, Lightning
Poker paid $400,000 in cash at closing.  In addition 344,058
shares of Lightning Poker’s stock were issued to Poker Automation’s members
and certain creditors.





In
January 2007 Lightning Poker entered into an exclusive licensing and
distribution agreement with Shuffle Master, Inc. (“Shuffle
Master”).  Pursuant to the agreement, Shuffle Master acts as the
worldwide exclusive distributor of the Systems to the gaming
industry.  In exchange for distributing the Systems, Shuffle
Master  receives a fixed distribution fee for each System placed into
operation.  The initial term of the agreement is for ten years and is
renewable for an additional five year term at Shuffle Master's option if
specific minimum order requirements are met.  Shuffle Master must also
achieve certain minimum order requirements during the first five years of the
agreement to retain exclusive distribution rights.  In addition to
selling Systems, Shuffle Master is responsible for carrying out all service and
maintenance on Systems and  receives all the service
revenues.





Through
December 31, 2006, Lightning Poker was considered a development stage company.
During 2007, Lightning Poker increased its customer base and commenced leasing
and sales of Systems to a point that it no longer believes this
classification is necessary.





Lightning
Poker’s activities through December 31, 2006 principally related to the
development of its Systems, assembling and training personnel and applying for
and obtaining the required licenses and certifications to operate in certain
jurisdictions in the gaming industry.





From
April 1, 2004 (inception) through June 1, 2005, Lightning Poker operated as a
limited liability company, Pokermatic, L.L.C.  On June 1, 2005,
Lightning Poker incorporated under the name Pokermatic, Inc.  In
September 2006 Lightning Poker changed its name to Lightning Poker,
Inc.





Basis of
Presentation:





The
unaudited condensed statements of operations and cash flows reflect the
Merger as if the Merger occurred on January 1, 2007.





The
unaudited interim financial statements contained herein should be read in
conjunction with the Company’s amended report on Form 8-K filed on April 29,
2008 (“Merger Form 8-K”). The accompanying interim financial statements are
presented in accordance with the requirements of  Article 8.03 of
Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”)
and, accordingly, do not include all the disclosures required by generally
accepted accounting principles with respect to annual financial statements. The
interim consolidated condensed financial statements have been prepared in
accordance with the Company’s accounting practices described in the Merger Form
8-K but have not been audited. In management’s opinion, the financial statements
include all adjustments, which consist only of normal recurring adjustments,
necessary for a fair statement of the Company’s results of operations for the
periods presented. The balance sheet data as of December 31, 2007 were derived
from the Company’s audited financial statements, but do not include all
disclosures required by accounting principles generally accepted in the
United States of America (“GAAP”). The results of operations for the
nine months ended September 30, 2008 are not necessarily indicative of the
results to be expected for the entire year.









8








Lightning
Gaming, Inc. and Subsidiary Notes to Consolidated Condensed Financial Statements
(Continued)





Note
1.   Nature of Business and Summary of Significant Accounting
Policies (Continued)








There
were no material changes during the most recent fiscal quarter in the
Company’s significant accounting policies described in the Merger Form
8-K.





The
allowance for doubtful accounts at September 30, 2008 and December 31, 2007 was
$1,000 and $13,625, respectively.





The
accompanying financial statements have been prepared on a going concern basis,
which assumes realization of all assets and settlement or payment of all
liabilities in the ordinary course of business. The Company has limited capital
resources, net operating losses and negative cash flows from operations since
inception and expects these conditions to continue for the foreseeable
future. The generation of cash flow sufficient to meet the Company’s cash
needs in the future will depend on its ability to obtain the regulatory
approvals required to distribute its Systems and successfully market it to
casinos and card clubs. However, if sales of the Systems do not meet its
projections or its expenses exceed its projections, the Company may need to
raise additional funds through public or private offerings of
its securities or through a credit facility. If that becomes
necessary, there is no assurance that the Company would be able
to obtain such financing at all, or on reasonable terms. If the
Company needs additional funding and is unable to obtain it, its
financial condition would be materially and adversely affected. In that event,
it would have to postpone or discontinue planned operations and projects.
The Company’s continuance as a going concern is dependent upon these
factors, among others. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





Recent
Accounting Pronouncements


In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157 (“FAS 157”), Fair Value Measurements. FAS
157 defines fair value, establishes a framework for measuring fair value in
accordance with accounting principles generally accepted in the United States,
and expands disclosures about fair value measurements. FAS 157 established a
three-tier fair value hierarchy, which prioritizes the inputs used in measuring
fair value. These tiers include: Level 1, defined as observable inputs such as
quoted prices in active markets; Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own
assumptions.





The
Company adopted the provisions of FAS 157 as of January 1, 2008, for financial
instruments measured at fair value on a recurring and nonrecurring basis.
Although the adoption of FAS 157 did not materially impact its financial
condition, results of operations, or cash flows, the Company is now required to
provide additional disclosures as part of its financial statements.





