UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,D.C.20549




Form 10-K




þ
            
            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the fiscal
      year ended December 31, 2008ORo
            
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the
      transition period
      from          to




Commission
File Number: 000-52575




Lightning Gaming,
Inc.


(Exact name of
registrant as specified in its charter)




Nevada
                (State
      or other jurisdiction of
                incorporation
      or organization)
              
              20-8583866
                (I.R.S.
      Employer
                Identification
      No.)106
      Chelsea Parkway
                Boothwyn,
      PA
                (Address of
      principal executive offices)
              
              19061
                (Zip
    Code)




Registrant’s telephone number,
including area code:


(610) 494
5534




Securities registered pursuant to
Section 12(b) of the Act: None


Securities registered pursuant to
Section 12(g) of the Act:


Common
stock, par value $0.001 per share




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o     No þ




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o     No þ




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 þ     No o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 o
            
            Accelerated
      filero
            
            Non-accelerated
      filer o
              (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 by
Rule 12b-2 of the Act). Yes oNo þ




The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant as of June 30, 2008 was approximately $5,168,000  based
on the valuation determined by the board of directors when it set the exercise
price of warrants on that date.




The
number of shares of the registrant’s common stock, par value $0.01, outstanding
as of March 15, 2009 was 4,647,474.






1




PART I




Item 1.
            Business.




Completion
of Acquisition or Disposition of Assets




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. As a result of the Merger, LPI Acquisition
Corp. a Pennsylvania corporation and wholly-owned subsidiary of the Company,
merged with and into Lightning Poker. Lightning Poker thereby became a wholly
owned subsidiary of the Company and each share of common stock of Lightning
Poker outstanding immediately prior to the Merger was converted into the right
to receive one share of the Company's common stock. As a result, the former
stockholders of Lightning Poker received an aggregate of 4,644,785 shares of the
Company's common stock. In addition, all of the Company's previously outstanding
stock, which was held by Brian D. Haveson, was canceled with no obligation on
the Company's part for the payment of any consideration. Consequently, the
Merger resulted in the former stockholders of Lightning Poker having the same
percentage ownership interests in the Company as they had in Lightning Poker
prior to the Merger.
 
 This transaction has been
accounted for as a recapitalization of Lightning Poker. For financial accounting
purposes, the accompanying financial statements, identified as Lightning Gaming,
Inc. and Subsidiaries, represent the historical accounts and operations of
Lightning Poker. The accounts of Lightning Gaming at January 29, 2008 were not
material.




The
Company was incorporated in Nevada on March 1, 2007.  Prior to the
Merger, it was a "shell company," had no operations or employees (other than its
officer Brian Haveson and his predecessor) and owned no property.  Its
executive offices are located at 106 Chelsea Parkway, Boothwyn, Pennsylvania
19061.





Lightning
Poker was incorporated in Pennsylvania in 2005 under the name Pokermatic, Inc.
and succeeded to the business of Pokermatic, LLC, a Pennsylvania limited
liability company formed in 2004. As a result of the Merger, Lightning Poker
became a wholly owned subsidiary of the Company. Lightning Poker is an early
stage company which manufactures and sells fully-automated, proprietary
electronic poker tables intended for sale to casinos, card rooms, cruise ships,
other gaming and lottery venues, bars and restaurants and the home
market.  The following discussion of the Company’s business includes
the business of Lightning Poker.





Product





Our
initial product is The Lightning Poker Gaming System ("System"), 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.




Our
System has received Gaming Laboratories Incorporated ("GLI") certification for a
casino version of Texas Hold'em, Omaha, cash, and single table tournament poker,
which we need  in order to install our System in certain
jurisdictions.





Our
current System consists of  nine individual player stations and a
cashier station situated along an elongated octagonal perimeter with a 45 -inch
plasma community display in the center.  Each player station is
independently controlled and capable of running any number of
applications.  An internal server controlling the game logic manages
the player stations.  A data logging and management system function
exists, and it can be either located on the physical server, or relocated
remotely in order to control multiple tables.  This application allows
for the recording of critical game actions and events as well as the control of
the table itself.  This architecture provides the flexibility of
providing a low-cost stand-alone solution for use in the home or bar/restaurant
markets.





The open
architecture of Java and Linux provides us with the flexibility to adopt the
System for use in different vertical markets (casino, bar/restaurant, and home)
as well as additional gaming applications such as additional poker varieties,
Black Jack, Keno, Bingo, Slots and Craps.





Poker has
become one of the most popular table games at casinos, yet it is one of the
least profitable games for casino and card room operators due to slow speed of
play, dealer labor, benefits and training costs, and dealer and player
error.  Our System provides a solution for each of these issues, and
adds additional benefits to casinos and other operators.  In
traditional live poker, a dealer employed by the casino or card room is
responsible for dealing cards, calculating bets, collecting the “rake”, which is
the amount the casino or card room 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’s or card room’s
revenue from the poker room is limited to the rake.  Consequently, the
speed of play is critical to the amount of revenue generated at poker
tables.  Our System allows for twice as many games to be played on
average than the traditional dealer-run tables, effectively doubling the
rake.  Through our System the casinos experience faster shuffling,
dealing and bet-placing, which can be enforced by player time
constraints.





2




Our
System also eliminates the possibility of dealer or user error, which typically
reduces the speed of play with a live dealer.  A second major
limitation to the profitability of poker at casinos is dealer payroll, benefits
and training costs.  Industry sources estimate that a casino will pay
$75,000 - $150,000 in total labor costs per poker table each year, assuming that
a manual table is staffed with between four and five dealers.  Our
System eliminates all per-table labor costs of live dealers, and requires the
oversight of one pit boss for every six tables, the same ratio as with
traditional live poker.





Our
System also improves a player’s gaming experience by increasing the speed of
play, eliminating dealer and player mistakes and eliminating the need for dealer
tipping, all of which result in more hands played on our table than on poker
tables operated by live dealers.  Furthermore, our System has been
designed to increase security in casinos by eliminating the potential for
collusion between a  player and a live dealer. Because our System
provides automated information on bets placed and hands played that is not
available with tables operated by live dealers, our System will add to the
profitability of casinos in which it is installed by identifying valuable casino
customers who can then be targeted through additional marketing
efforts.





As of
March 1, 2009, we have sold or leased 68  Systems to domestic and
international casinos and card rooms and have agreements for  an
additional 35  Systems.




Distribution





Our
System is distributed to casinos and other legal gaming venues through an
exclusive distribution agreement with Shuffle Master, Inc. (“Shuffle Master”).
We expect to sell or lease the System directly to other customers, such as bars
and restaurants and consumers who are not covered by our exclusive distribution
agreement with Shuffle Master.





Shuffle
Master is a global leader in distributing automatic utility and entertainment
products to casinos and gaming venues. Shuffle Master’s leadership position and
deep relationships with casino operators provide us with access to key
decision-makers in our target market.





Our
agreement with Shuffle Master provides for it to act as the exclusive worldwide
distributor for the System to the gaming industry.  Under the
agreement, Shuffle Master receives a fixed distribution fee for each System
placed into operation. The agreement has a ten year term which began on January
22, 2007, with the right of Shuffle Master to renew for additional five year
terms under certain conditions. Under the agreement Shuffle Master must
place a minimum number of Systems  in each of the first five years of
the agreement and thereafter use its commercially reasonable efforts to promote,
market, distribute and service the product. Shuffle Master has not met this
minimum annual requirement under the agreement, which gives us a right to
terminate the agreement. As of the date of this report, we have not exercised
our termination right. Shuffle Master will have the right to terminate the
agreement if there is a change in control (as defined in the agreement) of
Lightning Poker.




Revenue
Models





We have
four different revenue models that we offer to our customers depending on each
individual situation:





·
            Customer
      lease model·
            Outright
      sale model·
            Revenue
      sharing model·
            Sale/
      license model





We offer
a lease program to some of our customers whereby we receive a monthly lease
payment and amortize the operating expenses over the term of the
lease.  Typical lease agreements involve a month-to-month term. In an
outright sale of our System, we receive cash for the entire purchase
amount.  All operating expenses are booked as they are
incurred.  We will typically use this model in situations where there
is a strong customer preference for an outright purchase or in situations where
leasing to a customer may be impractical due to geographic or financial
reasons.  Our third model is a revenue sharing model, where we place
our System on the floor of the casino or card room and participate in a portion
of the  revenue generated by the System.  Typical revenue
sharing agreements involve a month-to-month term and certain agreements provide
for  a minimum and maximum monthly payment. Our fourth model combines
the sale and lease models whereby we sell the equipment and enter into a three
year license agreement with the customer to use our software.  We
offer our customers both a service and software support agreement. Our service
agreement provides for repair or replacement of System component hardware at a
monthly rate of $500.  Our software support agreement provides for
telephone support during the customer’s hours of operation and is also priced at
$500 per month.  Shuffle Master receives the revenue from the service
contracts with casinos and legal gaming venues, and we expect
to  receive the revenue generated from all software support agreements
as well as service agreements with customers in the bar/restaurant and home
markets.




3





In
addition to our primary revenue streams of System sales and leasing , we
anticipate receiving revenue from secondary initiatives that will support our
growth in the gaming industry.  We expect to
receive  revenue from the sale of other electronic gaming programs
such as bingo and slot tournaments that can be used with our current
System.  After we have successfully penetrated casinos and card rooms,
we believe that there will be demand for additional electronic games that can be
easily transferred to our Systems. We also expect to receive revenue from
technical support contracts and other maintenance work that we will perform
ourselves or outsource.





Manufacture
of Product





We
assemble the System at our facility in Boothwyn, Pennsylvania, using off-the-
shelf components purchased from a variety of vendors and a table base and top
manufactured to our specifications by a vendor of cabinetry products. The off-
the -shelf components include touch screen monitors for the individual player
stations, a 45-inch center screen, a hard drive and memory cards, and other
electronic equipment and materials.  We perform final assembly of
these components in our facility and then test and ship the System to our
customers.








Competition





The market for electronic gaming
devices is mature and characterized by a variety of competitors that create and
license proprietary table games. We are currently aware of one GLI-certified
direct competitor, PokerTek, Inc. (“PokerTek”), a publicly traded, North
Carolina based manufacturer of electronic poker tables.  We expect to
compete directly with PokerTek in distribution to tribal and commercial casinos,
card rooms, restaurants and amusement facilities.  Other potential
competitors include Amaya Gaming Group (formerly Gametronix) and Digideal
neither of which is currently GLI-certified.  In addition to pure-play
electronic poker table manufacturers, we may encounter competition from major
casino operators and distributors that choose to develop their own electronic
poker systems.  We anticipate that established manufacturers of gaming
devices will have widespread brand recognition, substantially greater resources
and marketing capabilities than we have and some, if not all, of the regulatory approvals
that would be required to market and sell their products in our target markets,
including target markets in which we have not yet obtained regulatory approval.
If we are unable to obtain all the regulatory approvals that we are seeking or
if we are unable for other reasons to compete successfully, we may be unable to
establish market acceptance for our System, which could prevent us from
achieving or sustaining profitability.





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





We will
compete to gain and expand market acceptance of our System among owners and
operators of casinos and card rooms as well as among poker players. The basis on
which we will compete will differ between these two groups. We expect to compete
for space on a casino’s or card room’s floor principally on the basis of revenue
generation, cost savings, immediate distribution through our agreement with
Shuffle Master, and costs associated with switching from existing gaming
devices. We expect to compete to attract and retain poker players principally on
the basis of ease of play, speed of play, product functionality and additional
games including Shuffle Master products and costs associated with
play.





Intellectual
Property





We
currently have three patents and 13 applications for patents pending before
the U.S. Patent and Trademark Office, which relate to various aspects of our
System. However, patent applications can take many years to issue and we can
provide no assurance that any of these patents will be issued. As we continue to
develop new technology, we may file patent applications with respect to such
technology.





Our
trademark for “Lightning Poker” is registered with the U.S. Patent and Trademark
Office.


We have
registered the www.LightningPoker.net
and www.LTGaming.com Internet
domain names.





We have a
license from Standing Stone Gaming for its Oneida II Lite software that runs
part of the cash system of our System. The license is
non-exclusive  and expires  on March 31, 2011 and may be
renewed by mutual agreement of both parties for an additional term of five
years. From time to time we also use a number of licensed trademarks. The
trademarks, logos, trade names, and product names used herein, other than ours,
are the property of their respective owners.




4




Gaming
Regulations and Licensing





Regulatory
Overview





Generally,
the manufacture, sale and use of gambling devices are subject to extensive
federal, state, local and , in some jurisdictions, tribal regulation. In order
to sell and distribute our System to our target markets we, along with our
customers, must comply with the applicable regulations of each jurisdiction in
which we operate. We expect it to take 24 months or longer from the date of the
submission of our application to obtain regulatory approval in some
jurisdictions. As of  March 1, 2009 we are licensed in, have filed or
are in the process of filing applications  in  11
jurisdictions. Because our System represents a new and innovative technology, it
is impossible for us to accurately determine how the various regulatory
authorities will view its sale and use, or how long it will take to obtain any
required approvals or licenses. It is possible that the approval of our System
will take much longer than we expect or that our System will not be approved in
the jurisdictions where we intend to operate, in which case we will be unable to
generate revenues in such jurisdictions. The laws and regulations of the
jurisdictions in which we intend to operate are subject to amendment and
reinterpretation from time to time, and therefore it is possible that even if
our System is approved at one time, its use may be restricted, conditioned or
prohibited in the future.





Some
states prohibit playing poker or gambling in any form. We will not sell or
distribute our System in these states.





The
following is a brief description of the material regulations that may apply to
us in some of the jurisdictions in which we intend to market and sell our
System.





If a
state requires that the Company, as well as our System, obtain regulatory
approval, we will be required to submit detailed financial and operating reports
and furnish any other information the state commission may require. Our
officers, directors, certain key employees and any person having a material
relationship with us may also have to qualify with the state commission and
obtain a finding of suitability. Our beneficial owners, especially beneficial
owners of more than 5% of our outstanding Common Stock, may also be required to
obtain a finding of suitability.





Thus far
only one officer and one of our directors have been found suitable by gaming
authorities in several jurisdictions. If a gaming authority in any jurisdiction
fails to find any of our officers, directors or significant shareholders
suitable, we may be prohibited from leasing, licensing or selling our System in
that jurisdiction.





A finding
of suitability is generally determined based upon a myriad of facts and
circumstances surrounding the entity or individual in question and many gaming
authorities have broad discretion in determining whether a particular entity or
individual is suitable. We are unaware of circumstances that would categorically
prevent a gaming authority from finding any of our officers, directors or
significant shareholders suitable.





If any of
our officers, directors or significant shareholders is not found suitable in a
jurisdiction requiring a finding of suitability, we would be prevented from
leasing, licensing or selling our System in that jurisdiction as long as the
person  in question remained an officer, director, or a significant
shareholder. Such an occurrence would likely delay introduction of our System
into such jurisdictions or prevent us from introducing our System in such
jurisdictions altogether. Depending on how material such jurisdictions are to
our plan of operations, failure to obtain such findings of suitability could
have a material adverse affect on our results of operations. In addition, a
finding that one of our officers, directors or significant shareholders is not
suitable in any jurisdiction may hinder our ability to obtain necessary
regulatory approvals in other jurisdictions. Conversely, however, a finding of
suitability by one or more gaming authorities does not ensure that similar
suitability determinations will be obtained from any other gaming
authorities.





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





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





We
have   applied for the required gaming regulatory approvals to
sell our System in Nevada.  Due to the current state of the United States
economy we have requested that the investigation  of our application
be suspended  until further notice. A decision from the Nevada
gaming regulatory authorities could take up to 24 months from the start of the
investigation of the application, and we have no assurance of obtaining the
required approvals to sell our System in Nevada.  We consider Nevada
to be a significant target market, so obtaining Nevada gaming approvals would be
a key factor in achieving future profitability and success.




5




The
following is a summary of the Nevada gaming regulatory scheme that
is  applicable to us as a Nevada gaming applicant and thereafter as a
Nevada gaming licensee, if we obtain the required approvals.




Nevada
Gaming Authorities




The
ownership and operation of casino gaming facilities in Nevada are subject to:
(1) The Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, the “Nevada Act”) and (2) various local ordinances and
regulations.  If we become licensed in Nevada, our gaming operations
will be subject to the licensing and regulatory control of the Nevada Gaming
Commission (the “Nevada Commission”), the State of Nevada Gaming Control Board
(the “Nevada Board”), and, in order for us to share in the gaming revenue
derived from users of the System, the Clark County Business Department and the
Clark County liquor/gaming authorities (collectively, the “Clark County Board”),
all of which are collectively referred to as the “Nevada Gaming
Authorities.”




The laws,
regulations and supervisory procedures of the Nevada Gaming Authorities are
based upon declarations of public policy which are concerned with, among other
things: (1) the prevention of unsavory or unsuitable persons from having a
direct or indirect involvement with gaming at any time and in any capacity; (2)
the establishment and maintenance of responsible accounting practices and
procedures; (3) the maintenance of effective controls over the financial
practices of licensees, including the establishment of minimum procedures for
internal fiscal affairs and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports with the
Nevada Gaming Authorities; (4) the prevention of cheating and fraudulent
practices; and (5) providing a source of state and local revenues through
taxation and licensing fees.  If we become licensed in Nevada, changes
in such laws, regulations and procedures could have an adverse effect on our
operations.




Lightning
Poker is required to be licensed by the Nevada Gaming Authorities  if
we sell our System in Nevada. If Lightning Poker obtains a gaming license, the
license will require the periodic payment of fees and taxes and will not be
transferable.  Also, if we become licensed in Nevada, we will be
registered by the Nevada Commission as a publicly traded corporation (a
“Registered Corporation”) and we will need to be found suitable to own the stock
of Lightning Poker.  As a Registered Corporation, we will be required
periodically to submit detailed financial and operating reports to the Nevada
Commission and to furnish any other information, which the Nevada Commission may
require.  No person will be permitted to become a stockholder of, or
receive any percentage of profits from, Lightning Poker, without first obtaining
licenses and approvals from the Nevada Gaming Authorities.  We and
Lightning Poker will have to obtain from the Nevada Gaming Authorities the
various registrations, approvals, permits, findings of suitability and licenses
required in order to engage in gaming activities and manufacturing and
distribution activities in Nevada.




The
Nevada Gaming Authorities will be able to investigate any individual who has a
material relationship to, or material involvement with, us or Lightning Poker in
order to determine whether such individual is suitable or should be licensed as
a business associate of a gaming licensee.  Officers, directors and
certain key employees of Lightning Poker will have to file applications with the
Nevada Gaming Authorities and may be required to be licensed or found suitable
by the Nevada Gaming Authorities.  Our officers, directors and key
employees who are actively and directly involved in the gaming activities of
Lightning Poker may be required to be licensed or found suitable by the Nevada
Gaming Authorities.  The Nevada Gaming Authorities may deny an
application for licensing for any cause, which they deem
reasonable.  A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation.  Any change
in a corporate position by a licensed person must be reported to the Nevada
Gaming Authorities.  In addition to their authority to deny an
application for a finding of suitability or licensure, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in a corporate
position.




