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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2010

or

For the transition period from                     to                

Commission file number: 000-25855

Entertainment Gaming Asia Inc.

(Name of registrant as specified in its charter)

Unit 3705, 37/F, The Centrium

60 Wyndham Street

Central, Hong Kong

(Address of principal executive offices)

+ 852-3151-3800

(Registrant’s telephone number, including area code)

Securities to be registered under Section 12(b) of the Act:

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

None

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  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes o No  x

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  o  No  o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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 (as defined in Rule 12b-2 of the Act):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes  o  No  x

State the aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:  $16,819,055

State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 116,606,060 shares as of March 15, 2011.

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CAUTIONARY NOTICE

This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Those forward-looking statements include our expectations, beliefs, intentions and strategies regarding the future.  Such forward-looking statements relate to, among other things, overall industry environment, our working capital requirements and results of operations, the further approvals of regulatory authorities, adverse court rulings, production and/or quality control problems, the denial, suspension or revocation of privileged operating licenses by governmental authorities, competitive pressures and general economic conditions.  These and other factors that may affect our financial results are discussed more fully in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report.  We caution readers not to place undue reliance on any forward-looking statements.  We do not undertake, and specifically disclaim any obligation, to update or revise such statements to reflect new circumstances or unanticipated events as they occur, and we urge readers to review and consider disclosures we make in this and other reports that discuss factors germane to our business.  See in particular our reports on Forms 10-K, 10-Q, and 8-K subsequently filed from time to time with the Securities and Exchange Commission.

PART I

Item 1.                    Business

GENERAL

Entertainment Gaming Asia Inc. is engaged in: (i) electronic gaming machine (EGM) participation operations, which include the ownership and leasing of EGMs in resorts, hotels and other venues in Pan Asia placed on a revenue sharing basis with venue owners; (ii) table game product operations, which consist exclusively of the design, manufacture and distribution of gaming chips and plaques; (iii) non-gaming product operations, which consist primarily of the design, manufacture and distribution of automotive components; and (iv) development of regional casinos in the Indo-China region where we intend to own and operate such casinos under the “Dreamworld” brand.  Our current primary focus is our EGM participation operations.

For our EGM participation business, we utilize our developed operational experience and established market presence and key relationships to identify and develop new gaming venues, acquire the EGMs, casino management systems and other gaming peripherals directly from manufacturers, dealers and suppliers and install the same in our contracted venues. In addition, we assist the venue owners in brand-building and marketing promotions.  A good example is the signing of an agreement with NagaWorld Limited, where we have evolved from a pure machine lessor to a slot floor operator.  In NagaWorld, a luxury casino resort in Phnom Penh, Cambodia, we jointly manage with the casino owner the slot floor operations and design marketing programs and slot promotions for our designated gaming space.  We also hire, train and manage the floor staff and set high expectations on the level of customer service.

In addition to our core EGM participation business, through our subsidiaries, Dolphin Products Pty Limited and Dolphin Advanced Technologies Pty Ltd., we have historically developed, manufactured and distributed both high-frequency RFID and traditional non-RFID gaming chips and plaques as well as component parts primarily for the automotive industry, including inner and remote door handles, fuel filler hinge assemblies, module brackets, steering wheel spoke covers, speaker grills, fasteners, safety products and cosmetic components for automobiles.

In May 2010, we announced our intention to expand our gaming operations and become an owner and operator of regional casinos under the “Dreamworld” brand in select emerging gaming markets in Pan Asia.  We believe this expanded business strategy will allow us the potential for higher long-term incremental returns on our operations given the ability to collect a greater share of the net win compared to our existing participation contracts.  In addition, it provides us greater long-term control over our operations.