In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161
(“FAS 161”), Disclosures about
Derivative Instruments and Hedging Activities. FAS 161 improves
financial reporting on derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance and cash flows.
The new standard is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008. The Company is not
currently the holder of any derivative instruments; thus, adoption of FAS 161
would not currently have any effect on the Company's results of operations,
financial condition, or cash flows.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“FAS 162”). FAS 162 identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation of financial statements that are presented in conformity
with  GAAP. The  GAAP hierarchy was previously set forth in
the American Institute of Certified Public Accountants Statement on Auditing
Standards No. 69, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting
Principles. Though the FASB does not expect a change in current practice,
the FASB issued FAS 162 in order for the GAAP hierarchy to reside in the
accounting literature established by the FASB. FAS 162 is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. Any effect of
applying the provisions of FAS 162 shall be reported as a change in accounting
principle in accordance with Statement of Financial Accounting Standards No.
154, Accounting Changes and
Error Corrections. The Company is currently reviewing FAS 162 to
determine its impact on the Company’s  financial statements upon
adoption.





In June
2008, the FASB issued FSP EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(“FSP EITF 03-6-1”). The FASB concluded in this FSP that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents are participating securities and shall be included in the
calculation of earnings per share pursuant to the two-class method. This FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, requiring all prior-period earnings per share data to be
adjusted retrospectively. The Company is currently reviewing FAS 162 to
determine its impact on the Company’s  financial statements upon
adoption .





9







In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160 (“FAS 160”), Noncontrolling Interest in
Consolidated Financial Statements - an amendment of ARB No. 51. FAS
160 changes reporting standards for noncontrolling interests in a subsidiary.
The standard is effective for fiscal years beginning on or after
December 15, 2008. The Company is currently reviewing FAS 162 to determine
its impact on the Company’s  financial statements upon adoption
..





In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for
Financial Assets and Liabilities (“FAS 159”). FAS 159 provides entities
with the option to report selected financial assets and liabilities at fair
value. Business entities adopting FAS 159 will report unrealized gains and
losses in earnings at each subsequent reporting date on items for which the fair
value option has been elected. The Company has not elected the fair value option
for any of its assets or liabilities.








Note
2.   Inventory





Inventory consists
of the following:





September
      30,
              2008
            
            
            December
      31,
              2007Finished
      tables
            
            $
            169,523
            
            
            $
            484,540Raw
      materials
            
            
            498,253
            
            
            
            284,013Inventory
            
            $
            667,776
            
            
            $
            768,553








Note
3.   Property and Equipment





Property
and equipment consist of the following:




September
      30,
              2008
            
            
            December
      31,
              2007Equipment,
      principally Systems
            
            $
            2,263,721
            
            
            $
            1,260,620Furniture
      and fixtures
            
            
            41,786
            
            
            
            20,796Property,
      plant and equipment
            
            
            2,305,507
            
            
            
            1,281,416Less
      accumulated depreciation
            
            
            616,031
            
            
            
            298,846Property,
      plant and equipment, net
            
            $
            1,689,476
            
            
            $
            982,570












10







Lightning
Gaming, Inc. and Subsidiary Notes to Consolidated Condensed Financial Statements
(Continued)








Note
4.   Intangible Assets





Intangible
assets consist of the following:





September
      30,
              2008
            
            
            December
      31,
              2007Customer
      contracts
            
            $
            151,884
            
            
            $
            377,540Non-compete
      agreement
            
            
            167,052
            
            
            
            167,052Software
      license
            
            
            16,518
            
            
            
            -Total
      intangibles
            
            
            335,454
            
            
            
            544,592Less
      accumulated amortization
            
            
            124,304
            
            
            
            22,601Intangible
      assets, net
            
            $
            211,150
            
            
            $
            521,991





During
the quarter ended September 30, 2008, the Company reviewed the value of certain
contracts acquired in 2007. As a result of the review the Company recorded an
impairment charge of $204,000. The fair value of the contracts was determined
based on the sum of the future undiscounted cash flows which was determined to
be nil. The impairment charge is included in depreciation and amortization
including impairment charges expense in the Statement of Operations for three
months and nine months ended September 30, 2008.





At
September 30, 2008, the weighted average amortization period for the customer
contracts acquired in 2007 is 3 years.  The weighted average
amortization period for the non-compete agreement acquired in 2007 is 2
years.  The software license acquired in 2008 is being amortized
over 3 years.