If the
Nevada Gaming Authorities were to find an officer, director or key employee
unsuitable for licensing or unsuitable to continue having a relationship with
Lightning Poker or us, we would have to sever all relationships with such
person.  In addition, the Nevada Commission may require us or
Lightning Poker to terminate the employment of any person who refuses to file
appropriate applications.  Determination of suitability or questions
pertaining to licensing are not subject to judicial review in
Nevada.




We and
Lightning Poker will be required to submit detailed financial and operating
reports to the Nevada Commission.  Substantially all material loans,
leases, sales of securities and similar financing transactions by us will have
to be reported to or approved by the Nevada Commission.




If it
were determined that the Nevada Act was violated by Lightning Poker, its gaming
license could be limited, conditioned, suspended or revoked, subject to
compliance with certain statutory and regulatory procedures.  In
addition, we or Lightning Poker and the persons involved could be subject to
substantial fines for each violation of the Nevada Act, at the discretion of the
Nevada Commission.  Limitation, conditioning or suspension of the
gaming license of Lightning Poker could (and revocation of any gaming license
would) materially adversely affect our gaming operations.




6




If we
become licensed in Nevada, any beneficial holder of our voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have its suitability as a beneficial holder of
our voting securities determined if the Nevada Commission has reason to believe
that such ownership would otherwise be inconsistent with the declared policies
of the State of Nevada.  The applicant must pay all costs of
investigation incurred by the Nevada Gaming Authorities in conducting any such
investigation.




The
Nevada Act requires any person who acquires more than 5% of a Registered
Corporation’s voting securities to report the acquisition to the Nevada
Commission.  If we become licensed in Nevada, the Nevada Act will
require that beneficial owners of more than 10% of our voting securities apply
to the Nevada Commission for a finding of suitability within 30 days after the
Chairman of the Nevada Board mails the written notice requiring such
filing.  Under certain circumstances, an “institutional investor,” as
defined in the Nevada Act, which acquires more than 10%, but not more than 15%,
of our voting securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds our voting
securities for investment purposes only.  An institutional investor
that has obtained a waiver may, in certain circumstances, hold up to 19% of our
voting securities for investment purposes only if the voting securities were
acquired and are held in the ordinary course of business as an institutional
investor and not for the purpose of causing, directly or indirectly, the
election of a majority of the members of our board of directors, any change in
our corporate charter, bylaws, management, policies or operations, or any of our
gaming affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding our voting securities for investment purposes
only.  Activities which are deemed consistent with holding our voting
securities for investment purposes only include: (1) voting on all matters voted
on by stockholders; (2) making financial and other inquiries of management of
the type normally made by securities analysts for informational purposes and not
to cause a change in management, policies or operations; and (3) such other
activities as the Nevada Commission may determine to be consistent with such
investment intent.  If the beneficial holder of our voting securities
who must be found suitable is a business entity or trust, it must submit
detailed business and financial information including a list of beneficial
owners.  The applicant is required to pay all costs of
investigation.




Any
person who fails or refuses to apply for a finding of suitability or a license
within 30 days after being ordered to do so by the Nevada Commission or the
Chairman of the Nevada Board may be found unsuitable.  The same
restrictions apply to a record owner of stock if the record owner, after
request, fails to identify the beneficial owner.  Any stockholder who
is found unsuitable and who holds, directly or indirectly, any beneficial
ownership of stock beyond such period of time prescribed by the Nevada
Commission may be guilty of a criminal offense.  We will be subject to
disciplinary action if, after we receive notice that a person is unsuitable to
be a stockholder or to have any other relationship with us or Lightning Poker,
we (1) pay that person any dividend or interest upon voting our securities, (2)
allow that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (3) pay remuneration in any
form to that person for services rendered or otherwise, or (4) fail to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securities for cash at fair market value.  Additionally, the Clark
County Board has the authority to approve all persons owning or controlling the
stock of any corporation controlling a gaming licensee.




If we
become licensed in Nevada, the Nevada Commission may, in its discretion, require
any holder of our debt securities to file applications, be investigated and be
found suitable to own such securities, if it has reason to believe that such
ownership would be inconsistent with the declared policies of the State of
Nevada.  If the Nevada Commission determined that a person is
unsuitable to own such security, then we can be sanctioned (which may include
the loss of our approvals) if, without the prior approval of the Nevada
Commission, we (1) pay to the unsuitable person any dividend, interest, or any
distribution whatsoever, (2) recognize any voting right by such unsuitable
person in connection with such securities, (3) pay the unsuitable person
remuneration in any form or (4) make any payment to the unsuitable person by way
of principal, redemption, conversion, exchange, liquidation, or similar
transaction.




We will
be required to maintain a current stock ledger in Nevada, which may be examined
by the Nevada Gaming Authorities at any time.  If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming
Authorities.  A failure to make such disclosure may be grounds for
finding the record holder unsuitable.  We will also be required to
render maximum assistance in determining the identity of the beneficial
owner.  The Nevada Commission will have the power to require our stock
certificates to bear a legend indicating that the securities are subject to the
Nevada Act.




We may
not make a public offering of our securities without the prior approval of the
Nevada Commission if the securities or proceeds therefrom are intended to be
used to construct, acquire or finance gaming facilities in Nevada, or to retire
or extend obligations incurred for such purposes.  In addition, (1) a
corporate gaming  licensee, which Lightning Poker would be, may not
guarantee a security issued by a Registered Corporation pursuant to a public
offering, or hypothecate its assets to secure the payment or performance of the
obligations evidenced by such a security, without the prior approval of the
Nevada Commission; (2) the pledge of the stock of a Corporate Licensee is void
without the prior approval of the Nevada Commission; and (3) restrictions upon
the transfer of an equity security issued by a Corporate Licensee and agreements
not to encumber such securities are ineffective without the prior approval of
the Nevada Commission.




Changes
in control of a Registered Corporation through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he obtains control, may not occur without the prior approval
of the Nevada Commission.  Entities seeking to acquire control of a
Registered Corporation must meet a variety of stringent standards of the Nevada
Board and Nevada Commission prior to assuming control.  The Nevada
Commission may also require controlling stockholders, officers, directors and other persons
having a material relationship or involvement with the entity proposing to
acquire control, to be investigated and licensed as part of the approval process
relating to the transaction.


7




The
Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defensive tactics
affecting Nevada corporate gaming licensees and Registered Corporations that are
affiliated with those operations may be injurious to stable and productive
corporate gaming.  The Nevada Commission has established regulations
to ameliorate the potentially adverse effects of these business practices upon
Nevada’s gaming industry and to further Nevada’s policy to: (1) assure the
financial stability of corporate gaming licensees and their affiliates; (2)
preserve the beneficial aspects of conducting business in the corporate form;
and (3) promote a neutral environment for the orderly governance of corporate
affairs.  Approvals are, in certain circumstances, required from the
Nevada Commission before the Registered Corporation can make exceptional
repurchases of voting securities above the current market price and before a
corporate acquisition opposed by management can be consummated.  The
Nevada Act also requires prior approval of a plan of recapitalization proposed
by the Registered Corporation’s board of directors in response to a tender offer
made directly to the Registered Corporation’s stockholders for the purposes of
acquiring control of the Registered Corporation.




License
fees and taxes, computed in various ways depending on the type of gaming or
activity involved, will be payable to the State of Nevada and to the county in
which Lightning Poker’s operations are conducted.  Depending upon the
particular fee or tax involved, these fees and taxes are payable monthly,
quarterly or annually and are based upon: (1) a percentage of the gross revenues
received; (2) the number of gaming devices operated; or (3) the number of table
games operated.  A live entertainment tax is also paid by casinos
where live entertainment is furnished in connection with admission charges, the
serving or selling of food, refreshments or the selling of
merchandise.  A Nevada licensee that holds a license to manufacture
and distribute slot machines and gaming devices, which Lightning Poker would be,
also pays certain fees and taxes to the State of Nevada.




Any
person who is licensed in Nevada, required to be licensed, registered or
required to be registered, or a person who is under common control with any of
such persons (collectively, “Licensees”), and who proposes to become involved in
a gaming venture outside of Nevada, is required to deposit with the Nevada
Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay
the expenses of investigation by the Nevada Board of such person’s participation
in such foreign gaming.  The revolving fund is subject to increase or
decrease in the discretion of the Nevada Commission.  Thereafter,
Licensees are required to comply with certain reporting requirements imposed by
the Nevada Act. Licensees are also subject to disciplinary action by the Nevada
Commission if they knowingly violate any laws of the foreign jurisdiction
pertaining to the foreign gaming operation, fail to conduct the foreign gaming
operation in accordance with the standards of honesty and integrity required of
Nevada gaming operations, engage in activities or enter into associations that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employ, have contact with or associate with a person in the foreign
operation who has been denied a license or finding of suitability in Nevada on
the ground of such person’s unsuitability.






Tribal
Casinos





Under the
Indian Gaming Regulatory Act of 1988 (the "IGRA")  we believe that
the  System is categorized as a Class II gaming device and therefore
we may legally use our System if we are in compliance with all other applicable
laws and regulations in those tribal casinos located in states where poker is
either expressly permitted or not expressly prohibited. However, there is no
assurance that our belief is correct. Certain tribes may require a legal
opinion  that the System  qualifies as a Class II device,
and the casino itself may seek an opinion from the National Indian Gaming
Commission ("NIGC"). Obtaining such legal opinions may be difficult, time
consuming and expensive, and although NIGC opinions are advisory in nature,
should we receive an adverse opinion from the NIGC, it would impact our ability
to sell our System to tribal casinos. It is also possible that a court having
jurisdiction or the NIGC could determine that our System is a Class III gaming
device, the use of which is only permitted if the compact between the state and
the tribe allows Class III gaming. There are substantially fewer tribes that are
permitted to conduct Class III gaming than are permitted to conduct Class II
gaming and therefore such a ruling would significantly impair our ability to
sell or lease our System to tribal casinos.





TheUnited StatesDepartment of Justice ("DOJ"), the
primary law enforcement entity responsible for enforcing the federal law that
restricts or prohibits certain gaming devices and activities, namely the
Johnson Act, has traditionally taken a broad view as to what constitutes a
gambling device prohibited by the Johnson Act.  We believe the
Johnson Act is inapplicable to the use of our System, but it is possible that
the DOJ would disagree with our position.  In that event, the DOJ might
institute criminal and civil proceedings against us, and a court might rule
that the Johnson Actprohibits the use of our System by
tribal casinos unless the tribe and state have entered into an appropriate
tribal-state compact.  Any such proceedings could interfere with our
ability to obtain regulatory approvals in other
jurisdictions.





Additionally,
certain tribes require GLI approval for devices such as our System before the
casino will agree to purchase or lease the devices. GLI certification requires
meeting certain technical specifications and standards and can be difficult and
time consuming. It is possible this process will take longer than we anticipate
for a particular jurisdiction, or we may never obtain GLI certification for a
particular jurisdiction.




8




Federal
Regulation





We
believe the Johnson Act is inapplicable to the use of our System.  However,
the DOJ has traditionally taken a broad view as to what constitutes a gambling
device prohibited by the Johnson Act, and may disagree with our position on the
Johnson Act.





International
Regulation





Through
our agreement with Shuffle Master, we market our System internationally. Certain
foreign countries permit the importation, sale and operation of gaming equipment
in casino and non-casino environments. To market our System in these
jurisdictions, our company, our executives and certain shareholders, and the
System itself must comply with each individual country’s applicable
regulations.




Research
and Development





Our
research and development efforts to date have been historically focused on the
development of our System. Our research and development expenses
were  $1,400,370 and $1,354,173 during the fiscal years ended December
31, 2008 and December 31, 2007, respectively. Our System currently allows
players to play limit and no-limit Texas Hold ’em, Omaha, cash, and single table
tournament poker and slots. We are in the process of designing improvements to
our System that allow other varieties of poker to be played and to add other
functions that are currently unavailable in our System or in other gaming
technologies. We also are developing other related gaming technologies that
are designed to benefit casinos or card clubs.





Significant
Customers, Foreign Revenues and Foreign Assets





For the
years 2008 and 2007 revenue from customers outside the United States accounted
for approximately $1,223,800 and $1,648,000 or 83% and 90% of revenues,
respectively  and four  customers accounted for 66% and 88 %
of  our respective revenues.  As of December 31, 2008
approximately 50% of our long-lived assets were outside the United States. As of
December 31, 2008 and December 31, 3007, four customers and one customer
accounted for 67% and 83%, respectively, of our net accounts
receivable.





Employees





As of
March 1, 2009, we had 20 full-time employees. In addition to our full time
employees we have one consultant that provides legal services and one consultant
that provides engineering services on a part-time basis. We consider our
relationships with our employees to be satisfactory. None of our employees is
covered by a collective bargaining agreement.






Item
1A.  Risk
Factors.




Our
business is subject to a variety of risks. The following risk factors could
result in a material adverse effect upon our business, financial condition,
results of operations, and ability to implement our business plan. Many of these
events are outside of our control.




9




Risks
Relating to our Business




We are an
early stage company that has generated only minimal operating revenue. Our
business model is unproven and the lack of meaningful historical financial data
makes it difficult to evaluate our prospects. To the extent that we are able to
implement our business plan, our business will be subject to all of the problems
that typically affect a business with a limited operating history, such as
unanticipated expenses, capital shortfalls, delays in program development and
possible cost overruns. In addition, our only product, our System, is an
innovative product that has not yet been introduced to the gaming market on a
wide scale. We are still in the process of developing and testing the software
that will allow additional poker games to be played on our System and enhance
the player tracking and accounting capabilities of our
System.  Moreover, given the current decline in revenues that gaming
companies are experiencing, they might not choose to take on new gaming products
that do not have a proven record of success.




We
have a history of losses. We may be unable to generate sufficient net revenue in
the future to achieve or sustain profitability.




We have
accumulated losses of $12,770,674 through the year ended December 31, 2008. To
implement our business plan and generate the increased revenues necessary to
achieve profitability, we must gain broad market acceptance of our System. This
may be particularly difficult during the current economic recession in which
gaming companies are experiencing significant declines in revenues. Moreover,
the market for our System is heavily regulated. We must obtain regulatory
approvals for our Company and our System in many additional jurisdictions,
including some jurisdictions where we have not yet filed applications. In
addition to the usual risks associated with the introduction of a new product,
the timing of our revenue generation will be driven in part by our ability to
gain broad market acceptance of our System in those  jurisdictions
where we are able to distribute our System, our receipt of regulatory approvals
in additional jurisdictions, and entry into definitive agreements with customers
in those jurisdictions. We anticipate increased expenses, losses and cash flow
deficits as we seek additional regulatory approvals for our System and market it
in various jurisdictions. We may not receive further regulatory approval in any
jurisdiction and even if we do, we may not obtain market acceptance in that
jurisdiction. For the reasons discussed in this Risk Factors section and
elsewhere in this report, we might not generate significant revenues to achieve
profitability in the foreseeable future or at all. Even if we achieve
profitability, we might not be able to sustain or increase it on a quarterly or
annual basis.  Our failure to do so would adversely affect our
business and may require us to raise additional capital, which may be very
difficult given the current state of the gaming industry and capital
markets. We have recently received
assurance from a major stockholder to support our operations for 2009 should
such support become necessary.




Our
success depends on our System achieving and maintaining widespread acceptance by
casinos and poker players.




Our
success depends to a large extent on broad market acceptance of our System among
casinos and poker players. Even if we demonstrate the effectiveness of our
System and our business model, casinos and poker players may not use our System
for other reasons, including preference for live dealers, mistrust of technology
and perceived lack of reliability. We believe that acceptance of our System by
casinos and poker players will depend primarily on the following
factors:





·
            Our
      ability to demonstrate our System’s economic and other benefits to
      casinos;·
            Players
      becoming comfortable with using our System; and·
            The
      reliability of the hardware and software comprising our
      System.




We enter
into month-to-month agreements with our customers with whom we license the
software associated with our System and lease the hardware components of our
System.  If our System fails to achieve market acceptance quickly, our
customers may not renew such leases, which would reduce our net revenue and
impede our efforts to market our  System.




If
we fail to obtain or maintain gaming licenses and regulatory approvals, we will
be unable to operate our business and license or sell our System.




The
manufacture and distribution of gaming machines are subject to extensive
federal, state, local and tribal regulation. Some jurisdictions require
licenses, permits and other forms of approval for gaming devices. Most, if not
all, jurisdictions also require licenses, permits and documentation of
suitability, including evidence of financial stability, for the manufacturers
and distributors of such gaming devices and for their officers, directors, major
shareholders and key personnel. Our failure to obtain regulatory approval in any
jurisdiction will prevent us from distributing our product and generating
revenue in that jurisdiction.




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




10




Based on
our understanding of classification under the IGRA, we believe that our System
qualifies as a permissible aid to Class II gaming and that tribal casinos that
are located in states where poker is either expressly permitted or not expressly
prohibited (so long as poker is being played somewhere in the state) will be
legally entitled to use our System, provided that they otherwise comply with the
IGRA, and the regulations of the NIGC and the tribe. However, there is no
assurance that our belief is correct. The DOJ, the primary law enforcement
entity responsible for enforcing the Johnson Act, has traditionally taken a
broad view as to what constitutes a gambling device prohibited by the Johnson
Act. It is possible that the DOJ will disagree with our view that the Johnson
Act is inapplicable to the use of our System.  If so, the DOJ may
institute criminal and civil proceedings against us and a court may rule that
the Johnson Act prohibits the use of our System by tribal casinos unless the
tribe and state have entered into an appropriate tribal-state compact. Any such
proceedings could interfere with our ability to obtain regulatory approvals in
other jurisdictions.




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




If
we fail to obtain or maintain gaming licenses and regulatory approvals for our
officers, directors and significant shareholders, we might be unable to
operate our business and license or sell our System.




Gaming
authorities in some jurisdictions may investigate any individual who has a
material relationship with us, and any of our shareholders, to determine whether
the individual or shareholder is suitable to those gaming authorities. Other
than Mr. Tecce, one of our directors who has been found suitable by the
Pennsylvania Gaming Control Board as a result of regulatory approval of another
company he is associated with,  and  Mr. Ciunci, our Chief
Financial Officer (“CFO”) who has been found suitable by various gaming
authorities as a result of regulatory approvals of other companies with which he
has been associated,  none of our officers, directors or significant
shareholders has been found suitable by any gaming authority. If a gaming
authority in any jurisdiction fails to find any of our officers, directors or
significant shareholders suitable, we may be prohibited from leasing, licensing
or selling our System in that jurisdiction and it could adversely affect our
regulatory approvals in other jurisdictions.