Pursuant to this growth strategy, we have secured two casino projects in Cambodia near the Vietnam border.  These projects are strategically located in two separate provinces in southern Cambodia in order to capitalize on what we believe are attractive target markets in the nearby respective major cities and towns.  On May 26, 2010, we formed a new company in Cambodia, Dreamworld (Takeo) Investment Holding Limited, which entered into a Land Sale & Purchase Agreement for the acquisition of a parcel of land in the Takeo province of Cambodia where we intend to develop and operate a casino-hotel.  On March 4, 2011, we entered into a shareholder agreement with a local partner with respect to our participation in a joint venture company with the tentative name of “Dreamworld Leisure (Kampot) Limited”  for the development, ownership and operation of a casino located in Kampot province of Cambodia, near the Vietnam border.

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We have offices in Hong Kong, Philippines, Cambodia and Australia.  We also have manufacturing facilities in Melbourne, Australia.

Our mailing address in the United States is:

Entertainment Gaming Asia Inc.

40 E. Chicago Avenue, #186

Chicago, Illinois, 60611

USA

The telephone number in the United States is (312) 867-0848.

During the fiscal year ended December 31, 2010, we owned or had rights to certain trademarks that we used in connection with the sale of our products, including, but not limited to Dolphin™ and we made applications for the trademark “Dreamworld” in certain Pan Asian countries. Other than the aforesaid trademarks, this report also makes reference to trademarks and trade names of other companies.

RECENT DEVELOPMENTS

During the fiscal year ended December 31, 2010 and through the date of this report, we have engaged in the following:

Change of Corporate Name

As approved by our stockholders during our annual meeting held on July 23, 2010, we changed our corporate name from Elixir Gaming Technologies, Inc. to the current name Entertainment Gaming Asia Inc.  We believe this new corporate name more aptly reflects our expanded gaming business model, particularly in relation to the establishment of casino projects in the Indo-China region as more specifically described below, to complement our EGM participation business.

Expanded Gaming Business Model to Include the Development and Operation of Regional Casinos

In May 2010, we announced our intention to expand our gaming operations and become an owner and operator of regional casinos under the “Dreamworld” brand in select emerging gaming markets in the Indo-China region.  We believe this growth strategy will enable us to leverage our existing market presence and relationships and capitalize on what we perceive to be attractive economic and socio-demographic trends in our target markets.  We believe this expanded business strategy will allow us the potential for higher long-term incremental returns on our gaming operations given the ability to collect up to 100% of the gaming revenue compared to our existing percentage of EGM net win under our participation contracts.  In addition, we believe it will provide us with greater long-term control over our operations.

Pursuant to this growth strategy, on May 26, 2010, we formed a new company in Cambodia, Dreamworld (Takeo) Investment Holding Limited (“Dreamworld Holding”), which entered into a Land Sale & Purchase Agreement (the “S&P Agreement”) for the acquisition of a parcel of land in Takeo Province of Cambodia (the “Land”) with the owner of the Land (the “Seller”).

The Land has a total area of approximately seven acres (30,000 square meters) and is located in Takeo province, a border area of Cambodia and Vietnam, which is approximately 125 miles (200 kilometers) south of Cambodia’s capital city Phnom Penh and connects the major cities of southern Vietnam and Phnom Penh. The total consideration for the Land was $1.76 million and the purchase transaction was completed on June 28, 2010.

On May 21, 2010, a license to build and open a casino hotel in the Takeo province of Cambodia was granted by the Government of the Kingdom of Cambodia to Dreamworld Leisure (Cambodia) Limited (“Dreamworld Leisure”), another new wholly-owned subsidiary of the Company. Pursuant to the license, Dreamworld Leisure is allowed to construct and open a casino-hotel for table games and EGMs with the proposed name of Dreamworld Casino and Resort (“Dreamworld Casino (Takeo)”). It is anticipated that Dreamworld Casino (Takeo) will be constructed on the Land and upon its completion, a formal casino license will be granted to Dreamworld Leisure, which will be the operating company of Dreamworld Casino (Takeo).  As discussed elsewhere in this report, we intend to slow development of the Takeo Project in order to divert our available capital to certain potential new projects, which we believe will offer greater short-and medium-term return potential and, as a result, we presently do not have a timeline for the development of the Takeo Project and do not expect to commit significant capital to the project in 2011.