Note
5.   Debt




Long Term
Debt consists of the following:




September
      30, 2008
            
            
            December
      31, 2007Capital
      Lease obligation interest at 7.5% payable monthly through March,
      2013
            
            $
            84,928
            
            $
            -Notes
      Payable 8% interest due 2009
            
            
            2,000,000
            
            
            2,000,000Notes
      Payable 8% interest due 2010
            
            
            6,500,000
            
            
            6,500,000Notes
      Payable 8% interest due 2011
            
            
            4,000,000
            
            
            -Total
      long term debt
            
            
            12,584,928
            
            
            8,500,000Less:
      current installments
            
            
            ( 2,015,879)
            
            
            -Less:
      unamortized fair market value of  warrants
            
            
            (402,024)
            
            
            (375,765)Total
      long term debt
            
            $
            10,167,025
            
            $
            8,124,235




In June
2008, the Company entered into a $4,000,000 three year loan agreement with
interest at 8% per annum.  The Notes issued under the loan agreement
are secured by the assets of Lightning Poker.  In connection with the
loan, the Company issued warrants to purchase $4,000,000 worth of common
stock  at an exercise price of $2.00 per share of
stock.  The warrants are exercisable through June 2013.





The
Company borrowed $2,000,000 in June 2008 and another $2,000,000
in July 2008, under the June 2008 loan agreement.





Interest
is payable at maturity of the Notes.




In
March 2008, the Company entered into a capital lease obligation to
finance the purchase of a recreational vehicle.  Annual payments,
including interest, under the capital lease are $22,152 a year. The capital
lease is secured by the vehicle and a certificate of deposit in the amount of
$40,000. The certificate of deposit is included in other assets.









11










Lightning
Gaming, Inc. and Subsidiary Notes to Consolidated Condensed Financial Statements
(Continued)





Note
5.   Debt (continued)







In
accordance with the loans obtained by the Company, the lenders
hold warrants to purchase 7,009,145 shares of the Company’s
common stock at any time through June 2013 at prices ranging between
$1.10 and $2.00 per share.  The purchase price is subject to
adjustment from time to time pursuant to the provisions of the respective
warrant agreements.  The Company accounts for the value of these
warrants in the same manner used for stock-based compensation. Expense
recognized for the three months ended September 30, 2008 and September 30,
2007 and nine months ended September 30, 2008 and September 30, 2007
related  to these warrants was $62,229; $65,590; $194,575; and
$209,368, respectively, and was included in interest expense.





Certain
notes in the amount of $1,500,000 and related accrued interest of $193,014 at
September 30, 2008 are convertible at the discretion of the
noteholder  into 846,507 shares of the Company’s common
stock.





Note
6.   Stockholders’ Deficit





Stockholders’
deficit includes the following transactions:





Stock
Options:  In 2007 the Company adopted the 2007 Equity
Incentive Plan (the “Stock Plan”) to enable the Company to offer key
employees, consultants and directors equity interests in the Company, thereby
helping to attract, retain and motivate such persons to exercise their best
efforts on behalf of the Company.  The options are granted at the
discretion of the Board of Directors (acting as the Company’s Compensation
Committee) and, at September 30, 2008, the maximum aggregate number of shares of
common stock issuable under the Stock Plan
was 2,500,000.  The exercise price of each option will be
determined by the Board at the time the option is granted, but in no event will
be less than 100% of the fair market value of the common stock at the time of
grant.  Options granted will not be exercisable after 10 years from
the grant date.





Options
granted under the Stock Plan generally vest at 20% per year starting on the
first anniversary of the grant date and are fully vested after five
years.  The options can be exercised in partial or full amounts upon a
change in control and at such other times as specified in the award
agreements.





As
permitted under GAAP, stock options granted  are accounted for under
Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share Based
Payments”, and its related interpretations.  Accordingly, compensation
costs of $21,226 and $23,522 have been recognized for the three
months ended September 30, 2008, and 2007, and $90,839 and
$71,541 have been recognized for the nine months ended September 30, 2008
and 2007, respectively.





A summary
of option transactions in 2008 is as follows:




WeightedAverageShares
            
            
            Exercise
      PriceOutstanding
      at December 31, 2007
            
            
            1,873,000
            
            
            $
            1.53Options
      granted
            
            
            200,200
            
            
            $
            1.68Options
      exercised
            
            
            -
            
            
            
            -Options
      cancelled
            
            
            (460,000)
            
            
            $
            1.23Options
      outstanding at September 30, 2008
            
            
            1,613,200
            
            
            $
            1.62Options
      available for grant  under the Stock Plan at September 30,
      2008
            
            
            1,002,000




Included
in the options granted during  2008 are 115,200 shares granted outside
the Stock Plan. The fair value of each option award is estimated on the date of
grant using the Black-Scholes option pricing model.   Expected
volatility is based upon publicly traded companies with characteristics similar
to those of the Company.  The Company uses historical data to
estimate option exercise and employee termination within the valuation
model.  The expected term of options granted represents the period of
time that options granted are expected to be outstanding.  The
risk-free rate for periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the time of grant.