A finding
of suitability is generally determined based upon a myriad of facts and
circumstances involving the entity or individual in question, and many gaming
authorities have broad discretion in determining suitability.  If any
of our officers, directors or significant shareholders are not found suitable in
a jurisdiction requiring a finding of suitability, we would be prevented from
leasing, licensing or selling the System in that jurisdiction as long as the
individual or entity in question remained an officer, director, or significant
shareholder. Such an occurrence would likely delay or prevent our introduction
of the System into such jurisdiction.




Depending
on how material such jurisdiction is to our plan of operations, failure to
obtain findings of suitability could have a material adverse effect on us. In
addition, a finding that one of our officers, directors or significant
shareholders is not suitable in any jurisdiction may hinder our ability to
obtain or retain regulatory approvals in other jurisdictions. Conversely,
however, a finding of suitability by one or more gaming authorities does not
ensure that similar suitability determinations will be obtained from any other
gaming authorities.




Although
we can terminate the employment of an officer or remove a director who is not
found suitable, such action could disrupt the management of our Company and
adversely affect our business and the results of our operations. In addition,
the removal of a director may be delayed if such removal requires action on the
part of our shareholders at a shareholders’ meeting.




Our
failure to remain competitive with our competitors, some of which have greater
resources, could adversely affect our ability to retain existing customers and
obtain future business.




There are
a number of companies that offer poker-related entertainment or manufacture and
distribute automated gaming machines. Most of these companies have greater
financial resources than we have. We are aware of one GLI-certified competitor
offering automated poker tables such as ours.




The
primary challenges to entering the market are the need to establish
relationships with the owners and operators of casinos and card clubs, the
requirements for regulatory approvals, and the development of the necessary
technology for an automated poker table. We anticipate that our potential
competitors will include manufacturers of gaming devices that have already
established such relationships and that have received some, if not all, of the
regulatory approvals needed to market and sell automated poker tables in our
target markets. Most of these companies have greater financial resources than we
have. Therefore, we anticipate that the challenges to entry in our market would
not pose a significant obstacle for such manufacturers if they sought to compete
with us.




11




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




We
compete in a single industry which is suffering a severe economic
downturn.




We expect
to continue to derive substantially all of our revenues from the leasing,
licensing, and sale of the System and from providing related maintenance and
support services.  The current economic recession in general, and the
severe economic downturn in the gaming industry in particular, have weakened the
financial condition of many casino operators and may further weaken them, which
could result in fewer customers leasing, licensing or purchasing our
System.





Since
2008, general worldwide economic conditions and the performance of the gaming
industry have both declined dramatically.  This has made it difficult
for our customers and us to accurately forecast and plan future business
activities, and it could cause our domestic and foreign customers to slow or
terminate their spending on our lease-, license- and sales-based
Systems.  We cannot predict the full effect or duration of the current
recession or the timing or strength of an economic recovery. If the domestic and
foreign markets for our Systems significantly deteriorate due to these
macroeconomic effects, our business, financial condition and results of
operations will likely be materially and adversely affected.





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





We lease
our System to customers under operating leases. Until we are able to sell
substantially more units of our System, our ability to lease the System to
customers on a large scale may require us to obtain additional financing
necessary for the manufacture of the System. However, sources of financing for
the gaming industry have diminished dramatically during the current economic
recession. Our inability to obtain financing on terms that would allow us to
lease the System profitably would hamper our ability to distribute the System on
a large scale and may therefore delay our ability to obtain significant early
market presence as well as market acceptance of the System.





In
addition, if our revenue is less than we anticipate or if we incur unforeseen
expenses, we may need to seek additional equity or debt financing. Under current
economic conditions, it is uncertain whether we could obtain such financing.
Even if such financing is available, it may not be available on terms that are
favorable to us or in sufficient amounts to satisfy our requirements. If we
need, but are unable to obtain, additional financing we may be unable to develop
our System, adequately protect our intellectual property, meet customer demand
for our System, withstand adverse operating results, or otherwise accomplish our
business objectives. More importantly, if we are unable to obtain further
financing when needed, our continued operations may have to be scaled down or
even ceased and our ability to generate revenues would be negatively
affected.





The
current state of financial markets exposes us to significant risks.




Financial
markets world-wide have been experiencing extreme disruption since 2008,
including, among other things, extreme volatility in security prices, and
severely diminished liquidity and credit availability (especially for the gaming
industry).  Governments have taken unprecedented actions intended to
address extreme market conditions that include severely restricted credit and
declines in real estate values.  These conditions affect us in various
ways.  The current tightening of credit in financial markets
generally, and the particularly severe tightening of them for the gaming
industry, adversely affect the ability of our customers to obtain financing for
purchases and operations and could result in weakened demand for our System and
services.  Current economic conditions could also affect our ability
to raise funds through debt or equity financing.  Our debt includes
approximately $8.5 million maturing in 2010 and $4 million maturing
in  2011.  If economic conditions do not improve by the
respective maturity dates of our debt, we might not be able to refinance them on
favorable terms, or at all.  This, in turn, could have a material and
adverse effect on us.




Risks
that impact our customers may impact us.




If fewer
players visit our customers’ facilities, if such players have less disposable
income to spend at our customers’ facilities or if our customers are unwilling
or unable to devote resources to purchasing or leasing our System, there could
be an adverse effect on our business.  Risks that affect our
customers, and thereby affect us indirectly, include, but are not limited
to:




·
            material
      adverse conditions that currently exist in gaming
  markets;




·
            global
      geopolitical events such as terrorist attacks and other acts of war or
      hostility; and




·
            natural
      disasters such as floods, hurricanes and
  earthquakes.




12




Our
business may suffer if patents are issued to our competitors in the
future.





Competitors
in our industry are currently seeking patent protection for various features
involving design and technology in electronic games and electronic poker tables
specifically.  If patents are issued to our competitors we may not
obtain, or we may lose, a competitive advantage in the marketplace and our
revenue and profitably may be negatively impacted.





Third
party claims of infringement against us could adversely affect our ability to
market our System and require us to redesign our product or seek licenses from
third parties.





We are
susceptible to intellectual property lawsuits that could cause us to incur
substantial costs, pay substantial damages or prohibit us from distributing the
System at all. We have from time to time received correspondence from our
principal competitor advising us that it has filed certain patent applications,
is aggressively pursuing patent protection for its products, and will
aggressively pursue any patent infringers. Whether a product infringes a patent
involves complex legal and factual issues, which can be time- consuming and
expensive to resolve.  In addition, because patent applications can
take many years to issue, there may be applications now pending of which we are
unaware, which may later result in the issuance of patents that our System may
infringe. If the System infringes a patent, we could be prevented from
distributing the System unless and until we can obtain a license or redesign the
System to avoid infringement. A license may not be available or may require us
to pay substantial royalties. We also may not be successful in redesigning the
System to avoid infringement. Infringement and other intellectual property
claims, with or without merit, can be expensive and time-consuming to litigate,
and we may not have the financial and human resources to defend ourselves
against any infringement suits that may be brought against us.





Defects
in, and fraudulent manipulation of, our System could reduce our revenue,
increase our costs, burden our engineering and marketing resources, involve us
in litigation and adversely affect our gaming licenses.





Our
success will depend, in part, on our ability to avoid, detect and correct
software and hardware defects and prevent fraudulent manipulation of the System.
The System is subject to rigorous internal testing, and will be subject to
additional testing by regulators in certain gaming jurisdictions. We may not be
able to build and maintain products that are free from defects or manipulations
and that satisfy these tests. Although we have taken steps to prevent defects
and manipulations, the System could suffer such defects and manipulation after
it has been widely distributed.





Although
we do not believe it is likely, it is possible that an individual could breach
the security of a casino or card club, gain access to the server on which the
System operates, and fraudulently manipulate its operations. Any such fraudulent
manipulation, defects or malfunctions could result in financial losses for our
customers and, in turn, termination of leases, cancellation of orders, product
returns and diversion of our resources.  Even if our customers do not
suffer financial losses, casinos and card clubs may replace the System if it
does not perform according to expectations. Any of these occurrences could also
result in the loss of, or delay in, market acceptance of the System and loss of
licenses, leases and sales.





In
addition, the occurrence of defects in, or fraudulent manipulation of, the
System and its associated software may give rise to claims for lost revenues and
related litigation by our customers and may subject us to investigation or other
disciplinary action by regulatory authorities that could include suspension or
revocation of our regulatory approvals.





The
use of our System could result in product liability claims that could be
expensive and that could damage our reputation and harm our
business.





Our
business exposes us to the risk of product liability claims. Subject to
contractual limitations, we will face financial exposure to product liability
claims if the System fails to work properly and causes monetary damage to poker
players, casinos or card clubs. In addition, defects in the design or
manufacture of the System  might require us to recall each
System  that has been leased. Although we maintain product liability
insurance, the coverage limits of policies available to us may not be adequate
to cover future claims. If a successful claim is brought against us in excess or
outside of our insurance coverage, we may be forced to divert resources from the
development of the System, the pursuit of regulatory approvals and other working
capital needs in order to satisfy such claims.





The
loss of the services of our Chairman and Chief Executive Officer
(“CEO”)  or other key employees, or the failure to attract additional
key individuals, could materially adversely affect our business.





Our
success will depend on retention of key executives who have been instrumental in
our development thus far, and on our ability to attract and retain employees to
complete the development of enhancements to the System and to market it widely.
We seek to compensate and incentivize our executives and other key employees
through competitive salaries and equity incentive compensation, but such
compensation may not be sufficient to enable us to retain key personnel or hire
new personnel.




13





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





We have
not yet demonstrated that we are able to implement our business plan fully or in
a timely manner. The limited experience of our management team in the gaming
industry and the market for automated game technology could result in increased
operating and capital costs, difficulties in executing our operating and
marketing strategies and delays in our expansion strategy. Our management team
also has limited experience with the process of obtaining the regulatory
licenses, certifications and approvals that we will need in order to market and
distribute the System in additional jurisdictions. We may not successfully
address any or all of the risks posed by this limited experience, and our
failure to do so could seriously harm our business and operating
results.





Our
success will depend on the reliability and performance of third party
manufacturers and suppliers.





We
currently manufacture the System from component parts obtained from third party
suppliers, but we expect in the future to retain third parties to complete all
phases of manufacturing. If those manufacturers are unable to meet our
requirements, we would be significantly hampered in serving our customers and
may miss revenue-generating opportunities. We currently obtain the touch screen
monitors for the System from a single supplier. While changing suppliers for
this component is not impossible, doing so would require significant time and
effort on our part and could cause us to miss revenue-generating opportunities
until we obtain touch screen monitors from a new supplier. In addition, the
supply of the liquid crystal display for the System is uncertain, and we could
experience significant backlogs. Our inability to contract with third party
manufacturers and suppliers to provide a sufficient supply of our product on
acceptable terms and on a timely basis could negatively impact our relationships
with existing customers and cause us to lose revenue-generating opportunities
with potential customers.





If
the network infrastructure of certain casinos in which our System is or will be
installed proves unreliable, market acceptance of our System would be materially
and adversely affected.





We expect
to enter into agreements with operators of casinos and card clubs in more than
one location. We anticipate that our agreements with such customers will provide
that they are responsible for providing at their expense a dedicated high-speed
connection between the tables comprising the System in the various locations
operated by them to a remote central server supporting such tables. Failures or
disruptions of a customer’s dedicated high-speed connection that result in the
stoppage of play or in reduced performance of our System could reduce players’
gaming experience, adversely affect the casinos’ or card clubs’ satisfaction
with automated gaming devices in general and delay or prevent market acceptance
of the System.




We are exposed to
foreign currency risk.
 
 We are
exposed to foreign currency exchange rate risk inherent in our lease and sales
commitments, anticipated leases and sales,  in foreign jurisdictions,
and assets,  denominated in Euros.  Fluctuations in the
value of the Euro may adversely affect our results of operations, We expect that
a significant portion of the volume of our business will continue to be
denominated in the Euro and because our financial results are reported in U.S.
dollars, if we generate sales or earnings in other currencies, the translation
of those results into U.S. dollars can result in a significant increase or
decrease in the amount of those sales or earnings. As such, we expect our cash
flows and earnings to continue to be exposed to the risks that may arise from fluctuations in the Euro exchange
rates.


Attitudes
and public policies regarding gaming might change, to our
detriment.





Although
poker in particular and gaming in general  have been popular in the
United States and abroad, gaming has historically experienced backlash from
various constituencies and communities. Public tastes are unpredictable and
subject to change, and they may be affected by changes in the country’s
economic, political and social climate. A change in public tastes or a backlash
among certain constituencies or in certain communities could result in reduced
popularity of poker or increased regulation of the gaming industry, either of
which could significantly reduce demand for the System.





We
have been incurring significant additional costs since we became a public
operating company in 2008, and we expect this to continue.





Our
public company compliance costs before we acquired Lightning Poker in January
2008 in the Merger were not substantial, due to our minimal operations before
the Merger. Lightning Poker did not operate as a public company before the
Merger. As a public company with operations since January 2008, we have been
incurring and will continue to incur significant legal, accounting and other
expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules
implemented by the United States Securities and Exchange Commission (“SEC”),
have imposed various requirements on public companies. Our management and other
personnel need to devote a substantial amount of time to these
matters.





Risks
Relating to our Common Stock





There
is no trading market for our common stock, and liquidity of shares of our common
stock is limited.





There is
no public trading market for our common stock, and we do not expect a public
trading market to develop in the foreseeable future.  Trading in our
stock has been minimal, the number of shareholders is relatively small and,
there are no market makers for our stock.  Consequently, holders of
our stock may find it difficult to liquidate their investments.




14




Our
common stock might never be listed on any stock exchange.




We might
not attempt to meet, or we might be unable to meet, the initial listing
standards of Nasdaq or any other stock exchange.  Even if we obtain a
listing of our common stock, we might be unable to maintain that
listing.  Before our stock is so listed, we might seek to have our
stock quoted  on the OTC Bulletin Board or on the Pink Sheets, where
our stockholders may find it more difficult than on a stock exchange to
dispose of shares or obtain accurate quotations as to trading price and trading
activity. In addition, if we failed to meet criteria set forth in a trading rule
issued by the SEC, that rule would impose various practice requirements on
broker-dealers who sell our stock to persons other than established customers
and accredited investors. Consequently, such rule may deter broker-dealers from
recommending or selling our stock, which may further reduce  its
liquidity. This would also make it more difficult for us to raise additional
capital.





We
have never paid dividends on our common stock.





We have
never paid dividends on our common stock and do not intend to pay any dividends
in the foreseeable future. We anticipate that any funds available for payment of
dividends will instead be re-invested into the Company to further our business
strategy.





Our
authorized Preferred Stock could be issued under circumstances that would
adversely affect holders of our common stock.





Our
Articles of Incorporation authorize the issuance of up to 10,000,000 shares of
Preferred Stock with designations, rights and preferences determined from time
to time by our Board of Directors. Accordingly, our Board of Directors is
empowered, without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting, or other rights which could adversely affect
the voting power or other rights of holders of our common stock.  The
Preferred Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of our company.
Although we have no present intention to issue any Preferred Stock, there can be
no assurance that we will not do so in the future.




Item1B.  Unresolved
Staff Comments
 
 None.





Item
2. Properties.





We
currently sub-lease office and warehouse space of approximately 7,500 square
feet located at 106 Chelsea Parkway, Boothwyn, PA 19061 at a rental of $63,750
per year. The sub-lease expires in March 2010. This is currently the location of
our principal offices and substantially all of our operations.  The
premises are in good condition and adequate for our foreseeable needs. We
believe our property is adequately insured.





Item
3. Legal Proceedings.





On
October 13, 2008, we settled our patent infringement lawsuit against PokerTek
that we filed in March 2008, and that we reported in the Legal Proceedings
section in Item 2.01 of the Form 8-K amendment that we filed on April 29,
2008.  We agreed to dismiss that lawsuit and PokerTek agreed to
dismiss a lawsuit that it filed against us, which pertained to our hiring of a
former employee of PokerTek.  The parties also agreed not to sue each
other for 15 years in connection with manufacturing, selling or importing
automated poker systems, except for our right to sue in connection with our Slot
Machine Tournament and  Cash Assignment Device patent applications and
PokerTek’s right to sue in connection with its Head to Head patent
application.




We and
our directors and officers have applications for licensure pending with the
Pennsylvania Gaming Control Board ("PGCB"). In the course of reviewing the
applications, the PGCB's staff has raised questions that we and a director
applicant are discussing with the staff. We are conducting these discussions
with a view towards reaching a consent agreement with the PGCB in conjunction
with the PGCB's approval of our license applications. We expect to resolve this
matter in a manner that will not have a material effect on our operations or
future prospects.





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





No
matters were submitted to a vote of security holders during the fourth quarter
of 2008.




15




PART
II





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





Market
information. There is
no established public trading market for our common stock and we do not expect
such a market to develop in the foreseeable future. Trading in
our  stock has been minimal and we have no reliable basis for
reporting trading prices or bid prices.




Holders of record.On March 1,
2009, there were approximately 75 shareholders of record of our common
stock.  We have no information that indicates the number of beneficial
owners of our common stock is materially higher.




Dividend policy.We have
never declared or paid cash dividends on our common stock. We currently intend
to retain any future earnings to finance the growth and development of our
business and do not intend to pay any cash dividends on our common stock in the
foreseeable future. Payment of dividends in the future, if any, will be made at
the discretion of our board of directors.  Such decisions will depend on a
number of factors, including our future earnings, capital requirements,
financial condition and future prospects and such other factors as our board of
directors may deem relevant.




Securities Authorized for Issuance Under Equity Compensation
Plans





The
following table sets forth information, as of December 31, 2008, with respect to
our stock option plan under which our common stock  is authorized for
issuance. We have allocated 2,500,000 shares under the Company’s 2007 Equity
Incentive Plan (the “2007 Plan”).




Plan
      Category
                      
                      Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                        (a)
                      
                      Weighted-average
      exercise price of outstanding options, warrants and rights
                        (b)
                      
                      Number
      of securities remaining available for future issuance under equity
      compensation plan (excluding securities reflected in column
      (a))
                        (c)





Equity
      compensation plans approved by security holders
                                        1,698,000(1)
                                        
                                        $1.72
                                        
                                        799,000Equity
      compensation plans not previously approved by security
    holders
                                        115,200(2)
                                        
                                        $1.10
                                        
                                        -Total
                                        1,813,200
                                        
                                        $1.68
                                        
                                        799,000




(1) Stock
options in 2007 were granted under Lightning Poker’s 2006 Equity Incentive Plan
( the”2006 Plan”). After the Merger those options were exchanged for an equal
number of the Company’s  stock options under the 2007 Plan on
substantially the same terms and conditions. All stock options granted after the
Merger were granted under the 2007 Plan.




(2) These consist of
options that were granted to a former executive in connection with his
severance.




Recent
Sales of Unregistered Securities




On
October 1, 2008, we sold 7,500 shares of common stock to one of our existing
shareholders for a cash price of $15,000, without registration under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance on the
exemptions from registration set forth in Rules 505 and 506 promulgated by the
SEC under the Securities Act.




Item
6. Selected Financial Data.





Not
applicable.





Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operation.





CAUTIONARY
STATEMENT




Throughout
this report we make “forward-looking statements,” as that term is defined in
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the”Exchange Act”).  Forward-looking
statements


16




include
the words “may,” ”will,” “could,” “would,” likely,” estimate,” “intend,” “plan,”
“continue,” “believe,” “expect,” “projections” or “anticipate” or the negative
of such terms and similar words and include all discussions about our ongoing or
future plans, objectives or expectations.  We have based these
forward-looking statements on our current expectations and projections about
future events.  These forward-looking statements are subject to known
and unknown risks, uncertainties and assumptions that may cause our actual
results, level of activity, performance or achievements  to be
materially different from any future results, levels of activity performance or
achievements expressed or implied by such forward-looking statements. You should
read this report completely and with the understanding that actual future
results may be materially different from what we expect.  We do not
plan to update forward-looking statements unless applicable law requires us to
do so, even though our situation or plans may change in the future.




All
future written and oral forward-looking statements attributable to us or any
person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section or elsewhere in
this report.  In light of these and other risks, uncertainties and
assumptions, the forward-looking events discussed in this report might not
occur. Specific factors that might cause our actual results to differ from our
expectations, might cause us to modify our plans or objectives, or might affect
our ability to meet our expectations include, but are not limited to those
identified  in Item. 1A “RISK FACTORS”.




The
information contained in this section has been derived from
our  financial statements and should be read together with the
financial statements and related notes contained elsewhere in this
report.





Overview





We were
formed to develop and market our System, which is an electronic poker table that
provides a fully automated table gaming experience without a dealer in casinos
and card rooms in regulated jurisdictions worldwide.   Our System
is designed to increase revenue and security while helping to reduce the labor
costs associated with poker play.  Our 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. Our automated table has an added
benefit of eliminating mistakes by both the dealer and the player, and
eliminating the need to tip the dealer.   The automated nature of
our System also provides an opportunity to present information about the game to
the players via individual player screens and via the common center
monitor.





We have
generated operating revenue, but we have a history of losses since our
inception. We incurred a net loss of $5,602,134 in the fiscal year ended
December 31, 2008.




We
are  registered as an approved vendor to distribute our System to
casinos, tribal casinos and card rooms located in California, Connecticut,
Iowa and New York. We have also placed our System in casinos in the Alberta
and  British Columbia provinces in Canada, Aruba, Australia, Bulgaria,
Columbia, Curacao, Finland, Germany, Guatemala, Lebanon, Macau, Panama,
Portugal, Romania, Spain, and  the Czech Republic. We must obtain
regulatory approvals in many additional jurisdictions, including Nevada, in
order to fully effectuate our business plan. We may not receive any such
regulatory approvals. Due to this and a variety of other factors, including
those described under “Risk
Factors” in Item  1A of this report, we may be unable to
generate significant revenues or margins, control operating expenses
or  achieve or sustain profitability in future years.





Critical
Accounting Policies





The
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”) . The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures. On an ongoing basis, we evaluate these
estimates, including those related to the valuation of equity awards issued. We
base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.





We
believe that of our significant accounting policies, which are described in Note
1 to our financial statements appearing elsewhere in this report, the following
accounting policies involve a greater degree of judgment and complexity.
Accordingly, these are the policies we believe are the most critical to aid in
fully understanding and evaluating our consolidated financial condition and
results of operations.





Revenue
Recognition





We
generate revenue from leasing our System and from providing maintenance and
support services to customers that license our System.  We also sell
our Systems outright (not including the software which is licensed and not sold)
to some customers , with a recurring fee for


17


maintenance. We recognize
revenue in accordance with Statement of Position (“SOP”) No. 97-2, Software
Revenue Recognition (as amended by SOP No. 98-4 and SOP No. 98-9), and Staff
Accounting Bulletin (“SAB”) No. 101, updated by SAB Nos. 103 and 104, “Update of
Codifications of Staff Accounting Bulletins”.





We
recognize revenue on sales of our System, net of rebates, discounts and
allowances, when persuasive evidence of an agreement exists, the sales price is
fixed or determinable, our System is delivered and our ability to collect is
reasonably assured. We recognize revenue generated under operating leases when
the ability to collect is reasonably assured. The lease agreements are based on
either a fixed monthly price or a pre-determined percentage of the monthly net
“rake” revenue collected for each System.




If
multiple units of our System are included in any one  sale or lease
agreement, we  allocate revenue to each unit based upon its respective
fair value against the total contract value and defer revenue recognition on
those units where we have not met all requirements of revenue
recognition.





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





Research
and Development





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





Capitalized
Software





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





Equity-based
Compensation





We
account for our stock-based employee compensation awards in accordance with SFAS
No. 123(R), Share Based Payment , which establishes accounting standards for
transactions in which an entity exchanges its equity instruments for goods or
services. SFAS No. 123(R) also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity’s equity instruments. SFAS No. 123(R) replaced
previous  requirements under SFAS No. 123 and eliminated the ability
to account for share-based compensation transactions using Accounting Principles
Board  Opinion No. 25.  SFAS No. 123(R) became effective for
us on January 1, 2006.  Under SFAS No. 123(R), we value stock options
issued based upon the Black-Scholes option-pricing model and recognize this
value as an expense over the period in which the options vest.





We
estimate the fair value of each option award on the date of grant using the
Black-Scholes option pricing model that used the assumptions noted in the
following table.  Expected volatility is based upon publicly traded
companies with similar characteristics.  We  use 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.





Year
      ended
                              December
      31,
                            
                            Year
      ended
                              December
      31,2008
                            
                            2007Weighted
      average volatility
                            
                            
                            32.1
                            %
                            
                            
                            18
                            %Expected
      dividends
                            
                            
                            0
                            
                            
                            
                            0Expected
      term (in years)
                            
                            
                            10
                            
                            
                            
                            10Weighted
      average risk-free interest rate
                            
                            
                            3.3
                            %
                            
                            
                            4.8
                            %




18




Based on
the Black-Scholes model, we recorded $125,941 and $97,096 of compensation
expense during the years ended December 31, 2008 and  2007,
respectively.





Income
Taxes





We
account for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. The accounting for income taxes involves significant judgments and
estimates and deals with complex tax regulations. The recoverability of certain
deferred tax assets is based in part on estimates of future income and the
timing of temporary differences, and the failure to fully realize such deferred
tax assets could result in a higher tax provision in future
periods.




In June
2006, the FASB issued FASB Interpretation No. 48, or FIN 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109." FIN
48 clarifies the accounting for uncertainty in income taxes recognized in
financial statements.  It prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. The interpretation became effective for Lightning Poker beginning in
2007. The adoption by Lightning Poker of FIN 48 did not have any material impact
on its results of operations, financial position or cash flows.




Recent
Accounting Pronouncements





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the United
States, and expands disclosures about fair value measurements. SFAS No. 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 SFAS No. 157 as of January 1, 2008, for
financial instruments measured at fair value on a recurring and nonrecurring
basis. Although the adoption of  SFAS No. 157 did not materially impact
our  financial condition, results of operations, or cash flows, we
are  now required to provide additional disclosures as part
of our financial statements.




In
December 2007, the FASB issued SFAS No. 141R (revised 2007), "Business
Combinations" ("SFAS No. 141R"), which replaces SFAS No. 141.  SFAS
No. 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any resulting goodwill, and any
non-controlling interest in the acquiree.  SFAS No. 141R also provides
for disclosures to enable users of the financial statements to evaluate the
nature and financial effects of the business combination.  SFAS
No. 141R will be effective for us beginning on January 1, 2009 and
must be applied prospectively to business combinations completed on or after
that date.
  In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interest in Consolidated Financial Statements - an amendment of ARB
No. 51.S FAS No. 160 changes reporting standards for noncontrolling
interests in a subsidiary. The standard is effective for fiscal years beginning
on or after December 15, 2008. We are currently reviewing SFAS No. 160 to
determine its impact on the Company’s  financial statements upon
adoption .







In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.S FAS No. 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. We are  not
currently the holder of any derivative instruments; thus, adoption of S FAS No.
161 would not currently have any effect on our  results of operations,
financial condition, or cash flows.





In April
2008, the FASB issued FASB Staff Position (“FSP”)  No. 142-3,“Determination of the Useful
Life of Intangible Assets”, which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No.142.  FSP No. 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. It will
be effective for our fiscal year beginning in Janaury 2009.  The guidance
contained in this FSP for determining the useful life of a recognized intangible
asset shall be applied prospectively to intangible assets acquired after the
effective date. However, the disclosure requirements of FSP No. 142-3 must be
applied prospectively to all intangible assets recognized in the Company’s
financial statements as of the effective date. We are currently evaluating the
effect, if any, that FSP No. 142-3 will have on our consolidated financial
statements.







19





In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) No. 14-1,“Accounting
For Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement)”(“APB 14-1”).  APB 14-1
requires that convertible debt instruments that may be settled in cash upon
conversion be separated into a debt and equity component. The debt component
will be equal to the fair value of a similar liability and reflect the entity's
borrowing rate for nonconvertible instruments. The equity component will be the
residual difference between the proceeds and the value of the debt component.
APB 14-1 is effective for fiscal years beginning after December 15, 2008 and
interim periods within those fiscal years and requires retrospective restatement
of all periods presented. It will be effective for our fiscal year
beginning in January 2009.  We are currently evaluating the effect, if
any, that APB 14-1 will have on our consolidated financial
statements.




In May
2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles. SFAS No. 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 SFAS No. 162 in order for the GAAP hierarchy to reside
in the accounting literature established by the FASB. SFAS No.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 SFAS No.162 shall be reported as a change in accounting
principle in accordance with SFAS  No. 154, Accounting
Changes and Error Corrections. We are currently reviewing SFAS No. 162 to
determine its impact on the Company’s  financial statements upon
adoption.





In June
2008, the FASB issued FSP Emerging Issues Task Force (“EITF”)
Issue  No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
.. The FASB concluded in this FSP EITF 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 EITF 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. We are currently reviewing EITF No. 03-6-1 to determine its
impact on  our  consolidated financial statements upon
adoption .





In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock”(“EITF 07-5”).
EITF 07-5 mandates a two-step process for evaluating whether an equity-linked
financial instrument or embedded feature is indexed to the entity’s own stock.
It is effective for our fiscal year beginning January 2009.  We are
currently evaluating the effect, if any, that EITF 07-5 will have on our
consolidated financial statements.




Twelve
Months Ended December 31, 2008 Compared to Twelve  Months Ended
December 31, 2007





Revenue





Our
revenues for the year ended December 31, 2008 were $1,478,911 compared to
$1,857,313  for the comparable prior year period. This decline was
principally due to lower sales of Systems  partly offset by an
increase  in license fees due to additional  Systems placed
in the field during 2008.





Cost
of Good Sold




Cost
of  good sold decreased by $270,340 to $532,949 for the twelve months
ended December 31, 2008 compared to $803,289 for the comparable prior year
period. This decline was principally due to lower sales of Systems . Gross
margins on sales remained relatively constant at 51% and 50% for the years ended
December 31, 2008 and December 31, 2007, respectively.




Operating
Expenses





Operating
expenses increased by $93,964 to $750,546 for the year ended December 31,
2008, from $656,582 for the year ended December 31, 2007.  This
increase was primarily the result of the addition of personnel, assembly,
installation and travel expenses to support our growth strategy.





Research
and Development Expenses





Research
and development expenses increased by $46,197 to $1,400,370 for the year
ended December 31, 2008, from $1,354,173 for the year ended December 31, 2007.
Research and development expenses are primarily related to the
development of our System.




20





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses increased by $174,622 to $1,966,458 for the
year ended December 31, 2008 from $1,791,836 for  the year ended
December 31, 2007. This increase was primarily the result of one-time Merger
expenses of $136,000, additional public company compliance costs  and
the addition of personnel, licensing expenditures and travel expenses to support
our growth strategy.




Depreciation
and Amortization





Depreciation
and amortization increased from $ 516,858 for the year ended December 31, 2007
to $1,391,221 for the year ended December 31, 2008. This increase was primarily
related to an impairment charge of $299,000 related to the usefulness of
certain  contracts acquired from Poker Automation, LLC. Also in 2008
we incurred an impairment charge of $227,000 related to an older version of our
System which is being replaced by our current kiosk System. In addition,
depreciation increased due to the placement of our System under
contracts.





Net
Interest Income (Expense)





Net
interest expense increased from $683,744 for the year ended December 31, 2007 to
$1,009,439 for the year ended December 31, 2008. This change was the result of
the issuance of notes payable and related warrants during 2008 and 2007 of
$4,000,000 and $6,500,000, respectively.





Liquidity and Capital
Resources





Since our
inception, we have funded our startup costs, operating costs and capital
expenditures through loans and from the issuance of our common
stock.





For the
year ended December 31, 2008, we incurred a net loss of $5,602,134 and used
$3,000,533 of cash in operating activities. At December 31, 2008, we had an
accumulated deficit of $12,770,674. The generation of cash flow sufficient to
meet our cash needs in the future will depend on our ability to obtain the
regulatory approvals required to distribute our System and successfully market
it to casinos and card clubs.





Our
current cash requirements are approximately $150,000 to $250,000 per month,
principally for salaries, professional services, marketing, office expenses and
the purchase of the hardware components for our System.





Based on
our cash flow projections and anticipated revenues, we believe we will be able
to support our operations for the foreseeable future, and we do not expect to
have to raise additional capital to fund our operations. However, if sales of
our System do not meet, or our expenses exceed, our projections, we may need to
raise additional funds through a public or private offering of securities
or  a credit facility. If that becomes necessary, there is no
assurance that such financing would be available to us, particularly during this
economic recession and severe downturn in the gaming industry. If we need
additional funding and are unable to obtain it, our financial condition would be
adversely affected.




In
addition, our ability to sell or lease our System on a large scale may require
additional financing for working capital. There is no assurance that such
additional financing would be available to us, if at all, on reasonable terms,
particularly  for the reasons mentioned above. Our inability to obtain
such financing on terms that allow us to lease our System profitably would
hamper our ability to distribute our System on a large scale.




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





Not
Applicable.





Item
8.  Financial Statements and Supplementary
Data.




Report of
Independent Registered Public Accounting Firm




The
following is a list of financial statements filed herewith:




Consolidated
Balance Sheets as of  December 31, 2008 and December 31,
2007




Consolidated
Statements of Operations for the years ended December 31, 2008 and
2007




Consolidated
Statements of Stockholders’ Equity (Deficit) for the years ended December 31,
2008 and 2007




Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and
2007




21




Report
of Independent Registered Public Accounting Firm




To the Board of Directors
and Stockholders


Lightning Gaming,
Inc.




We have audited the
accompanying consolidated balance sheets of Lightning Gaming, Inc. and
Subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statments based on our audits.




We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.




In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Lightning Gaming, Inc. and
Subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for the years then ended in conformity
with U.S. generally accepted accounting principles.




We were not engaged to
examine management's assessment of the effectiveness of Lightning Gaming Inc.
and Subsidiaries' internal control over financial reporting as of December 31,
2008, included in the accompanying Item 9A(T) - Internal Control Over
Financial Reporting and accordingly, we do not express an opinion
thereon.




/s/
McGladrey & Pullen, LLP




Blue Bell,
Pennsylvania


April 8, 2009











Lightning
      Gaming, Inc. and Subsidiaries
                                                                                    Consolidated
      Balance SheetsDecember
      31, 2008
                                                                                  
                                                                                  
                                                                                  December
      31, 2007AssetsCurrent
      AssetsCash
                                                                                  
                                                                                  $
                                                                                  2,429,493
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,638,266Accounts
      receivable, net
                                                                                  
                                                                                  
                                                                                  68,518
                                                                                  
                                                                                  
                                                                                  
                                                                                  411,615Inventory
                                                                                  
                                                                                  
                                                                                  824,268
                                                                                  
                                                                                  
                                                                                  
                                                                                  768,553Prepaid
      expenses and notes receivable
                                                                                  
                                                                                  
                                                                                  211,868
                                                                                  
                                                                                  
                                                                                  
                                                                                  73,552Total
      Current Assets
                                                                                  
                                                                                  
                                                                                  3,534,147
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,891,986Property,
      Plant and Equipment, net
                                                                                  
                                                                                  
                                                                                  1,488,541
                                                                                  
                                                                                  
                                                                                  
                                                                                  982,570Intangible
      Assets, net
                                                                                  
                                                                                  
                                                                                  144,567
                                                                                  
                                                                                  
                                                                                  
                                                                                  521,991Other
      Assets
                                                                                  
                                                                                  
                                                                                  143,094
                                                                                  
                                                                                  
                                                                                  
                                                                                  36,082Total
      Assets
                                                                                  
                                                                                  $
                                                                                  5,310,349
                                                                                  
                                                                                  
                                                                                  $
                                                                                  5,432,629Liabilities
      and Stockholders' DeficitCurrent
      LiabilitiesCurrent
      portion of capital lease
                                                                                  
                                                                                  $
                                                                                  15,879
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Accounts
      payable
                                                                                  
                                                                                  
                                                                                  538,512
                                                                                  
                                                                                  
                                                                                  
                                                                                  433,390Accrued
      expenses
                                                                                  
                                                                                  
                                                                                  813,544
                                                                                  
                                                                                  
                                                                                  
                                                                                  579,042Total
      Current Liabilities
                                                                                  
                                                                                  
                                                                                  1,367,935
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,012,432Long
      Term Debt and Other LiabilitiesLong
      term notes payable
                                                                                  
                                                                                  
                                                                                  12,
      290,831
                                                                                  
                                                                                  
                                                                                  
                                                                                  8,124,235Interest payable and other long term liabilities
                                                                                  
                                                                                  
                                                                                  1,250,765
                                                                                  
                                                                                  
                                                                                  
                                                                                  514,006Total
      Long Term Debt and Other Liabilities
                                                                                  
                                                                                  
                                                                                  13,541,596
                                                                                  
                                                                                  
                                                                                  
                                                                                  8,638,241CommitmentsStockholders'
      DeficitPreferred
      stock: $0.001 par value; authorized 10,000,000 shares,
                                                                                    no
      shares issued and outstandingCommon
      stock: $0.001 par value; authorized 90,000,000 shares,
                                                                                    4,655,285  shares
      issued and 4,647,474 outstanding at December 31, 2008
                                                                                  
                                                                                  
                                                                                  4,656
                                                                                  
                                                                                  
                                                                                  
                                                                                  -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
                                                                                  
                                                                                  
                                                                                  3,174,647
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Accumulated
      deficit
                                                                                  
                                                                                  
                                                                                  (12,770,674
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (7,168,540
                                                                                  )Treasury stock
                                                                                  
                                                                                  
                                                                                  (7,811
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -Total
      Stockholders' Deficit
                                                                                  
                                                                                  
                                                                                  (9,599,182
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (4,218,044
                                                                                  )Total
      Liabilities and Stockholders’ Deficit
                                                                                  
                                                                                  $
                                                                                  5,310,349
                                                                                  