On March 4, 2011, we entered into a shareholders agreement with a local partner (the “Shareholders Agreement”) with respect to our participation in a joint venture company with the tentative name of “Dreamworld Leisure (Kampot) Limited” (the “JVC”) for the development, ownership and operation of a casino located in Kampot province of Cambodia, near the Vietnam border (the “Kampot Project”).

The local partner is the owner of a parcel of land (the “Kampot Land”) measuring approximately 108,000 square feet (10,000 square meters) located in a prominent area of southern Cambodia in the Kampot province near the Vietnam border and the Kampot Project will be constructed thereon.  It will include a casino, which will be operated under the ‘Dreamworld’ brand (“Dreamworld Casino (Kampot)”), with table games such as baccarat, roulette and dice games as well as EGMs.  The initial phase of Dreamworld Casino (Kampot) is expected to include up to 14 table games, such as baccarat, roulette and dice games, and 25 EGMs and, subject to the timely receipt of the required gaming licenses, to open in the fourth quarter of 2011.

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Upon completion of Dreamworld Casino (Kampot), we will have the dominant management right and control over the business operations of the JVC and Dreamworld Casino (Kampot) and all business decisions and policy-making in respect of the business will be vested in the board of directors of the JVC in which we will have the right to nominate a majority of the members.

Subject to any early termination of the Kampot Project pursuant to the terms of the Shareholders Agreement, the Kampot Project is for an initial term of 25 years commencing from the date of the Shareholders Agreement and is subject to renewal by the parties mutual consent.

The Kampot Project will be owned by the JVC, a private company incorporated in Cambodia for the sole purpose of holding and operating Dreamwold Casino (Kampot). The respective shareholdings of the JVC by us and the local partner are 67% and 33%, respectively.

Pursuant to the terms of the Shareholders Agreement, the JVC will apply for its own gaming license for the operation of Dreamwold Casino (Kampot) in Kampot province of Cambodia (the “Casino License”) and the local partner will lease to the JVC the Kampot Land for an annual fee of $1.00 throughout the term of the Kampot Project (the “Lease Agreement”).  Subject to certain conditions precedent, namely, the entering into of the Lease Agreement between the local partner and the JVC, the delivery of the vacant possession of the Kampot Land by the local partner to the JVC, and the obtaining of the Casino License and the necessary construction permit and approvals by the JVC (all such conditions precedent shall be fulfilled or waived by us within three months from the date of the Shareholders Agreement or such later date as may be agreed by us in writing), we will provide funding for all development, construction and pre-opening costs of the Kampot Project; provide all necessary EGMs and gaming tables to Dreamworld Casino (Kampot) as well as pay the local partner a lump sum of $260,000 as balance consideration of their contributions.  Regardless of the aforesaid percentages of the shareholding interests, it is agreed that all dividends declared by the JVC will be distributed to us and the local partner on a 60:40 basis, respectively.

Quasi-Reorganization

Effective December 31, 2010, we effected an elective Quasi-Reorganization of our balance sheet in accordance with Section 210 of the Codification of Financial Reporting Policies and reduced our accumulated deficit account to a zero balance, with a commensurate reduction in our additional paid-in capital, for purposes of establishing a new earned surplus account for the accumulation of future earnings from current operations (the “Quasi-Reorganization”).

As of December 31, 2010, we had an accumulated deficit of approximately $386.1 million and additional paid-in capital of approximately $415.8 million. The accumulated deficit was mainly attributable to the impairment of assets including contract acquisition fees, goodwill and intangibles.  While we have dramatically improved our operating results, we effected the Quasi-Reorganization as it is believed that it is not realistic to expect to be able to recover the accumulated deficit in the short to medium term.

The Quasi-Reorganization enables companies such as ourselves, which have undergone a shift in business focus, to establish a “fresh start” from an accounting perspective. The Quasi-Reorganization adjustments have no effect on our cash flow and result in a balance sheet that more accurately reflects our retained earnings.