12










Lightning
Gaming, Inc. and Subsidiary Notes to Consolidated Condensed Financial Statements
(Continued)





Note
6.   Stockholders’ Deficit (continued)


Stock Options
(continued)





The
weighted average grant-date fair value of options granted during the three
months ended September 30, 2008 was $0.15 per share.





Stock-based
compensation expense is recognized in the statement of operations based on
awards ultimately expected to vest and may be reduced for estimated
forfeitures.  The Company estimated 0% forfeitures for the stock
options that were granted in 2008.





The
following table summarizes information with respect to stock options outstanding
at September 30, 2008:




Options
      Outstanding
            
            Vested
      OptionsWeightedAverage
            Weighted
            
            
            
            Weighted
            WeightedRemaining
            Average
            Aggregate
            
            
            Average
            Average
            AggregateContractual
            Exercise
            Intrinsic
            
            
            Contractual
            Exercise
            IntrinsicNumber
            Life
      (Years)
            Price
            Value
            
            Number
            Term
      (Years)
            Price
            Value1,613,200
            6.23
            $1.62
            -
            
            621,000
            7.74
            $1.31
            -








The
following table summarizes information with respect to stock options outstanding
at December 31, 2007:





Options
      Outstanding
            
            Vested
      OptionsWeightedAverage
            Weighted
            
            
            
            Weighted
            WeightedRemaining
            Average
            Aggregate
            
            
            Average
            Average
            AggregateContractual
            Exercise
            Intrinsic
            
            
            Contractual
            Exercise
            Intrinsic\Number
            Life
      (Years)
            Price
            Value
            
            Number
            Term
      (Years)
            Price
            Value1,873,000
            7.70
            $1.53
            -
            
            558,200
            8.70
            $1.10
            -








As
of September 30, 2008, there was approximately $199,000 of total
unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under the Stock Plan.  The cost is expected to be
recognized over a weighted-average period of 2.75 years.





Warrants:  In
accordance with the loans obtained by the Company (Note 5), the lenders
hold warrants to purchase 7,009,145 shares of the Company’s
common stock at any time through June 2013 at prices ranging
between $1.10 and $2.00 per share.  The purchase price is subject to
adjustment from time to time pursuant to the provisions of the respective
warrant agreements.  The Company accounts for the value of these
warrants in the same manner used for stock-based
compensation.





The
following table is a summary of the Company’s warrant activity for the
nine months ended September 30, 2008:





WeightedWarrants
            
            
            AverageOutstanding
            
            
            Exercise
      PriceOutstanding
      at December 31, 2007
            
            
            4,453,157
            
            
            $
            1.77Warrants granted
            
            
            4,500,000
            
            
            $
            2.00Warrants exercised
            
            
            -
            
            
            
            -Warrants cancelled
            
            
            (1,944,012)
            
            
            $
            2.57Warrants outstanding
      at September 30, 2008
            
            
            7,009,145
            
            
            $
            1.70




13











Lightning
Gaming, Inc. and Subsidiary Notes to Consolidated Condensed Financial Statements
(Continued)





Note
6.   Stockholders’ Deficit (continued)


Warrants
(continued)





The
following table summarizes information with respect to warrants outstanding at
September 30, 2008:





Warrants Outstanding
            
            Vested
      WarrantsWeightedAverage
            Weighted
            
            
            
            WeightedRemaining
            Average
            Aggregate
            
            
            Average
            AggregateContractual
            Exercise
            Intrinsic
            
            
            Exercise
            IntrinsicNumber
            Life
      (Years)
            Price
            Value
            
            Number
            Price
            Value7,009,145
            3.78
            $1.70
            -
            
            7,009,145
            $1.70
            -




The
weighted average fair value per share of each  warrant granted for the
nine months ended September 30, 2008 was $0.05.





The
following table summarizes information with respect to warrants outstanding at
December 31, 2007:





Warrants Outstanding
            
            Vested
      WarrantsWeightedAverage
            Weighted
            
            
            
            WeightedRemaining
            Average
            Aggregate
            
            
            Average
            AggregateContractual
            Exercise
            Intrinsic
            
            
            Exercise
            IntrinsicNumber
            Life
      (Years)
            Price
            Value
            
            Number
            Price
            Value4,453,157
            4.10
            $1.77
            -
            
            4,453,157
            $1.77
            -





The
weighted average fair value per share of each  warrant granted for the
year ended December 31, 2007 was $0.08.





In June
2008, the Company repurchased 7,811 shares of  common stock at $1.00
per share.





Note
7.   Income Taxes





The
Company accounts for income taxes under the provisions of Financial
Accounting Standards No.109, Accounting
for Income Taxes.  SFAS No.109 provides for the recognition and
measurement of deferred income tax benefits and liabilities based on the
likelihood of their realization in future years.  A valuation
allowance must be established to reduce deferred income tax benefits if it is
more likely than not that a portion of the deferred benefits will not be
realized.