                                                                                  
                                                                                  $
                                                                                  5,432,629See
      Notes to Consolidated  Financial Statements




22




Lightning
Gaming, Inc. and Subsidiaries
 Consolidated
Statements of
 Operations


Year
      EndedDecember
      31,
                                                                                                                                                                    
                                                                                                                                                                    December
      31,2008
                                                                                                                                                                    
                                                                                                                                                                    2007RevenuesSales
      of systems and parts
                                                                                                                                                                    $
      1,090,481
                                                                                                                                                                    
                                                                                                                                                                    $
      1,608,967License
      fees
                                                                                                                                                                    352,946
                                                                                                                                                                    
                                                                                                                                                                    237,709Service
      revenues
                                                                                                                                                                    
                                                                                                                                                                    35,484
                                                                                                                                                                    
                                                                                                                                                                    10,637Total
      revenues
                                                                                                                                                                    
                                                                                                                                                                    1,478,911
                                                                                                                                                                    
                                                                                                                                                                    1,857,313Costs
      and Operating ExpensesCost
      of products sold
                                                                                                                                                                    
                                                                                                                                                                    532,949
                                                                                                                                                                    
                                                                                                                                                                    803,289Operating
      expenses
                                                                                                                                                                    
                                                                                                                                                                    750,546
                                                                                                                                                                    
                                                                                                                                                                    656,582Research
      and development
                                                                                                                                                                    
                                                                                                                                                                    1,400,370
                                                                                                                                                                    
                                                                                                                                                                    1,354,173Selling,
      general & administrative expenses
                                                                                                                                                                    1,966,458
                                                                                                                                                                    
                                                                                                                                                                    1,791,836Depreciation
      and amortization, including impairment charges
                                                                                                                                                                    1,391,221
                                                                                                                                                                    
                                                                                                                                                                    516,858Total
      costs and operating expenses
                                                                                                                                                                    
                                                                                                                                                                    6,041,544
                                                                                                                                                                    
                                                                                                                                                                    5,122,738Operating
      Loss
                                                                                                                                                                    
                                                                                                                                                                    (4,562,633
                                                                                                                                                                    )
                                                                                                                                                                    (3,265,425
                                                                                                                                                                    )Non
      Operating Income (expense)Net
      interest expense
                                                                                                                                                                    (1,009,439
                                                                                                                                                                    )
                                                                                                                                                                    (683,744
                                                                                                                                                                    )Other
      income (expense)
                                                                                                                                                                    
                                                                                                                                                                    (30,062
                                                                                                                                                                    )
                                                                                                                                                                    16,748Net
      Loss
                                                                                                                                                                    
                                                                                                                                                                    $(5,602,134
                                                                                                                                                                    )
                                                                                                                                                                    $(3,932,421
                                                                                                                                                                    )Net
      Loss per common share-basic and fully diluted
                                                                                                                                                                    $(1.21
                                                                                                                                                                    )
                                                                                                                                                                    $(.92
                                                                                                                                                                    )Weighted
      average common shares outstanding-basic and fully diluted
                                                                                                                                                                    4,643,505
                                                                                                                                                                    
                                                                                                                                                                    4,270,570See
      Notes to Consolidated Financial Statements







23


Lightning Gaming, Inc. and Subsidiaries
 Consolidated
Statements of Stockholders' Equity (Deficit)
 Years ended
December 31, 2008 and December 31, 2007


Common
      Stock
                                                                                    AdditionalPaid
      in
                                                                                    Accumulated
                                                                                    Treasury
      StockShares
                                                                                    
                                                                                    Amount
                                                                                    Capital
                                                                                    Deficit
                                                                                    Shares
                                                                                    Amount
                                                                                    TotalBalance
      December 31, 2006
                                                                                    
                                                                                    4,100,727
                                                                                    
                                                                                    $2,031,636
                                                                                    $    
      -
                                                                                    $(3,236,119)
                                                                                    -
                                                                                    $    
      -
                                                                                    ($1,204,483)Net
      Loss
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    -
                                                                                    -
                                                                                    (3,932,421)
                                                                                    -
                                                                                    -
                                                                                    (3,932,421)Issue
      of warrants
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    223,300
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    223,300Sales
      of capital stock
                                                                                    
                                                                                    
                                                                                    200,000
                                                                                    
                                                                                    220,000
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    220,000Stock
      based compensation
                                                                                    
                                                                                    -
                                                                                    
                                                                                    97,096
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    97,096Issuance  of
                                                                                        capital
      stockin connection with
      an acquisition
                                                                                    
                                                                                    344,058
                                                                                    
                                                                                    378,464
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    378,464Balance
      December 31, 2007
                                                                                    
                                                                                    4,644,785
                                                                                    
                                                                                    2,950,496
                                                                                    -
                                                                                    (7,168,540)
                                                                                    -
                                                                                    -
                                                                                    (4,218,044)Net
      Loss
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    -
                                                                                    -
                                                                                    (5,602,134)
                                                                                    -
                                                                                    -
                                                                                    (5,602,134)Cancellation
      of Note Receivable
                                                                                    
                                                                                    -
                                                                                    
                                                                                    (40,000)
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    (40,000)Exchange
      of shares in connection with the Merger
                                                                                    
                                                                                    -
                                                                                    
                                                                                    (2,905,851)
                                                                                    2,905,851
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    -Exercise
      of stock options
                                                                                    
                                                                                    
                                                                                    3,000
                                                                                    
                                                                                    3
                                                                                    4,197
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    4,200Sales
      of common stock
                                                                                    
                                                                                    
                                                                                    7,500
                                                                                    
                                                                                    8
                                                                                    14,992
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    15,000Stock
      based compensation
                                                                                    
                                                                                    -
                                                                                    
                                                                                    -
                                                                                    125,941
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    125,941Issue
      of warrants
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    -
                                                                                    123,666
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    123,666Purchase
      of treasury stock
                                                                                    
                                                                                    -
                                                                                    
                                                                                    -
                                                                                    -
                                                                                    -
                                                                                    7,811
                                                                                    (7,811)
                                                                                    (7,811)Balance
      December 31, 2008
                                                                                    
                                                                                    4,655,285
                                                                                    
                                                                                    $4,656
                                                                                    $3,174,647
                                                                                    ($12,770,674)
                                                                                    7,811
                                                                                    ($7,811)
                                                                                    ($9,599,182)




See
Notes to Consolidated Financial Statements
  
 24




Lightning
Gaming, Inc. and Subsidiaries
 Consolidated
Statements of
 Cash
Flows


Year
      EndedDecember
      31,
                                                                              
                                                                              
                                                                              December
      31,2008
                                                                              
                                                                              
                                                                              2007Cash
      Flows from Operating ActivitiesNet
      loss
                                                                              
                                                                              $
                                                                              (5,602,134
                                                                              )
                                                                              
                                                                              $
                                                                              (3,932,421
                                                                              )Adjustments
      to reconcile net loss to net cash used in operating
      activities;Gain
      on sale of equipment
                                                                              
                                                                              
                                                                              (237,414
                                                                              )
                                                                              
                                                                              
                                                                              (122,118
                                                                              )Depreciation
      and amortization including impairment charges
                                                                              
                                                                              
                                                                              1,391,221
                                                                              
                                                                              
                                                                              
                                                                              516,858Stock based
      compensation
                                                                              
                                                                              351,161
                                                                              
                                                                              
                                                                              
                                                                              409,912Changes
      in Assets and LiabilitiesDecrease
      (Increase) in accounts receivable
                                                                              
                                                                              
                                                                              343,097
                                                                              
                                                                              
                                                                              
                                                                              (411,615
                                                                              )Increase in
      inventories
                                                                              
                                                                              (55,715
                                                                              )
                                                                              
                                                                              
                                                                              (599,212
                                                                              )Increase
      in prepaid expenses and other assets
                                                                              
                                                                              (267,132
                                                                              )
                                                                              
                                                                              
                                                                              (109,634
                                                                              )Increase
      in accounts payable
                                                                              
                                                                              
                                                                              105,122
                                                                              
                                                                              
                                                                              
                                                                              151,464Increase in accrued
      interest
                                                                              
                                                                              840,001
                                                                              
                                                                              
                                                                              
                                                                              467,540Increase
      in accrued expenses
                                                                              
                                                                              
                                                                              131,260
                                                                              
                                                                              
                                                                              
                                                                              502,000Net
      cash used in operating activities
                                                                              
                                                                              
                                                                              (3,000,533
                                                                              )
                                                                              
                                                                              
                                                                              (3,127,226
                                                                              )Cash
      flows from investing activitiesPurchase
      of equipment
                                                                              
                                                                              
                                                                              (1,581,749
                                                                              )
                                                                              
                                                                              
                                                                              (1,050,653
                                                                              )Proceeds
      from sale of  equipment
                                                                              
                                                                              
                                                                              356,162
                                                                              
                                                                              
                                                                              
                                                                              186,000Increase
      in intangible assets
                                                                              
                                                                              
                                                                              (74,963
                                                                              )
                                                                              
                                                                              
                                                                              -Purchase
      of Poker Automation, LLC assets
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              (400,000
                                                                              )Net
      cash used in  investing activities
                                                                              
                                                                              
                                                                              (1,300,550
                                                                              )
                                                                              
                                                                              
                                                                              (1,264,653
                                                                              )Cash
      flow from financing activitiesProceeds
      from issuance of notes
                                                                              
                                                                              
                                                                              4,000,000
                                                                              
                                                                              
                                                                              
                                                                              6,500,000Proceeds
      from capital lease
                                                                              
                                                                              
                                                                              80,921
                                                                              
                                                                              
                                                                              
                                                                              -Proceeds
      from sale of stock
                                                                              
                                                                              
                                                                              15,000
                                                                              
                                                                              
                                                                              
                                                                              220,000Proceeds
      for exercise of stock options
                                                                              
                                                                              
                                                                              4,200
                                                                              
                                                                              
                                                                              
                                                                              -Purchase
      of treasury stock
                                                                              
                                                                              
                                                                              (7,811
                                                                              )
                                                                              
                                                                              
                                                                              -Net
      cash provided from financing activities
                                                                              
                                                                              
                                                                              4,092,310
                                                                              
                                                                              
                                                                              
                                                                              6,720,000Net
      increase ( decrease) in cash
                                                                              
                                                                              
                                                                              (208,773
                                                                              )
                                                                              
                                                                              
                                                                              2,328,121Cash
      beginning
                                                                              
                                                                              
                                                                              2,638,266
                                                                              
                                                                              
                                                                              
                                                                              310,145Cash
      ending
                                                                              
                                                                              $
                                                                              2,429,493
                                                                              
                                                                              
                                                                              $
                                                                              2,638,266Supplemental
      Disclosure of cash Flow Information:Non
      cash financing activities:Issuance
      of capital stock in connection with the purchase of Poker Automation
      assets
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              378,464Issuance
      of capital stock warrants in connection with services
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              36Issuance
      of capital stock warrants in connection with notes payable
                                                                              
                                                                              $
                                                                              123,666
                                                                              
                                                                              
                                                                              $
                                                                              223,264See
      Notes to Consolidated Financial Statements





25




Lightning
Gaming, Inc. Notes to Consolidated Financial Statements




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. As a result of the Merger, LPI Acquisition
Corp. a Pennsylvania corporation and wholly-owned subsidiary of the Company,
merged with and into Lightning Poker. Lightning Poker thereby became a wholly
owned subsidiary of the Company and each share of common stock of Lightning
Poker outstanding immediately prior to the Merger was converted into the right
to receive one share of the Company's common stock. As a result, the former
stockholders of Lightning Poker received an aggregate of 4,644,785 shares of the
Company's common stock. In addition, all of the Company's previously outstanding
stock, which was held by Brian D. Haveson, was canceled with no obligation on
the Company's part for the payment of any consideration. Consequently, the
Merger resulted in the former stockholders of Lightning Poker having the same
percentage ownership interests in the Company as they had in Lightning Poker
prior to the Merger.
 
 This transaction has been
accounted for as a recapitalization of Lightning Poker. For financial accounting
purposes, the accompanying financial statements, identified as Lightning Gaming,
Inc. and Subsidiaries, represent the historical accounts and operations of
Lightning Poker. The accounts of Lightning Gaming, Inc. at January 29, 2008
were not material.
  Lightning Poker, Inc. a
Pennsylvania corporation (“Lightning Poker”) was formed to manufacture and
market a fully automated, proprietary electronic poker table (the “System”) to
commercial and tribal casinos, card clubs, other gaming and lottery venues, bars
and restaurants and the home market.  Lightning Poker’s System is
designed to improve economics for casino operators while improving overall
player experience.





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 electronic poker tables 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 proprietary electronic poker tables, 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.





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 our cash needs in the future will
depend on our ability to obtain the regulatory approvals required to distribute
our System and successfully market it to casinos and card clubs. The Company
believes it will be able to support its operations for the foreseeable future,
and it does not expect to have to raise additional capital to fund its
operations. However, if sales of the System 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, on reasonable and feasible terms. If the Company needs
additional funding and is unable to  obtain it,  its
financial condition would be 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 dependant upon these factors, among
others. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty. We have recently received assurance
from a major stockholder to support our operations for 2009 should such support
become necessary.





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 Lightning Poker’s products to the gaming
industry.  In exchange for distributing the product, Shuffle Master
will receive 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 will receive all the service revenues.





On
November 12, 2007 Lightning Poker  completed the acquisition of
certain assets of Poker Automation, LLC, a California limited liability company
("Poker Automation"). In connection with the completion of the acquisition and
in





26




Lightning Gaming, Inc.Notes toConsolidatedFinancial Statements(Continued)




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





consideration
for the assets acquired, Lightning Poker paid $400,000 in cash.  In addition  344,058
shares of common stock were issued  to Poker Automation’s members and certain
creditors.




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





Revenue Recognition:
The Company generates revenue from licensing the rights to use its software on
and lease of the  System and from providing maintenance and support
services to its customers. We recognize revenue in accordance with Statement of
Position (“SOP”) No. 97-2, Software Revenue Recognition (as amended by SOP No.
98-4 and  98-9)  and Staff Accounting Bulletin (“SAB”)
No.101, updated by SAB Nos.  103 and 104, “Update of Codifications of
Staff Accounting Bulletins.”





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





If
multiple product deliveries are included under a sale or license agreement, we
intend to allocate revenue to each product based upon its respective fair value
against the total contract value and defer revenue recognition on those
deliveries where we have not met all requirements of revenue recognition. As of
December 31, 2008, there were no multiple product delivery agreements entered
into by the  Company.





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





Revenues
from four casino customers represented 66% and  88% of total revenues
for the years ended December 31, 2008 and December 31, 2007,
respectively.





Use of
Estimates:  The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period.  Actual results
could differ from those estimates.





Cash:For the purposes of
reporting the statement of cash flows, the Company considers all cash
 accounts and highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. The  Company
maintained and will maintain cash balances with highly reputable financial
institutions, which at times throughout the year exceeded the federally-insured
amount. The  Company has not experienced any losses from deposits
above the federally-insured amount.





Concentrations of Credit
Risk:Financial
instruments that subject us to credit risk primarily consist of cash and trade
receivables. The  Company’s credit risk is managed by investing
cash  primarily in high-quality financial institutions. Accounts
receivable include amounts owed by various customers and groups of customers. No
collateral is required. Accounts receivable are not sold or factored.
The  Company periodically reviews its trade receivables in determining
its allowance for doubtful accounts and at December 31, 2008 and 2007, the
allowance for doubtful accounts receivable was $10,005 and $13,635,
respectively.





27





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




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





Receivables and Allowance
for Doubtful Accounts:The  Company regularly evaluates the collectability of its
trade receivable balances based on a combination of factors. When a customer’s
account becomes past due, we initiate dialogue with the customer to determine
the cause. If it is determined that the customer will be unable to meet its
financial obligation to us, such as in the case of a bankruptcy filing,
deterioration in the customer’s operating results or financial position or other
material events impacting its business, we record a specific reserve for bad
debts to reduce the related receivable to the amount we expect to recover given
all information presently available. As of December 31, 2008 and 2007, the
Company recorded a reserve of $10,005 and $13,635, respectively. Except for this
reserve, the Company believes all of its other receivables are collectible. If
circumstances related to specific customers change, our estimates of the
recoverability of receivables could materially change. Recoveries of receivables
previously written off are recorded as revenue when recovered.





At
December 31, 2008 and December 31, 2007  accounts receivable from four
casino customers and one casino customer represented 67% and 83%,
respectively, of total accounts receivable.





Acquired Intangible  Assets:
The Company follows the provisions of  Statement of Financial Accounting
Standards (“SFAS”)  No. 142, Goodwill and Other Intangible
Assets  to account for acquired intangible assets. SFAS No. 142
requires that the purchase method of accounting be used for all assets acquired
in an exchange transaction. Also, under SFAS No.142 intangible assets with a
definite life shall be amortized over their useful lives.





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





Research and
Development:
Research and development costs are charged to expense when incurred and are
included in the statement of operations, except when certain qualifying expenses
are capitalized in accordance with SFAS No. 86. As of December 31, 2008 and
December 31, 2007, no amounts had been capitalized.





Inventories:  Inventories
are stated at the lower of cost or market using the first-in, first-out
method.





Property and
Equipment:  Property and equipment are recorded at
cost. Depreciation is computed using the straight line
method  over the estimated useful lives of 3 years.





Income
Taxes:  Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary differences
and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.  Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.





The
Company accounts for income taxes under the provisions of SFAS 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.
 The
Company  adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 48, or FIN 48, "Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109." FIN 48 clarifies the uncertainty
in income taxes recognized in financial statements.  It prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a tax return. The interpretation became effective for the Company
beginning in 2007. The adoption by the Company of FIN 48 did not have any
material impact on its results of operations, financial position or cash
flows.
  Our
policy is to record interest and penalties associated with unrecognized tax
benefits as additional income taxes in the statement of operations. As of
January 1, 2008, we had no unrecognized tax benefits, and accordingly, we have
not recognized any interest or penalites during 2008 related to unrecognized tax
benefits. We did not accrue for interest or penalties as of December 31, 2008.
We do not have an accrual for uncertain tax positions as of December 31,
2008.
  We file
U.S. income tax returns and multiple state and foreign income tax returns. With
few exceptions, the U.S. and state income tax returns filed for the tax years
ending on December 31, 2005 and thereafter are subject to examination by the
relevant taxing authorities.


Advertising:  The  Company
expenses advertising costs as incurred.  Advertising expense for the
years ended December 31, 2008 and 2007  was $11,905 and
$55,843, respectively.





28




Lightning Gaming, Inc.Notes toConsolidatedFinancial Statements(Continued)





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





Impairment of Long-Lived
Assets:  The  Company reviews its long-lived assets,
including property and equipment and patents and licenses, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable.  To determine the
recoverability of its long-lived assets, the  Company evaluates the
probability that future undiscounted net cash flows, without interest charges,
will be less than the carrying amount of the assets or for identifiable
intangibles with finite useful lives, by determining whether the amortization of
the intangible asset balance over its remaining life can be recovered through
undiscounted future cashflows.