As
of September 30, 2008, the Company has available, for federal and state income
tax purposes, net operating loss (“NOL”) carryforwards of approximately
$7,400,000, which expire at various times through 2028.  The
utilization of the NOL carryforwards is dependent upon the ability of the
Company to generate sufficient taxable income during the carryforward
periods.  The NOL carryforwards are also subject to certain
limitations on their utilization should changes in Company ownership occur. The
Company has not recognized any tax carryforward benefits in the financial
statements.





Note
8. Related Party Transactions





During
2006, 2007 and 2008 the Company borrowed $7,500,000 under
various loan agreements (the “CI II Loans”) with the Co Investment
Fund II LP (“CI II”). CI II is managed by Cross Atlantic Capital Partners Inc.
(“Cross Atlantic”) and beneficially owns more than 5% of the Company’s
outstanding common stock. Donald Caldwell, a director of the
Company,  is the founder and Chief Executive Officer of Cross
Atlantic  and  Frederick Tecce, also a director of the
Company, is a  managing director and of counsel of Cross
Atlantic.  In connection with the CI II Loans, the Company issued to
CI II warrants to purchase 4,401,385 shares of common stock. The aggregate fair
market value of the warrants at the respective times the Company issued them was
$791,205. In addition, principal and interest on certain notes in the amount of
$1,693,014 at September 30, 2008 are convertible into 846,507 shares of common
stock. During the three months ended September 30, 2008 and 2007 and nine
months  ended September 30, 2008 and 2007, interest on the CI II Loans
amounted to $150,000, $68,227, $370,000 and $167,295, respectively . During 2008
and 2007, we made no principal payments on the CI II
Loans.  As of September 30, 2008, the aggregate outstanding principal
amount of the CI II Loans was $7,500,000.





Mr. Tecce
is of counsel to the law firm of Buchanan Ingersoll & Rooney PC, which
the Company retained for various legal matters in 2008 and
2007.  During  the three months ended September 30, 2008 and
2007 and nine months ended September 30, 2008 and 2007,  fees and
expenses incurred to that firm totaled $41,000, $4,000, $48,000
and  $53,000, respectively.









14












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





Forward-Looking
Statements





Certain
statements, other than purely historical information, including estimates,
projections, statements relating to the Company’s business plans, objectives,
and expected operating results, and the assumptions upon which those statements
are based, are “forward-looking statements” as the term is defined
in   Section 27A of the Securities Act of 1933, as amended
(“Securities Act”), and Section 21E of the Securities Exchange Act of 1934,
as amended (“Exchange Act”). These forward-looking statements generally are
identified by the words “believes,” “projects,” “expects,” “anticipates,”
“estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,”
“will continue,” “will likely result,” and similar expressions, or the negatives
of any such words or expressions. We intend such forward-looking statements to
be covered by the safe-harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, and are
including this statement for purposes of those safe-harbor provisions.
Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties which may cause actual results to
differ materially from the forward-looking statements. The
Company’s ability to predict results or the actual effect of future plans
or strategies is inherently uncertain. Factors which could have a material
adverse affect on its operations and future prospects on a consolidated basis
include, but are not limited to: the Company’s future results under its
ownership of Lightning Poker, Inc. (“Lightning Poker”), the Company’s ability to
obtain additional gaming licenses, changes in economic conditions, fuel price
increases, the current slowdown in the economy and condition of
capital and credit markets, legislative/regulatory changes, availability of
capital, interest rates, competition, and changes in generally accepted
accounting principles. These risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance should not be placed
on such statements. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise, unless applicable law requires us to do so. Further
information concerning the Company’s business, including additional factors that
could materially affect the Company’s financial results, is included herein and
in the Company’s other filings with the Securities and Exchange
Commission (“SEC”).








Overview


On
January 29, 2008, the Company acquired Lightning Poker in a merger
(the “Merger”), under which Lightning Poker became a wholly-owned subsidiary,
the stockholders of Lightning Poker became the Company’s stockholders with the
same percentage ownership interests in the Company  as they had in
Lightning Poker prior to the Merger, all of the Company's previously outstanding
stock was canceled with no obligation on the part of the Company for the payment
of any consideration, and the Company ceased being a shell company.




Information
concerning Lightning Poker is contained in the amended Form 8-K that we filed
with the SEC on April 29, 2008.  Exchange Act reports for periods
ending after the date of the Merger are presented on a consolidated basis,
reflecting the Company’s ownership of Lightning Poker.