Stock Option
Plan:  The  Company has an equity-based compensation
plan which is more fully described in Note 7.  The  Company
accounts for its equity-based compensation plan under SFAS No. 123R, “Share
Based Payments”.  Compensation expense has been recognized in
connection with the options granted after December 31, 2005 pursuant to SFAS No.
123R.  All options have been granted with an exercise price equal to
the fair value of the Company’s common stock on the date of
grant.




Note
2.   Inventory





Inventory  consisted
of the following:





December
      31, 2008
              
              December
      31, 2007Finished
      tables
              
              $
              246,609
              
              $
              484,540Raw
      materials
              
              
              577,659
              
              
              284,013Inventory
              
              $
              824,268
              
              $
              768,553








Note
3.   Property and Equipment





Property
and equipment consisted of the following:




December
      31, 2008
              
              
              December
      31, 2007Equipment,
      principally tables
              
              $
              2,474,113
              
              
              $
              1,260,620Furniture
      and fixtures
              
              
              43,426
              
              
              
              20,796Property,
      plant and equipment
              
              
              2,517,539
              
              
              
              1,281,416Less
      accumulated depreciation
              
              
              (1,028,998
              )
              
              
              (298,846
              )Property,
      plant and equipment, net
              
              $
              1,488,541
              
              
              $
              982,570




During
the fourth quarter of 2008, the  Company reviewed the usefulness
of  certain older version Systems. As a result of this review
the  Company recorded an impairment charge of $226,600. The fair value
of the asset was determined based on the sum of the future undiscounted
cashflows which were estimated to be $27,700. The impairment charged is included
in depreciation and amortization expense in the Statement of Operations for the
year ended December 31, 2008.





29




Lightning Gaming, Inc.Notes toConsolidatedFinancial Statements(Continued)





Note
4.   Intangible Assets





Intangible
assets consist of the following:





December
      31, 2008
              
              
              December
      31, 2007Customer
      contracts
              
              $
              -
              
              
              $
              377,540Non-compete
      agreement
              
              
              167,052
              
              
              
              167,052Purchased  licenses
      and software
              
              
              74,964
              
              
              
              -Total
      intangibles
              
              
              242,016
              
              
              
              544,592Less
      accumulated amortization
              
              
              (97,449
              )
              
              
              (22,601
              )Intangible
      assets, net
              
              $
              144,567
              
              
              $
              521,991





The
weighted average amortization period for the customer
contracts  acquired in 2007 from Poker Automation is 2.5
years.  The weighted average amortization period for the non-compete
agreement  acquired in 2007 is 2 years. The weighted average useful
life of purchased licenses and software is 4.3 years.




Estimated
amortization expense related to recorded intangible assets is as
follows:
  Year
      Ending December 31,
                  
                  Amount2009
                  
                  $
                  82,9222010
                  
                  
                  18,3172011
                  
                  
                  18,3282012
                  
                  
                  10,0002013
                  
                  
                  10,000Thereafter
                  
                  
                  5,000$
                  144,567
  During
the third quarter of 2008, the Company reviewed the value of certain customer
contracts acquired in 2007 from Poker Automation. As a result of the review the
Company recorded an impairment charge of $299,400. 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 in the Statement of
Operations for year ended December 31, 2008.





During
the fourth quarter of 2007, the  Company reviewed the usefulness
of  certain software acquired from Poker Automation. As a result of
this review the Company recorded an impairment charge of $234,000. The fair
value of the asset was determined based on the sum of the future undiscounted
cashflows which were estimated to be nil. The impairment charged is included in
depreciation and amortization expense in the Statement of Operations for the
year ended December 31, 2007.





Note
5.   Debt





In
January 2007, the Company borrowed $1,000,000 under a one year loan agreement
with interest at 8% per annum.  At the discretion of the lender, all
principal and interest outstanding on the loan may be converted into shares of
the Company's capital stock issued in the  Company's next equity
financing at the same price and upon the same terms as the shares issued in the
next equity financing.  In connection with the loan
the  Company issued a warrant to purchase 388,802 shares of
the  Company's capital stock at an exercise price equal to $1.286 per
share of stock.  The warrant is exercisable through January 31, 2012.
In January 2008, the lender extended the maturity date of the note due in 2008
to 2010.





In April
2007, the Company amended this loan agreement and borrowed an additional
$500,000 at 8% interest per annum for one year.  At the discretion of
the lender, all principal and interest outstanding on the loan may be converted
into shares of the




30




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




Note
5.   Debt (Continued)





Company's
capital stock issued in the Company's next equity financing at the same price
and upon the same terms as the shares issued  in the next equity
financing.  In connection with the loan the Company issued a warrant
to purchase 194,401 shares of the Company's
capital stock at an exercise price equal to $1.286 per share.  The
warrant is exercisable through January 31, 2012. In January 2008, the
lender extended the maturity date of the note due in 2008
to  2010.




Also in
April 2007, the Company entered into two additional loan agreements, borrowing
$100,000 through each, at 8% interest per annum for one year. The loans have
been repaid.  In connection with the loans, the Company issued
warrants to purchase in total  77,760 shares of the Company's capital
stock at an exercise price  of $1.286.





In March
2009, the lender extended the maturity date of Notes due in 2009 to June
2010.




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 $4,000,000  under the June 2008 loan
agreement.





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. At December
31, 2008 the current portion of the capital lease amounted to $15,879.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.





In June
2007, the Company entered into a $5,000,000 three-year loan agreement with
interest at 8% per annum.  The Notes issued under the loan agreement
are secured by the assets of the Company.  In connection with the loan
the Company issued warrants to purchase $5,000,000 worth of shares of the
Company's capital stock at an exercise price equal to $2.00 per share of
stock.  The warrants are exercisable through June 2012.The
Company borrowed $4,000,000 and $1,000,000 in June 2007 and July 2007,
respectively under the June 2007 loanagreement.




In 2006,
the Company entered into a $2,000,000 three year loan agreement with
interest at 8% per annum.




Interest
is payable at maturity of the Notes.




Substantially
all of the Company’s assets are pledged as collateral on debt.




In
accordance with the loans obtained by the Company, the lenders
hold  warrants, whereby they may purchase 4,453,157
shares




31





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




Note
5.  Debt (Continued)





of the
Company’s stock at any time through June 2012 at a price of $1.77 per
share.  The purchase price shall be subject to adjustment from time to
time pursuant to the provisions of the respective warrant agreements. The
fair value of each warrant is estimated on the date of issuance using the
Black-Scholes option pricing model (see Note 7 for the assumptions used in the
model) . Expense recognized for the years ended December 31, 2008 and 2007
 related to these warrants was $225,219 and $312,817, respectively, and was
included in interest expense. The fair value of the warrants is expected to be
recognized  over the period of the related debt.





Certain
notes in the amount of $1,500,000 and related accrued interest of $222,612 at
December 31, 2008 are convertible at the discretion of the
noteholder  into 861,305 shares of the Company’s common
stock.





Long
Term Notes Payable consists of the following:




December
      31, 2008
              
              
              December
      31, 2007Notes
      Payable 8% interest due 2009
              
              $
              -
              
              
              $
              2,000,000Notes
      Payable 8% interest due 2010
              
              
              8,500,000
              
              
              
              6,500,000Notes
      Payable 8% interest due 2011
              
              
              4,000,000
              
              
              
              -Capital
      Lease obligation interest at 7.5% payable monthly through March,
      2013
              
              
              65,042
              
              
              
              -Total
      notes payable
              
              
              12,565,042
              
              
              
              8,500,000Less:
      unamortized fair market value of  warrants
              
              
              (274,211
              )
              
              
              (375,765
              )Total
      long term debt
              
              $
              12,290,831
              
              
              $
              8,124,235




See
Note 9 Related Party Transactions




Note
6.   Commitments




Through January 2007 the
Company leased its prior corporate office under a month-to-month
lease.  Rental expense under this lease was $1,900  for the
year ended December 31, 2007.




Effective
February 2007, the Company leases its corporate office under a noncancelable
operating sublease expiring in March 2010.  In addition to minimum
lease payments, the lease requires the Companyto pay for certain operating expenses
and utilities. Rental expense under this leasewas$66,647 and$56,719forthe years ended December 31, 2008 and
December 31, 2007, respectively.





Future
minimum lease payments  are as follows:




Year
      Ending December 31,
                
                Amount2009
                
                $
                63,7502010
                
                
                10,625$
                74,375




The
Company has entered into  non-exclusive licensing agreements with two
vendors whereby the Company is required to pay the vendors for maintenance
 and software licenses  used in conjunction with the Company’s
products.




We and
our directors and officers have applications for licensure pending with the
Pennsylvania Gaming Control Board ("PGCB"). In the course of reviewing the
applications, the PGCB's staff has raised questions that we and a director
applicant are discussing with the staff. We are conducting these discussions
with a view towards reaching a consent agreement with the PGCB in conjunction
with the PGCB's approval of our license applications. We expect to resolve this
matter in a manner that will not have a material effect on our operations or
future prospects.


Note
7.   Stockholders’ Deficit





Stock Option
Plan:  On March 8, 2006, Lightning
Poker adopted an equity incentive plan to enable Lightning
Poker to offer key employees, consultants and directors equity interests
in Lightning Poker, thereby helping to attract, retain and motivate such
persons to exercise their best efforts on behalf of Lightning
Poker.  After the Merger, the options previously granted by Lightning
Poker were exchanged for options to buy the Company's stock under the Company's
2007 Equity Incentive Plan (the "Stock Plan") having substantially the same
terms. The options are granted at the discretion of the Board of Directors and,
at December 31, 2008, the maximum aggregate number of
shares  issuable  under the Stock Plan
was  2,500,000.  The purchase price of each option will be
determined by the Board of Directors 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.  During 2008 and 2007, the Company issued
240,000 and 500,000 non-qualified stock options to a stockholder
and former director and to a stockholder, officer and director,
respectively.  At December 31, 2008 and  2007, 1,813,200 and
1,873,000 options to purchase shares, respectively, had been granted to
certain





32





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





Note
7.   Stockholders’ Deficit (Continued)





directors,
officers, employees and consultant of the Company.





Options
generally vest at 20% per year starting from 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
required under accounting principles generally accepted in the United States of
America, options granted under the plan are accounted for under SFAS No. 123R,
Share Based Payments, and its related interpretations.  Accordingly,
compensation costs of $125,941 and $97,096` have been recognized for the years
ended December 31, 2008, and 2007, respectively.





A summary
of option transactions in 2008 and 2007 is as follows:




WeightedAverageShares
            
            
            Exercise
      PriceOutstanding
      at January 1, 2007
            
            
            1,128,000
            
            
            $
            1.10Options
      granted
            
            
            835,000
            
            
            
            2.06Options
      cancelled
            
            
            (90,000
            )
            
            
            1.26Options
      at December 31, 2007
            
            
            1,873,000
            
            
            
            1.52Options
      granted
            
            
            433,200
            
            
            
            2.52Options
      exercised
            
            
            (3,000
            )
            
            
            1.40Options
      cancelled
            
            
            (490,000
            )
            
            
            1.22Options
      at December 31, 2008
            
            
            1,813,200
            
            
            
            1.68Options
      exercisable at December 31, 2008
            
            
            810,200
            
            
            
            1.18Shares
      available for grant at December 31, 2008
            
            
            799,000




Included
in the options granted during 2008 are 115,200 shares granted outside the Plan.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model that uses the assumptions noted in the
following table.  Expected volatility is based upon publicly traded
companies with similar characteristics.  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.




2008
                            
                            
                            2007Weighted
      average volatility
                            
                            
                            32.1
                            %
                            
                            
                            18
                            %Expected
      dividends
                            
                            
                            0
                            
                            
                            
                            0Expected
      term (in years)
                            
                            
                            10
                            
                            
                            
                            10Weighted
      average risk free interest rate
                            
                            
                            3.3
                            %
                            
                            
                            4.8
                            %




The
weighted average grant-date fair value of options granted during the twelve
months ended December 31, 2008 and 2007 was $.79 and $.17,
respectively.





Stock-based compensation expense is
recognized in the Statements of Operations based on awards ultimately
expected to vest and may




33




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




Note
7.   Stockholders’ Deficit (Continued)





Stock Option Plan (
Continued)





be reduced for estimated
forfeitures.  The Company estimated 0% forfeitures forthe stock options that were granted in
2008 and 2007.





The
following table summarizes information with respect to stock options outstanding
at December 31, 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
            Value1,813,200
            6.4
            $1.68
            -
            
            810,200
            6.3
            $1.18
            -





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
            IntrinsicNumber
            Life
      (Years)
            Price
            Value
            
            Number
            Term
      (Years)
            Price
            Value1,873,000
            7.7
            $1.53
            -
            
            558,200
            8.7
            $1.10
            -




As
of  December 31, 2008, there was approximately $364,000 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 2.7 years.





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





34




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




Note
7.   Stockholders’ Deficit (Continued)




Warrants(Continued)





The
following table is a summary of the Company’s warrant activity for the years
ended December 31, 2008 and  December 31,2007:




WeightedWarrants
              
              
              AverageOutstanding
              
              
              Exercise
      PriceOutstanding
      at January 1, 2007
              
              
              1,818,182
              
              
              $
              $1.77Warrants granted
              
              
              2,634,975
              
              
              
              2.25Warrants exercised
              
              
              -
              
              
              
              -Warrants cancelled
              
              
              -
              
              
              
              -Warrants at
      December 31, 2007
              
              
              4,453,157
              
              
              
              1.77Warrantsgranted
              
              
              2,555,988
              
              
              
              2.00Warrants exercised
              
              
              -
              
              
              
              -Warrants cancelled
              
              
              -
              
              
              
              -Warrants at
      December 31, 2008
              
              
              7,009,145
              
              
              
              1.70Warrants
      exercisable at December 31, 2008
              
              
              7,009,145




The
following table summarizes information with respect to warrants outstanding at
December 31, 2008:




Warrants Outstanding
            
            Vested
      WarrantsWeightedAverage
            Weighted
            
            
            
            WeightedRemaining
            Average
            Aggregate
            
            
            Average
            AggregateContractual
            Exercise
            Intrinsic
            
            
            Exercise
            IntrinsicNumber
            Life
      (Years)
            Price
            Value
            
            Number
            Price
            Value7,009,145
            3.6
            $1.70
            -
            
            7,009,145
            $1.70
            -







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
            4.1
            $1.77
            -
            
            4,453,157
            $1.77
            -




The
weighted average fair value of each warrant granted for the years ended December
31, 2008 and December 31, 2007 was $.006 and $.008,
respectively.





35




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




Note
7.   Stockholders’ Deficit (Continued)




Warrants (
Continued)





The fair value of each warrant is
estimated on the date of grant using the Black-Scholes option pricing model,
with the following assumptions for the years ended December 31, 2008 and
December 31, 2007:




2008
            
            
            2007Weighted
      average volatility
            
            
            24
            %
            
            18
            %Expected
      dividend yield
            
            
            -
            
            
            
            -Expected
      term (in years)
            
            
            5
            
            
            
            5Weighted
      average risk free interest rate
            
            
            4.0
            %
            
            
            5.1
            %Expected
      dividend yield
            
            
            -
            
            
            
            -










Note
8.   Income Taxes




The
components of the income tax provision (benefit) for the years ended December
31, 2008 and December 31, 2007  are as follows:




2008
              
              
              2007Current
      tax expense:Federal
              
              $
              -
              
              
              $
              -State
              
              
              -
              
              
              
              -$
              -
              
              
              $
              -Deferred
      tax benefit:Federal
              
              $
              1,609,000
              
              
              $
              1,080,000State
              
              
              520,000
              
              
              
              350,000Valuation
      reserve
              
              
              (2,129,000
              )
              
              
              (1,430,000
              )$
              -
              
              
              $
              -





36




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




Note
8.   Income Taxes (Continued)





Net
deferred tax assets consist of the following components as of December 31, 2008
and December 31, 2007:


2008
              
              
              2007Deferred
      tax asset:Net operating loss
      carryforward
              
              $
              3,602,000
              
              
              $
              1,980,000Accrued
      expenses
              
              
              879.000
              
              
              
              415.000Impairment
      charge
              
              
              94,000
              
              
              
              90,000Start up
      costs
              
              
              54,000
              
              
              
              50,000Stock based
      compensation
              
              
              47,000
              
              
              
              46,000Other
              
              
              97,000
              
              
              
              63,0004,773,000
              
              
              
              2,644,000Less valuation
      allowance
              
              
              (4,773,000
              )
              
              
              (2,644,000
              )Net
      deferred taxes
              
              $
              -
              
              
              $
              -





A reconciliation of income tax expense
at statutory rates to the income tax expense reported in the statements of
operations is as follows for the years ended December 31, 2008 and
2007.




Year
      ended December, 312008
                                                  
                                                  2007Federal
      tax benefit at statutory rate
                                                  $
                                                  (1,905,000)
                                                  
                                                  $
                                                  (1,337,000)
                                                  )State
      tax benefit net of federal taxes
                                                  
                                                  (357,000)
                                                  
                                                  
                                                  (145,700)SFAS
      No. 123R expense on stock options and warrants
                                                  
                                                  119,000
                                                  
                                                  
                                                  139,000Accrued
      expenses
                                                  
                                                  -
                                                  
                                                  
                                                  (67,000)Increase
      in valuation allowance
                                                  
                                                  2,129,000
                                                  
                                                  
                                                  1,430,000Other
                                                  
                                                  14,000
                                                  
                                                  
                                                  (19,300)Income
      tax expense
                                                  $
                                                  -
                                                  
                                                  $
                                                  -





As of December 31, 2008, the Company
has available, for federal and state income tax purposes, net operating loss
(“NOL”) carryforwards of approximately$8,900,000,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.




37




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





Note
9. Related Party Transactions





In August
2007, Lightning Poker loaned Brian Haveson, its CEO, the sum of $40,000 (the
"Loan"). The proceeds
of the Loan were used by Mr. Haveson to purchase all of the outstanding stock of
the Company pursuant to a Stock Purchase Agreement with Golden Buffalo
Capital, LLC. Under the terms of the Loan and the Merger, at the time of the
Merger the shares held by Mr. Haveson were cancelled with no obligation on the
part of the Company to pay any  consideration to Mr.
Haveson  and the Loan was discharged.





In 2006
Lightning Poker borrowed $2,000,000  under a three -year loan
agreement with Co Investment Fund II LP ( “CI II”). In 2007 Lightning
Poker borrowed $1,500,000 under a one- year loan agreement with CI II and
also in 2007 $2,000,000 under a three -year loan agreement with  CI II
(the 2006 and 2007 loans collectively the “ CI II Loans”) . CI II  is
managed by Cross Atlantic Capital Partners Inc. ("Cross Atlantic") and
benefically owns more than 5% of our outstanding stock. Mr. Caldwell, one of
our  directors, is the founder and CEO and  Mr. Tecce, also
one of our directors, is a  managing director of Cross Atlantic
..   In connection with the CI II Loans, Lightning
Poker issued to CI II warrants to purchase 3,178,990 shares of common
stock. The aggregate fair market value of the warrants at the
time Lightning Poker issued them was $706,088. During 2008 interest on
the CI II Loans amounted to $520,000 and for 2007, interest on the CI II Loans
amounted to $345,400. During 2008 and  2007, we made
no  principal payments on the CI II Loans.  As of December
31, 2008, the aggregate outstanding principal amount of the CI II Loans was
$7,500,000.