Lightning
Poker was formed to develop and market an electronic poker table that provides a
fully automated table gaming experience without a dealer in casinos and card
rooms in regulated jurisdictions worldwide.   Lightning Poker's
fully automated, electronic poker table (the “System”) is designed to increase
revenue and security while helping to reduce the labor costs associated with
poker play.  The System is a fully automated electronic poker table
that enables up to ten players to make their wagers and game decisions via
individual touch screen betting stations. It utilizes a software application
written in Java, which runs on a Linux-based multi-game table platform. The
System achieves the goal of increasing revenue by allowing a larger number of
hands to be played per hour, increasing the “rake” or per hand fee collected by
the operator commensurately.   The elimination of a live dealer
also reduces labor costs and permits more tables to be operational in
jurisdictions where skilled poker dealers are in short supply. The System has an
added benefit of eliminating mistakes by the dealer or the player, and it
eliminates the need to tip the dealer.   The System also provides
an opportunity to present information about the game to the players via
individual player screens and via the common center monitor.  The System
has received Gaming Laboratories Incorporated certification for a casino version
of Texas Holdem, Omaha, cash, and single table tournament poker, which the
Company needs in order to install the System in certain
jurisdictions.





The
Company has filed and will continue to file applications for licensure in
various gaming jurisdictions. The Company evaluates economic impact of each
jurisdiction in determining the priority of filing in a
jurisdiction.  Currently the Company is in the process of evaluating
the electronic poker table market in Nevada in order to determine the importance
of this market to the Company.





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.




Accordingly,
poker generally generates lower relative profits for the casino operator than
slots and other table games. The System is intended to improve the profitability
of poker by enhancing the operator’s revenue opportunities while decreasing the
labor burden.




15









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





The
Company has a history of losses since the Company’s inception. The Company
incurred a net loss of $3,830,143 in the nine months ended September 30,
2008. The Company has only recently begun to generate operating
revenue.






Three
Months Ended September 30, 2008  Compared to Three  Months
Ended September 30, 2007


( All
amounts rounded to the nearest $1,000)


Revenues





The
Company’s revenues for the three months ended September 30, 2008 were $734,000
compared to $475,000 for the comparable prior year period. The increase in
revenues was due to the increase in both sales of Systems and parts and license
and service fees.





Sales of
Systems and parts increased by $235,000 (64%) to $603,000 for the three months
ended September 30, 2008 as compared to $368,000 for the three monthed ended
September 30, 2007 due to the placement of additional Systems at existing
international customers.





License
and service fees increased by $24,000 (23%) to $131,000 for the three months
ended September 30, 2008 as compared to $107,000 for the three monthed ended
September 30, 2007 due to the placement of Systems at new casino
customers.







Cost
of Products Sold




For the
three months ended September 30, 2008, cost of products sold increased
$153,000 (96%) to $312,000 as compared to $159,000 for the three months ended
September 30, 2007 due to the placement of additional Systems at existing
international customers. Gross margins were 48% for the three months ended
September 30, 2008 compared with 57% for the three months ended September 30,
2007. The decline in gross margin for the three months ended September 30, 2008
was principally due to favorable terms the Company offered to customers on multi
System placements.







Operating
Expenses





Operating
expenses decreased by $174,000 to $53,000 for the three months
ended September 30, 2008, from $227,000 for the three months ended September 30,
2007.  This decrease was primarily the result of the
increase in System deliveries and completion of System hardware design, which
was partly offset by an increase in installation costs associated with
the Systems installed during the current quarter.





Research
and Development Expenses





Research
and development expenses decreased by $82,000 to $292,000 for the three
months ended September 30, 2008, from $374,000 for the three months ended
September 30, 2007. Research and development expenses are primarily related
to the development of the System.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses decreased by $119,000 to $388,000 for the
three months ended September 30, 2008, from $507,000 for the three months ended
September 30, 2007.  This decrease was primarily due to the decrease
in staff costs and timing of licensing activity partly offset by contract
acquisition costs.





Depreciation
and Amortization including Impairment Charges





Depreciation
and amortization including impairment charges increased by $ 367,000 to $447,000
for the three months ended September 30, 2008 from $80,000 for the three
months ended September 30, 2007. This increase was primarily related to the
asset impairment charge of $204,000 related to contracts acquired from Poker
Automation and to the placement of Systems under contracts.





Net
Interest Expense





Net
interest expense increased by $48,000 to $292,000 for the three
months ended September 30, 2008 from $244,000 for the three
months ended September 30, 2007. This change was the result of the issuance
of notes and related warrants during 2008 of $4,000,000, which
was  partly offset by interest income from the investment of cash
balances.





Nine Months Ended
September 30, 2008 Compared to Nine Months Ended September 30,
2007


( All
amounts rounded to the nearest $1,000)





Revenue





The
Company’s revenues for the nine months ended September 30, 2008 were $1,340,000
compared to $1,406,000 for the comparable prior year period. The decrease in
revenues was due to the absence in the current period of a multi System sale to
an international casino, and multi System pricing. The
decrease   was partly offset by an increase in Systems sold and
the increase in installations of Systems under license fee
arrangements.