Pursuant
to the Merger, each warrant to purchase a share of Lightning Poker capital stock
became exercisable for a share of the Company’s common stock on the same terms
and conditions.





Mr. Tecce is of counsel to the law firm
of Buchanan Ingersoll & Rooney PC, which the Company retained for
various legal matters in 2007 and 2008.  During the years ended
December 31, 2008 and 2007   fees and expenses incurred to that
firm totaled $48,000 and $121,000, respectively.




Note
10.   Recently Issued Pronouncements




In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. SFAS 157 defines fair value, establishes a framework
for measuring fair value in accordance with accounting principles generally
accepted in the United States ("GAAP"), and expands disclosures about fair value
measurements .SFAS 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.




38


Lightning
Gaming, Inc. Notes to Consolidated Financial Statements (Continued)
  Note
10.  Recently Issued Pronouncements (Continued)
 
 In
December 2007, the FASB issued SFAS No. 141R (revised 2007), "Business
Combinations" ("SFAS No. 141R"), which replaces SFAS 141. 
SFAS No. 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any resulting goodwill, and any
non-controlling interest in the acquiree.  SFAS No. 141R also provides for
disclosures to enable users of the financial statements to evaluate the nature
and financial effects of the business combination.  SFAS  No. 141R
will be effective for us beginning on January 1, 2009 and must be applied
prospectively to business combinations completed on or after that
date.
  In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interest in Consolidated Financial Statements - an amendment of ARB
No. 51. SFAS No. 160 changes reporting standards for noncontrolling
interests in a subsidiary. The standard is effective for fiscal years beginning
on or after December 15, 2008. We are currently reviewing SFAS No. 160 to
determine its impact on the Company’s  financial statements upon
adoption .
  In March
2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities. SFAS No. 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. We
are  not currently the holder of any derivative instruments; thus,
adoption of SFAS No. 161 would not currently have any effect on
our  results of operations, financial condition, or cash
flows.
  In April
2008, the FASB issued FASB Staff Position (“FSP”)  No. 142-3,“Determination
of the Useful Life of Intangible Assets”, which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No.142.  FSP
No. 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. It will be effective for our fiscal year beginning in January 2009.
 The guidance contained in this FSP for determining the useful life of a
recognized intangible asset shall be applied prospectively to intangible assets
acquired after the effective date. However, the disclosure requirements
of  FSP No. 142-3 must be applied prospectively to all intangible
assets recognized in the Company’s financial statements as of the effective
date. We are currently evaluating the effect, if any, that FSP No. 142-3
will have on our consolidated financial statements.
  In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) No. 14-1,“Accounting
For Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement)”(“APB 14-1”).  APB 14-1
requires that convertible debt instruments that may be settled in cash upon
conversion be separated into a debt and equity component. The debt component
will be equal to the fair value of a similar liability and reflect the entity's
borrowing rate for nonconvertible instruments. The equity component will be the
residual difference between the proceeds and the value of the debt component.
The rule is effective for fiscal years beginning after December 15, 2008 and
interim periods within those fiscal years and requires retrospective restatement
of all periods presented. It will be effective for our fiscal year
beginning in January 2009.  We are currently evaluating the effect, if
any, that APB 14-1 will have on our consolidated financial
statements.
  In May
2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles. SFAS No. 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 SFAS No. 162 in order for the GAAP hierarchy to reside in the
accounting literature established by the FASB. SFAS No.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 SFAS No.162 shall be
reported as a change in accounting principle in accordance with
SFAS  No. 154, Accounting
Changes and Error Corrections. We are currently reviewing SFAS No. 162 to
determine its impact on the Company’s  financial statements upon
adoption.
  In June
2008, the FASB issued FSP Emerging Issues Task Force (“EITF”)
Issue  No. 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities . The FASB concluded in this FSP EITF 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 EITF Issue 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. We are currently reviewing EITF Issue
No. 03-6-1 to determine its impact on  our  consolidated
financial statements upon adoption.
  In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”(“EITF 07-5”). EITF 07-5 mandates a two-step process for evaluating
whether an equity-linked financial instrument or embedded feature is indexed to
the entity’s own stock. It is effective for our fiscal year beginning January
2009.  We are currently evaluating the effect, if any, that EITF 07-5
will have on our consolidated financial statements.


39




Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.





We have
no disagreements, transactions or events to report under this item.





Item 9A(T).  Controls and
Procedures.




Disclosure Controls and
Procedures




We
maintain disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) that are designed to ensure that information required
to be disclosed in our 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, and that such information is accumulated and
communicated to our management including our CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosure.




In
designing and evaluating our disclosure controls and procedures, our management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.




As of
December 31, 2008, we conducted an evaluation, under the supervision and with
the participation of our management including our CEO and CFO, of the
effectiveness of our disclosure controls and procedures.  Based on
that evaluation, our CEO and CFO have concluded that as of December 31, 2008,
our disclosure controls and procedures were effective at the reasonable
assurance level.




Internal Control Over
Financial Reporting




Internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) refers to the process designed by, or under the supervision of, our
CEO and CFO, and effected by our Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP.  Management is responsible for
establishing and maintaining adequate internal control over our financial
reporting.




All
internal controls, no matter how well designed, have inherent limitations and
may not prevent or detect all misstatements and fraud.  Even those
internal controls that are determined to be effective can only provide
reasonable assurance with respect to financial statement preparation and
presentation.  Additionally, judgments in decision-making can be
faulty and breakdowns in internal control can occur because of simple errors or
mistakes that are not detected on a timely basis.  Furthermore, over
time, controls that were previously determined to be effective may become
inadequate due to changes in conditions or deterioration in the degree of
compliance with internal policies and procedures.




We have
evaluated the effectiveness of our internal control over financial reporting as
of December 31, 2008.  This evaluation was performed using the
criteria set forth in the Internal Control - Integrated
Framework developed by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on such evaluation, our management has
concluded that, as of such date, our internal control over financial reporting
was effective.




There
have been no changes in our internal control over financial reporting during the
quarter ended December 31, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the SEC  that
permit us to provide only management's report in this annual
report.




Item
9B. Other Information.




None.




40




PART  III





Item  10.
Directors, Executive Officers and Corporate Governance.





Below is
certain information regarding our directors, executive officers and significant
employee. All of the Company’s directors took office on January 29, 2008, except
Brian Haveson, who became a director of the Company on September 6,
2007.







Name
                        
                        Age
                        
                        Position
      Held with the CompanyBrian
      Haveson
                        
                        45
                        
                        Chairman,
      CEO, President, DirectorRobert
      Ciunci
                        
                        62
                        
                        Chief  Financial
      Officer , SecretaryDonald
      Caldwell
                        
                        62
                        
                        DirectorFrederick
      Tecce
                        
                        73
                        
                        Director




Brian
Haveson




Mr.
Haveson has served as CEO and President of the Company since August, 2007, CEO
of Lighting Poker since October 1, 2006, President of  Lightning
Poker since March, 2008 and has been a director of Lightning Poker since June,
2005. From 1994 through 2002, Mr. Haveson served as CFO and CEO of Nutri/System,
Inc. Prior to that he was a manager for 4 years with Arthur Andersen in its
Turnaround Group. Mr. Haveson has been a professional poker player for over 10
years, cashing in 26 major tournaments including 8 World Series of Poker. He won
best overall player honors at the 2002 World Poker Finals. Mr. Haveson received
a Bachelor of Science degree in Aerospace Engineering from the University of
Maryland and a Masters in Management from Purdue University.




Robert
Ciunci




Mr.
Ciunci has served as CFO  of  Lightning Poker since January,
2007,  CFO of the Company since January 29, 2008 and Secretary
since August 2008. Previously he held various executive positions with both
private and publicly-traded gaming companies.  Mr. Ciunci was Chief
Operating Officer and CFO of American Wagering, Inc. a publicly-traded casino
and sports book operator in Nevada.  Mr. Ciunci was CFO of Autotote
Systems, Inc., a publicly-traded service provider to the horse racing
industry.  He also was Vice President Finance for the racing division
of Scientific Games Corporation. He has held numerous domestic and international
gaming licenses including in Nevada, New Jersey and Australia.  Mr.
Ciunci is a Certified Public Accountant (“CPA”)  and holds a Masters
of Business Administration in finance and a Bachelors of Science Degree in
accounting from Widener University.




41




Donald
Caldwell




Mr.
Caldwell has been a director of Lightning Poker since June 2005 He is the
founder, Chairman and CEO of Cross Atlantic Capital Partners Inc. ("Cross
Atlantic"). Mr. Caldwell oversees the operations of all of Cross Atlantic's
offices and focuses a significant amount of his time on the growth of the Cross
Atlantic franchise through fundraising, network development, and deal
flow.




Mr.
Caldwell  serves on the board of several publicly and privately held
companies and civic organizations, including Diamond Management & Technology
Consultants, Inc. (NASDAQ); Quaker Chemical Corporation (NYSE); Voxware Inc.
(NASDAQ); Rubicon Technology, Inc. (NASDAQ); Health Benefits Direct Corporation
(OTCBB);Management Dynamics, Inc.; Pennsylvania Academy of the Fine Arts
(Chairman); and the Committee for Economic Development.




Until
March 1, 1999, he was President and Chief Operating Officer of Safeguard
Scientifics, Inc., where he also previously served as Executive Vice
President.  Prior to joining Safeguard in 1993, Mr. Caldwell held a
number of executive and financial positions, including Chief Administrative
Officer of a predecessor company of Cambridge Technology Partners, Inc.
(Massachusetts), a provider of information technology consulting and software
development; Executive Vice President and then President of Atlantic Financial;
and as a partner in the national office of Arthur Young & Co., a predecessor
to Ernst & Young, LLP.




He is a
CPA in the State of New York and holds a Bachelor of Science degree from Babson
College and a Master of Business Administration from the Graduate School of
Business at Harvard University.




Frederick
Tecce




Mr. Tecce
has been a director since June 2005. Mr. Tecce  is
a managing director of Cross Atlantic.  Mr. Tecce works closely with
Mr. Caldwell on fundraising, as well as overseeing  Cross Atlantic's
legal issues, including contracts and intellectual property rights. Mr. Tecce is
also of counsel to the law firm Buchanan Ingersoll & Rooney
PC.




Mr. Tecce
has served on the board of the Pennsylvania Public School Employees'
Retirement System Board, where he was appointed by Governor Tom Ridge in 1995,
serving as chairman of the finance committee for five years. Mr. Tecce also
serves on the board of another publicly-reporting company, Health Benefits
Direct Corporation (OTCBB).




Most of
Mr. Tecce's professional career has been spent as a principal in a company that
pioneered and licensed new technology in the textile industry.  This
involved managing a long-term, complex, multi-party lawsuit directed to
enforcing the Company's patent rights.  His experience in managing
complex litigation was also the basis for his engagement with two other
significant businesses whose existence was threatened by lawsuit
disputes.  In addition, Mr. Tecce  has launched several new
businesses from the seed stage and has  been an investor and active
participant in several emerging growth companies.




Mr.
Tecce  holds a B.A. from the University of Pennsylvania and J.D. from
the Dickinson School of Law of Pennsylvania State University.




Ian
Frisbie





Mr.
Frisbie is Chief Technology Officer (“CTO”) of Lightning Poker.  We
consider Mr. Frisbie to be a significant employee, but not an executive
officer.  Mr. Frisbie has held this position with Lightning Poker
since October 2006.  He served as Senior Developer of Lightning Poker
from April 2006 through July 2006 and as acting CTO from July 2006 to October
2006.  Mr. Frisbie owned and operated 3D Internet Group from 1998
until 2006.  Prior to 1998, he served as Senior Manager of Avionics
Development for Aeronautical Radio, Inc. in Annapolis, MD.  He
received a Bachelor of Science in Electrical Engineering from the University of
Maryland.




Director
Independence





Since our
shares are not listed for trading on any stock exchange or traded on any
inter-dealer quotation system, our directors are not required to be
independent.  Using the definition of independent director contained
in the Nasdaq listing standards, Mr. Caldwell and Mr. Tecce would be considered
independent. The Nasdaq listing standards define an "independent director"


42


generally
as a person, other than an officer or employee of the Company or an individual
who has a relationship that, in the opinion of the Company's Board of Directors,
would interfere with the director's exercise of independent
judgment.





Mr.
Caldwell and Mr. Tecce serve as the members of the  audit committee of
the Board of Directors and they meet Nasdaq’s standards for independence of
audit committee members.




Involvement
in Certain Legal Proceedings




To the
best of our knowledge, during the past five years, none of the following
occurred with respect to our directors or executive officers: (1) any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer; (2) any conviction in a criminal
proceeding or being subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses); (3) being subject to any order,
judgment or decree, not subsequently reversed, suspended or vacated, of any
court of any competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his or her involvement in any type of
business, securities or banking activities; and (4) being found by a court
of competent jurisdiction (in a civil action), the SEC or the Commodities
Futures Trading Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended or
vacated.




Section 16(a) Beneficial
Ownership Reporting Compliance




Section 16(a) of
the Exchange Act requires our directors and executive officers and persons who
beneficially own more than 10% of our common stock (“10% Shareholders”) to file
with the SEC certain reports regarding their stock ownership and stock
transactions (“Section 16(a) Reports”). Such persons are required to
furnish us with copies of all Section 16(a) Reports they file. Based
solely on our review of such reports (and amendments thereto) that were
furnished to us and written representations made to us by reporting persons in
connection with certain of these reporting requirements, we believe that all the
reporting persons met their Section 16(a) reporting obligations on a
timely basis during our last fiscal year except as follows:





Co
Investment Fund II LP ("CI II"), a 10% Shareholder, made a late filing of
Form 3 to report its initial beneficial ownership of our stock as of
January 29, 2008.  Brian Haveson made a late filing of Form 4 to
report a disposition of our stock.







Code
of Ethics





We have
adopted a code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions.  We undertake to provide to any
person without charge, upon request, a copy of our code of
ethics.  Such request should be directed to us in writing as
follows:   Mr Robert Ciunci, Chief Financial Officer Lightning
Gaming Inc., 106 Chelsea Parkway Boothwyn, PA 19061.





Audit
Committee




We have a
separately-designated standing audit committee established in accordance with
section 3(a)(58)(A) of the Exchange Act.  Mr. Caldwell and Mr.
Tecce are the audit committee members.




43




Item
11. Executive Compensation.




The
following Summary Compensation Table reports compensation we or Lightning Poker
paid in 2008 and 2007 to Brian Haveson, our and Lightning Poker’s principal
executive officer;  Ronald Skotarzcak, the former President of
Lightning Poker; and Robert Ciunci, our and Lightning Poker’s principal
financial officer (collectively, our "named executive officers").




SUMMARY COMPENSATION
TABLE








Salary
                                                                                                                                                                              Bonus
                                                                                                                                                                              Stock
      Awards
                                                                                                                                                                              Option
      Awards
                                                                                                                                                                              Non-Equity
      Incentive Plan Compensation
                                                                                                                                                                              Nonqualified
      Deferred Compensation Earnings
                                                                                                                                                                              All
      Other Compensation
                                                                                                                                                                              
                                                                                                                                                                              TotalName
      & Principal Position
                                                                                                                                                                              
                                                                                                                                                                              Year
                                                                                                                                                                              
                                                                                                                                                                              ($)
                                                                                                                                                                              ($)
                                                                                                                                                                              ($)
                                                                                                                                                                              ($)
      (1)
                                                                                                                                                                              ($)
                                                                                                                                                                              ($)
                                                                                                                                                                              ($)
      (2)
                                                                                                                                                                              
                                                                                                                                                                              ($)Brian
      Haveson, Chairman and CEO
                                                                                                                                                                              
                                                                                                                                                                              2008
                                                                                                                                                                                2007
                                                                                                                                                                              
                                                                                                                                                                              $247,247
                                                                                                                                                                                $197,917
                                                                                                                                                                              $-
                                                                                                                                                                              $-
                                                                                                                                                                              $1,440
                                                                                                                                                                                $   600
                                                                                                                                                                              $-
                                                                                                                                                                              $-
                                                                                                                                                                              $10,912
                                                                                                                                                                                $  8,595
                                                                                                                                                                              
                                                                                                                                                                              $259,599
                                                                                                                                                                                $207,112Ronald
      Skotarzcak, former President of Lightning Poker(3)
                                                                                                                                                                              
                                                                                                                                                                              2008
                                                                                                                                                                                2007
                                                                                                                                                                              
                                                                                                                                                                              $ 
      40,365
                                                                                                                                                                                $160,417
                                                                                                                                                                              $-
                                                                                                                                                                              $-
                                                                                                                                                                              $18,461
                                                                                                                                                                                $27,405
                                                                                                                                                                              $-
                                                                                                                                                                              $-
                                                                                                                                                                              $46,527
                                                                                                                                                                                $10,898
                                                                                                                                                                              (4)
                                                                                                                                                                              $105,353
                                                                                                                                                                                $198,720Robert
      Ciunci, CFO
                                                                                                                                                                              
                                                                                                                                                                              2008
                                                                                                                                                                                2007
                                                                                                                                                                              
                                                                                                                                                                              $100,417
                                                                                                                                                                                $  98,025
                                                                                                                                                                              $-
                                                                                                                                                                                $-
                                                                                                                                                                              $-
                                                                                                                                                                                $-
                                                                                                                                                                              $14,880
                                                                                                                                                                                $14,880
                                                                                                                                                                              $-
                                                                                                                                                                                $-
                                                                                                                                                                              $-
                                                                                                                                                                                $-
                                                                                                                                                                              $-
                                                                                                                                                                                $-
                                                                                                                                                                              
                                                                                                                                                                              $115,297
                                                                                                                                                                                $112,905




NOTES:




(1)
            Stock
      options  in 2007 were granted under  the 2006 Plan.
      After the Merger, those options were exchanged for an equal number of the
      Company’s stock options under the  2007 Plan  on
      substantially the same terms and conditions. All stock options granted
      after the Merger were granted under the 2007 Plan. The amounts in the
      Option Awards column reflect the dollar
      amounts  recognized  for financial statement purposes
      for the reported years in accordance with SFAS No. 123R . See
      "Equity-Based Compensation"  in the Management’s Discussion
      and Analysis of Financial Condition and Results of Operation section of
      this report for additional information regarding our valuation assumptions
      with respect to stock option awards. See “Outstanding Equity Awards at
      Fiscal Year-End” below for the material terms of the grants of stock
      options.(2)
            Includes
      an employer contribution to an employee benefit plan that is available to
      all employees.(3)
            On
      March 25, 2008, Ronald Skotarczak resigned  as the President and
      a member of the board of directors  of Lightning
      Poker.(4)
            Mr.
      Stokarczak received a $43,750 severance payment in connection with his
      resignation.




44




Outstanding
Equity Awards at Fiscal Year-End





The
following table contains information concerning all unexercised
stock  options granted to our named executive officers, which
were outstanding on December 31, 2008.








OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END




Option
      Awards




Name
                                                                                  Number
      of Securities Underlying Unexercised Options (#)
    Excercisable
                                                                                  Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
                                                                                  Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options (#)
                                                                                  OptionExercise
      Price ($)
                                                                                  Option
      Expiration Date(day / mo/ year)Brian
      Haveson (1)
                                                                                  100,000
                                                                                  400,000
                                                                                  -
                                                                                  $        2.56
                                                                                  08/08/2017Ronald
      Skotarczak(2)
                                                                                  115,200
                                                                                  -
                                                                                  -
                                                                                  $        1.10
                                                                                  31/08/2016Robert
      Ciunci(3)
                                                                                  30,000
                                                                                  120,000
                                                                                  -
                                                                                  $        1.10
                                                                                  08/01/201725,000
                                                                                  
                                                                                  $        2.00
                                                                                  17/10/2018




NOTES:




(1)
            At
      December 31, 2008, Mr. Haveson held options to purchase 500,000 shares.
      Options for 100,000 shares vest each August
      until  2012.(2)
            At
      December 31, 2008, Mr. Skotarczak held options to purchase 115,200 shares,
      all of which became vested as of March 25, 2008 when he resigned from
      Lightning Poker. Mr.  Skotarczak  can exercise these
      options until March 25, 2010. Mr. Skotarczak’s other options for 172,800
      shares, which had not become vested by the time of his resignation were
      cancelled.(3)
            At
      December 31, 2008, Mr. Ciunci held options to purchase an aggregate of
      175,000 shares. Options for 30,000 shares  vest each January
      until  2012 and options for 5,000 shares vest each
      October  until 2013.




45




All
options granted prior to the Merger were granted under the
2006  Plan  and were exchanged for options to purchase the
Company’s common stock under  the 2007 Plan after the Merger, on
substantially the same terms and conditions. The exercise price was the price
determined by  the board of directors of the granting entity to
be not less than 100% (110% for an owner of more than 10% of the outstanding
stock) of the fair market value of the underlying shares at the
time  of the grant of the option.  Options are
not  exercisable after ten years ( five years for an owner of more
than 10%  of the outstanding stock) from the date of
grant.




Director
Compensation




Our
directors, excluding directors who are named executive officers, did not
receive compensation during 2008





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





The
following table indicates how many shares of our common stock were beneficially
owned as of  March 1, 2009  by (1) each person known by us
to be the beneficial owner of more than 5% of our  common stock (“5%
Shareholder”), (2) our directors, (3) our executive officers, and (4) all our
directors and executive officers as a group. In general, “beneficial ownership”
includes those shares a person has sole or shared power to vote or transfer
(whether or not owned directly) and rights to acquire such power, such
as  through the exercise of options or warrants, within 60 days.
Except as indicated otherwise below, to our knowledge the persons named in the
table below have sole voting and investment power with respect to all shares
shown as beneficially owned by them. For each person or the group reported in
the table below we based our calculation of the percentage owned of 4,647,474
shares  and added shares that such person or group (as the case may
be)  may acquire within 60 days to the number of other shares that
such  person  or the group owns as well as to the number of
shares outstanding. See Part II., Item 5 of this report for further information
on securities authorized for issuance under our equity compensation
plan.





The
address of each of the directors and executive officers listed below is c/o
Lightning Gaming, Inc., 106 Chelsea Parkway, Boothwyn, Pennsylvania
19061.




Directors
      and Executive Officers:
                  
                  
                  
                  Number
      of SharesBeneficially
      Owned
                  
                  
                  Percent
      of Class





Donald
      Caldwell
                              
                              
                              6,102,690
                              (1)
                              
                              
                              61.6
                              %Fredrick
      C. Tecce
                              
                              
                              5,692,690
                              (2)
                              
                              
                              57.4
                              %Brian
      Haveson
                              
                              
                              893,409
                              (3)
                              
                              
                              18.8
                              %Robert
      Ciunci
                              
                              
                              60,000
                              (4)
                              
                              
                              1.3
                              %All
      directors and executive officers as a group (4 persons)
                              
                              
                              7,486,099
                              (8)
                              
                              
                              74.3
                              %5% Shareholders:CI
      II and related parties
                              
                              
                              5,262,690
                              (1)(5)
                              
                              
                              53.1
                              %SIG
      Strategic Investments, LLLP
                              
                              
                              2,000,000
                              (7)
                              
                              
                              30.1
                              %Seth
      Berger
                              
                              
                              469,916
                              (6)
                              
                              
                              9.6
                              %Stewart
      Greenebaum, LLC
                              
                              
                              500,000
                              (9)
                              
                              
                              9.7
                              %







(1)
                Includes
      warrants to purchase 4,401,385 shares  held by CI II and 861,305
      shares issuable on the conversion of Notes (including accrued interest)
      held by CI II. CI II is managed by Cross Atlantic of which Mr. Caldwell is
      Chairman and CEO. Consequently, Cross Atlantic and Mr. Caldwell may be
      deemed the beneficial owners of the shares that CI II beneficially
      owns.(2)
                Includes
      warrants to purchase 4,401,385 shares  held by CI II and 861,305
      shares  issuable on the conversion of Notes (including accrued
      interest) held by CI II. CI II is managed by Cross Atlantic of which Mr.
      Tecce is a managing director. Consequently, Cross Atlantic and Mr. Tecce
      may be deemed the beneficial owners of the shares that CI II beneficially
      owns. Also includes 50,000 shares  beneficially owned by Mr.
      Tecce’s wife.(3)
                Includes
      options to purchase 100,000 shares.(4)
                Consists
      of options to purchase shares .(5)
                Consists
      of warrants to purchase shares and Notes convertible into shares. The
      address of Cross Atlantic and CI II is Five Radnor Corporate Center, Suite
      55, 100 Matsonford Road, Radnor, Pa 19087.(6)
                Includes
      options to purchase 240,000 shares. The address is 3 Dovecote Lane,
      Malvern, Pa 19355.(7)
                Consists
      of warrants to purchase shares.  The investment manager of SIG
      Strategic Investments, LLLP (“SIG”) is Susquehanna Private Equity
      Investments, LLC (“Susquehanna”), which may also be deemed the beneficial
      owner of these shares.  The address of SIG and Susquehanna is
      401 City Avenue, Suite 220, Bala Cynwyd, Pa. 19004.  This
      information is based on a Schedule 13G amendment filed by SIG and
      Susquehanna with the SEC on February 13, 2009.(8)
                Includes
      an aggregate of 5,422,690 shares that can be acquired through the exercise
      of options and warrants and the conversion of Notes.(9)
                Consists
      of warrants to purchase shares. The address of Stewart
      Greenebaum,LLC  is Five Radnor Corporate Center, Suite 55, 100
      Matsonford Road, Radnor, Pa
19087.




46




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





In August
2007, Lightning Poker loaned Brian Haveson, its Chairman and  CEO, the
sum of $40,000 (the "Loan"). The proceeds of the Loan were used by Mr. Haveson
to purchase all of the outstanding  stock of  the Company
pursuant to a  Stock Purchase Agreement  with Golden Buffalo
Capital, LLC . Under the terms of the Loan and Merger Agreement, at the time of
the Merger the shares held by Mr. Haveson were cancelled with no obligation on
the part of  the Company to pay any  consideration to Mr.
Haveson  and the Loan was discharged.





In 2006
Lightning Poker borrowed $2,000,000  under a three-year loan agreement
with  CI II. In 2007 Lightning Poker borrowed
$1,500,000  under a one- year loan agreement with CI II, the
maturity date of which has been extended to  2010,  and also in
2007 $2,000,000 under a three -year loan agreement with  CI II. In
2008 Lightning Poker borrowed  $2,000,000 under a
three-year  loan agreement with CI II (the 2006, 2007
and 2008  loans collectively, the “ CI II Loans”) . CI
II  is managed by Cross Atlantic and  is a 5% Shareholder.
Mr. Caldwell is the founder and CEO and  Mr. Tecce is
a  managing director and of counsel of  Cross
Atlantic.  In connection with the CI II Loans, Lightning Poker issued
to CI II warrants to purchase 5,262,690 shares of common stock. The aggregate
fair market value of the warrants at the time Lightning Poker issued them was
$767,891. Also, a Note in the  amount of $1,500,000 and accrued
interest of $ 222,611 are convertible into 861,305 shares. For 2007
interest on the CI II Loans amounted to $ 345,400 and for 2008, interest on
the  CI II Loans amounted to $520,000. During 2007
and  2008, we made no  principal  or interest
payments on the CI II Loans.  As of March 1, 2009, the aggregate
outstanding principal amount of the CI II Loans was $7,500,000 plus accrued
interest of  $911,890.





Mr. Tecce
is of counsel to the law firm of Buchanan Ingersoll & Rooney PC, which
Lightning Poker, the Company or both retained for various legal matters in 2007
and 2008.  During 2007 and 2008 fees and expenses incurred to that
firm  totaled $121,000 and $48,000, respectively.




Item
14. Principal Accountant Fees and Services.





Our audit
committee selected and our Board of Directors approved the firm of McGladrey
& Pullen, LLP (“M&P”) as our principal accountant to audit our annual
consolidated financial statements and perform quarterly financial statement
review services for the fiscal year ended December 31, 2008.  M&P
previously performed similar audit and review services for  Lightning
Poker for the years ended December  31, 2007
and  December 31, 2006.




Audit
Committee’s Pre-Approval of Engagement




Our
policy is that before we engage our principal accountants annually to render
audit or non-audit services, the engagement is reviewed and approved by our
audit committee.  All of our principal accountant’s services for our last
two fiscal years, which consisted solely of audit services, were within the
scope of the engagement that our audit committee approved before we entered into
the engagement.




The
aggregate fees billed to us by M&P for 2008 and 2007 were $96,250 and
$150,647, respectively. All of M&P’s billings were for audit services, which
consisted of  the audits of our and Lightning
Poker’s  annual consolidated financial statements and review of our
quarterly consolidated financial statements included in our Form 10-Q
filings.




47




Item
      15.Exhibits and Financial Statement
  Schedules.




(a)(1)Financial
Statements




Included
in Part II of this report:




Report of
Independent Registered Public Accounting Firm




Consolidated
Balance Sheets at December  31, 2008 and 2007




Consolidated
Statements of Operations for the Years Ended December  31, 2008 and
2007




Consolidated
Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31,
2008 and 2007




Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008 and
2007




Notes to
Consolidated Financial Statements




(a)(2) and (c)Financial
Statement Schedules




All
schedules are omitted because of the absence of conditions under which they are
required or because the required information is given in the financial
statements or notes thereto.




(a)(3) and (b)Exhibits




EXHIBIT
      NUMBER
                                  EXHIBIT
      DESCRIPTION2.1*
                                  Agreement
      and Plan of Merger by and among the Company, LPI Acquisition Corp. and
      Lightning Poker (see Exhibit 10.1 to Form 8-K filed October 4,
      2007)3.1*
                                  Articles
      of Incorporation of the Company (see Exhibit 3.1 to Form 8-K filed January
      30, 2008)3.2*
                                  Bylaws
      of the Company ( see Exhibit 3.2 to Form 10-SB filed April 23,
      2007)10.1*
                                  Distribution
      Agreement dated January 22, 2007, between Lightning Poker and Shuffle
      Master, Inc.  (see Exhibit 10.1 to Form 8-K filed January 30,
      2008) [Portions have been omitted pursuant to a request for confidential
      treatment.]10.2*
                                  Sublease
      Agreement for office and warehouse  (see Exhibit 10.2 to Form
      8-K filed January 30, 2008)10.3*(A)
                                  2007
      Equity Incentive Plan of the Company (see Exhibit A to Schedule 14C filed
      October 29,
2007)




48




EXHIBIT
      NUMBER
                                                EXHIBIT
      DESCRIPTION10.4*(A)
                                                Lightning
      Poker 2006 Equity Incentive Plan and form of stock option agreement
      thereunder  (see Exhibit 10.4 to Form 8-K filed January 30,
      2008)10.5*
                                                Asset
      Purchase Agreement, dated November 9, 2007, between Lightning Poker and
      Poker Automation ,LLC (see Exhibit 10.5 to Form 8-K filed January 30,
      2008)10.6*
                                                Lightning
      Poker Warrant for Stock issued  to The Co Investment Fund II, LP
      ("CI II”) dated July 25, 2006 (see Exhibit 10.6 to Form 8-K filed January
      30, 2008)10.7*
                                                Lightning
      Poker Warrant for Stock issued to CI II dated November 8, 2006 (see
      Exhibit 10.7 to Form 8-K filed January 30, 2008)10.8*
                                                Lightning
      Poker Warrant for Stock issued to Lance Funston  dated April 19,
      2007 (see Exhibit 10.8 to Form 8-K filed January 30,
  2008)10.9*
                                                Lightning
      Poker Warrant for Stock issued to Robert Paul dated April 19,
      2007  (see Exhibit 10.9 to Form 8-K filed January 30,
      2008)10.10*
                                                Lightning
      Poker Amended and Restated Warrant for Stock issued to CI II dated June
      27, 2007  (see Exhibit 10.10 to Form 8-K filed January 30,
      2008)10.11*
                                                Lightning
      Poker Amended and Restated Warrant for Stock issued to CI II dated June
      27, 2007 (see Exhibit 10.11 to Form 8-K filed January 30,
      2008)10.12*
                                                Lightning
      Poker Warrant for Stock issued to CI II dated June 27,
      2007  (see Exhibit 10.12 to Form 8-K filed January 30,
      2008)10.13*
                                                Lightning
      Poker Warrant for Stock issued to SIG Strategic Investments, LLLP (“SIG”)
      dated June 27, 2007  (see Exhibit 10.13 to Form 8-K filed
      January 30, 2008)10.14*
                                                Lightning
      Poker Warrant for Stock issued to Stewart  Greenebaum, LLC dated
      June 27, 2007 (see Exhibit 10.14 to Form 8-K filed January 30,
      2008)10.15*
                                                Lightning
      Poker Warrant for Stock issued to Frederick A. Tecce dated July 23, 2007
      (see Exhibit 10.15 to Form 8-K filed January 30, 2008)10.16*
                                                Software
      License Agreement with Standing Stone Gaming (see Exhibit 10.16 to Form
      8-K filed January 30, 2008)10.17*
                                                Loan
      Agreement dated July 27, 2006 by and among PokerMatic, Inc. d/b/a
      Lightning Poker and CI II  (see Exhibit 10.17 to Form 8-K/A
      filed April 29, 2008)10.18*
                                                Loan
      Agreement dated January 31, 2007 by and among Lightning Poker and CI
      II (see Exhibit 10.18 to Form 8-K/A filed April
    29,2008)10.19*
                                                First
      Amendment dated April 12, 2007 to Loan Agreement dated January 31, 2007 by
      and among Lightning Poker, Inc. and CI II  (see Exhibit 10.19 to
      Form 8-K/A filed April 29, 2008)10.20*
                                                Second
      Amendment  dated January 16, 2008 to Loan Agreement dated
      January 31, 2007 by and among Lightning Poker and CI II  (see
      Exhibit 10.20 to Form 8-K/A filed April 29, 2008)10.21
      *
                                                Loan
      Agreement dated June 27, 2008 by and among Lightning Poker and CI II, SIG
      and Stewart J. Greenebaum, LLC  (see Exhibit 10.21 to Form 8-K/A
      filed April 29,
2008)
 10.22*(A)
                                                    Separation Agreement
      and Release and Stock Option Agreement among Ronald Skotarczak, Lightning
      Poker and the Company, dated March 25-26, 2008 (see Exhibit 10.2 to
      Form 10-Q filed May 15, 2008)10.23*(A)
                                                    The
      Company's 2007 Equity Incentive Plan form of Incentive Stock Option
      Agreement (see Exhibit 10.1 to Form 10-Q filed August 14,
  2008)10.24*(A)
                                                    The
      Company's 2007 Equity Incentive Plan form of Nonqualified Stock Option
      Agreement (see Exhibit 10.2 to Form 10-Q filed August 14,
      2008)10.25*
                                                    Loan
      Agreement dated June 30, 2008 among Lightning Poker, SIG and CI II
      (see Exhibit 99.1 to Form 8-K filed July 7, 2008)10.26*
                                                    Promissory
      Note issued by Lightning Poker to CI II (see Exhibit 99.2 to Form 8-K
      filed July 7,
2008)
  49
  EXHIBIT
      NUMBER
                                            EXHIBIT
      DESCRIPTION10.27*
                                            Promissory
      Note issued by Lightning Poker to SIG (see Exhibit 99.3 to Form 8-K filed
      July 7, 2008)10.28*
                                            Warrant
      for Stock issued by the Company to CI II (see Exhibit 99.4 to Form 8-K
      filed July 7, 2008)10.29*
                                            Warrant
      for Stock issued by the Company to SIG (see Exhibit 99.5 to Form 8-K filed
      July 7, 2008)10.30*
                                            Guaranty
      Agreement by the Company in favor of CI II as the Lenders’ Agent (“Agent”)
      (see Exhibit 99.6 to Form 8-K filed July 7, 2008)10.31*
                                            Security
      Agreement between Lightning Poker and CI II as Agent (see Exhibit 99.7 to
      Form 8-K filed July 7, 2008)10.32*
                                            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)10.33*
                                            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)21.1
                                            List
      of subsidiaries23.1
                                            Consent
      of McGladrey & Pullen, LLP31.1
                                            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
 (A)
              Management
      contract or compensatory plan or
arrangement.
  *These
documents are incorporated herein by reference as exhibits
hereto.  Following the description of each 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. The Commission File No. for all such filings is
000-52575.


50


SIGNATURES





Pursuant
to the requirements of  Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.





Lightning
Gaming, Inc.


By: 
/s/   Brian
Haveson


Brian
Haveson, President and Chief Executive Officer





Dated:
April 8, 2009







Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.




Signature
                        
                        Title
                        
                        Date/s/   Brian Haveson
                        
                        President
      and Chief Executive Officer, Director
                        
                        April
      8, 2009Brian
      Haveson
                        
                        (Principal
      Executive Officer)/s/  
      Robert D.
      Ciunci
                        
                        Chief
      Financial Officer
                        
                        April
      8, 2009Robert
      D. Ciunci
                        
                        (Principal
      Financial and Accounting Officer)/s/  
      Donald
      Caldwell
                        
                        Director
                        
                        April
      8, 2009Donald
      Caldwell/s/  
      Fredrick C.
      Tecce
                        
                        Director
                        
                        April
      8, 2009Fredrick
      C.  Tecce