16








Cost
of Products Sold




For the
nine months ended September 30, 2008, cost of products sold decreased
$98,000 to $507,000 for the nine months ended September 30, 2008 from
$605,000 for the nine months ended September 30,2007. This decrease was due to
lower System costs. Gross margins were 52% for the nine months ended September
30, 2008 and for the nine months ended September 30, 2007.




Operating
Expenses





Operating
expenses decreased $154,000 to $411,000  for the nine months ended
September 30, 2008, from $565,000 for the nine months ended September 30,
2007.  This decrease was primarily the result of the
increase in Systems deliveries and the completion of System hardware design,
which was  partly offset by the increase in installation costs
associated with Systems installed during the current period.





Research
and Development Expenses





Research
and development expenses increased by $132,000 to $1,137,000 for the nine
months ended September 30, 2008, from $1,005,000 for the nine months ended
September 30, 2007. Research and development expenses are primarily related
to the development of the System.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses increased by $271,000 to $1,558,000 for the
nine months ended September 30, 2008, from $1,287,000 for the nine months ended
September 30, 2007.  This increase was primarily the result
of expenses associated with the Merger, addition of personnel, insurance
costs, contract acquisition costs, and costs associated with SEC reporting.
These expenses were partly offset by lower advertising expenditures and timing
of licensing activity.




Depreciation
and Amortization including Impairment Charges





Depreciation
and amortization increased $660,000 to $824,000 for the nine months ended
September 30, 2008 from $164,000 for the nine months ended September 30,
2007. This increase was primarily related to the asset impairment charge of
$204,000 related to the contracts acquired from Poker Automation in
2007 and to the placement of additional Systems under
contracts.





Net
Interest Expense





Net
interest expense increased $287,000 to $742,000 for the nine months ended
September 30, 2008 from $455,000 for the nine months ended September 30,
2007. This change was the result of the issuance of notes payable and related
warrants during 2007 and 2008, which was partly offset by interest income from
investments of cash balances.







Liquidity
and Capital Resources





Since the
Company’s inception, the Company has funded its startup costs, operating costs
and capital expenditures through loans and issuance of common
stock.





For the
nine months ended September 30, 2008, we incurred a net loss of $3,845,000 and
used $2,174,000 of cash in operating activities. At September 30, 2008, the
Company had an accumulated deficit of $11,000,000. The generation of cash flow
sufficient to meet the Company’s cash needs in the future will depend on the
Company’s ability to obtain the regulatory approvals required to distribute the
System and successfully market it to more casinos and card clubs.






17








The
Company’s current cash requirements are approximately $250,000 to $350,000 per
month, principally for salaries, professional services, marketing, office
expenses and the purchase of the hardware components for the
System.





Based on
the Company’s cash flow projections and anticipated revenues, we believe we will
be able to support the Company’s operations for the foreseeable future. However,
if sales of the System do not meet, or the Company’s expenses exceed, the
Company’s projections, the Company may need to raise additional funds through an
offering of securities or a credit facility. If that becomes
necessary, there is no assurance that such financing would be available to the
Company at all, or on reasonable terms. If the Company needs additional
funding and is unable to obtain it, the Company’s financial condition would be
materially and adversely affected.




In
addition, the Company’s ability to sell or lease the System on a large
scale may require additional financing for working capital. There is no
assurance that such additional financing would be available at all, or on
reasonable terms. The Company’s inability to obtain such financing on terms that
allow it to lease the System profitably would hamper its ability to
distribute the System on a large scale.




Off-Balance
Sheet Arrangements





As of
September 30, 2008, there were no off-balance sheet arrangements.





Going
Concern





The
Company’s financial statements have been prepared on a going concern basis,
which assumes realization of all assets and settlement or payment of all
liabilities in the ordinary course of business. We have limited capital
resources, net operating losses and negative cash flows from operations since
the Company’s inception and expect these conditions to continue for the
foreseeable future. The generation of cash flow sufficient to meet the Company’s
cash needs in the future will depend on the Company’s ability to obtain the
regulatory approvals required to distribute the System and successfully market
it to more casinos and card clubs. However, if sales of the System do not
meet, or the Company’s expenses exceed, the Company’s projections, the
Company may need to raise additional funds through an offering of
securities or a credit facility. If that becomes necessary, there is no
assurance that the Company would be able to obtain such financing at all, or on
reasonable terms. If the Company needs additional funding
and is unable to obtain it, the Company’s financial condition
would be materially and adversely affected. In that event, the Company would
have to postpone or discontinue planned operations and projects. The Company’s
continuance as a going concern is dependent upon these factors, among others.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.







18







Item 3. Quantitative and Qualitative Disclosures about Market
Risk.





Not
applicable.








Item
4T. Controls and Procedures





The
Company carried out an evaluation of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2008. This
evaluation was carried out under the supervision and with the participation of
the Company’s Chief Executive Officer (“CEO”) and the Company’s Chief Financial
Officer (“CFO”).  Based upon that evaluation, the CEO and CFO
concluded that, as of September 30, 2008, the Company’s disclosure controls and
procedures were effective. There have been no changes in the Company’s internal
controls over financial reporting during the quarter ended September 30, 2008
that have  materially affected, or are reasonably likely to materially
affect, the Company’s internal control  over financial
reporting.





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in the Company’s reports filed
or submitted under the Exchange Act are recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in the
Company’s reports filed or furnished under the Exchange Act is accumulated and
communicated to management, including the CEO and CFO, to allow timely
decisions regarding required disclosure.





Limitations on the
Effectiveness of Internal Controls





The
Company’s management does not expect that the Company’s disclosure controls and
procedures or the Company’s internal control over financial reporting will
necessarily prevent all fraud and material error. The Company’s disclosure
controls and procedures are designed to provide reasonable assurance of
achieving the Company’s objectives, and the CEO and CFO concluded that the
Company’s disclosure controls and procedures are effective at that reasonable
assurance level. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the internal control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate.





19










PART
II - OTHER INFORMATION





Item
1.     Legal Proceedings


Not
applicable.





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


On
August 1, 2008, the Company issued to a former employee options to purchase up
to 2,000 shares of the Company’s common stock at a per-share exercise price of
$1.10 and up to 1,000 additional shares at a per-share exercise price of
$2.00.  The Company issued the options as part of a settlement
agreement with the former employee.  On September 30, 2008, the former
employee exercised the options in full.  The Company issued the
options and the 3,000 shares upon exercise of the options without registration
under the Securities Act based on the exemption from registration set forth in
Section 4(2) of the Securities Act.





Item
3.     Defaults upon Senior Securities


None





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


None





Item
5.     Other Information


None




Item
6.      Exhibits





Exhibit
      Number
            
            Description
      of Exhibit10.1*
            
            Loan
      Agreement dated June 30, 2008 among Lightning Poker, SIG Strategic
      Investments, LLLP (“SIG”) and Co Investment Fund II LP (“CI II”) (see
      Exhibit 99.1 to Form 8-K  filed  July 7, 2008,
      Commission File No. 000-52575)10.2*
            
            Promissory
      Note issued by Lightning Poker to CI II (see Exhibit 99.2 to Form
      8-K  filed  July 7, 2008, Commission File No.
      000-52575)10.3*
            
            Promissory
      Note issued by Lightning Poker to SIG (see Exhibit 99.3 to Form
      8-K  filed  July 7, 2008, Commission File No.
      000-52575)10.4*
            
            Warrant
      for Stock issued by Lightning Gaming, Inc. (“LGI”) to CI II (see Exhibit
      99.4 to Form 8-K  filed  July 7, 2008, Commission File
      No. 000-52575)10.5*
            
            Warrant
      for Stock issued by  LGI to SIG (see Exhibit 99.5 to Form
      8-K  filed  July 7, 2008, Commission File No.
      000-52575)10.6*
            
            Guaranty
      Agreement by LGI in favor of CI II as the Lenders’ Agent
      (“Agent”)   (see Exhibit 99.6 to Form
      8-K  filed  July 7, 2008, Commission File No.
      000-52575)10.7*
            
            Security
      Agreement between Lightning Poker  and CI II as Agent (see
      Exhibit 99.7 to Form 8-K  filed  July 7, 2008,
      Commission File No. 000-52575)10.8*
            
            Intellectual
      Property Security Agreement for Patents and Trademarks
      between  Lightning Poker and CI II as Agent  (see
      Exhibit 99.8 to Form 8-K  filed  July 7, 2008,
      Commission File No. 000-52575)10.9*
            
            Intellectual
      Property Security Agreement for Copyrights and Masked Works
      between  Lightning Poker and CI II as
      Agent   (see Exhibit 99.9 to Form
      8-K  filed  July 7, 2008, Commission File No.
      000-52575)31.1
            
            Certification
      of Principal Executive Officer pursuant to Exchange Act Rule
      13a-14(a)31.2
            
            Certification
      of Principal Financial Officer pursuant to Exchange Act Rule
      13a-14(a)32.1
            
            Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Exchange Act Rule 13a-14(b)

              and
      18 U.S.C. 1350





*
            This
      document is incorporated herein by reference as an exhibit
      hereto.  Following the description of such exhibit is a
      reference to the document as it appeared in a specified report previously
      filed with the SEC, to which there have been no amendments or changes
      unless otherwise indicated.








20









SIGNATURES





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







Date: 
      November
      14, 2008
            Lightning
      Gaming, Inc.By:      /s/
      Brian Haveson
              Brian
      Haveson
              President,
      Chief Executive Officer and
Director














21