We complied with Accounting Standard Codification (ASC) 805, Business Combination to restate assets and liabilities as part of the Quasi-Reorganization. The Company with the assistance of an independent third-party valuation firm performed the fair value assessment and computed the estimated fair value for operating entity as of December 31, 2010 under ASC 805 based on the income approach, excess earning methodology.  Participation contracts were recognized as intangible assets. In compliance with the SEC guidelines, no write-up of net assets were recorded as a result of the Quasi-Reorganization and the excess fair value was reallocated as a pro rata reduction to the non-current assets.

Third Amendment to Trade Credit Facility Agreement and Related Note

On May 25, 2010, we entered into Amendment No.3 to our Trade Credit Facility Agreement and Related Note (the “Third Amendment”) with EGT Entertainment Holding Limited (formerly known as Elixir Group Limited, a wholly-owned subsidiary of Melco International Development Limited (“EGT Entertainment Holding”)), our existing principal shareholder, pursuant to which the parties agreed to further amend the terms of the Trade Credit Facility Agreement and Related Note dated April 21, 2008, as amended by an amendment to it dated November 6, 2008 and a second amendment (the “Second Amendment”) dated July 24, 2009 (the “Facility Agreement”).

According to the Second Amendment, we were relieved from making any actual repayments of principal or interest under the Facility Agreement during the period from July 1, 2009 to June 30, 2010 although interest at the rate of 5% per annum continued to accrue on the outstanding principal balance of approximately $9.2 million (the “Outstanding Principal Balance”).

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Pursuant to the Third Amendment, the payment schedule for the Outstanding Principal Balance and the interest accrued thereon was further restructured in the following manner:

(i)            the total interest accrued on the Outstanding Principal Balance during the period from July 1, 2009 to June 30, 2010 in the amount of approximately $458,000 was paid by us in a lump sum payment on July 1, 2010;

(ii)           on the first day of each calendar month during the period from August 1, 2010 to June 1, 2011, we have to pay interest in arrears on the Outstanding Principal Balance at the same rate of 5% per annum for the preceding month; and

(iii)          we have to repay the Outstanding Principal Balance and interest accrued thereon at the rate mentioned above in 18 equal monthly installments commencing on July 1, 2011.

(See Part III Item 13. Certain Relationships and Related Transactions and Director Independence of this filing for more details.)

Supplemental Agreement with NagaWorld Limited

On May 25, 2010, we entered into a Supplemental Agreement (the “Supplemental Agreement”) to the Machines Operation and Participation Consolidation Agreement dated December 30, 2009 (the “Consolidation Agreement”) with NagaWorld Limited (“NagaWorld”) to place an additional 30 EGM seats on a participation basis at NagaWorld casino resort, a luxury casino resort in Cambodia and the only licensed full service casino in and around the capital city of Phnom Penh.   The additional 30 EGM seats under the Supplemental Agreement were placed as of August 31, 2010.

Pursuant to the terms of the Supplemental Agreement, our area of operation on the lobby gaming floor of NagaWord was expanded to include two new areas and the maximum number of EGMs that we are permitted to operate and manage at the operation area was increased by 30 seats from 640 seats to 670 seats.  The major operation of the Consolidation Agreement as amended by the Supplemental Agreement, included, amongst others, the joint management and operating control over the EGMs by us and NagaWorld; the sharing of the win per unit per day (“WUD”) from all EGMs and certain operating costs related to marketing and floor staff by us and NagaWorld at a 25%/75% split, respectively (subject to our entitlement to receive 100% of the WUD from certain EGMs during a certain period of time as described below); and the expiration date of the operation of the EGMs is at the end of a six-year period commencing March 1, 2010.

In consideration for entering into the Supplemental Agreement by NagaWorld, we paid to NagaWorld a commitment fee of $1 million in June 2010. While we and NagaWorld share the WUD from the 670 EGMs at a 25%/75% split, respectively, we were entitled to 100% of the WUD from the newly added 30 EGM seats and the 200 EGM seats placed under the Consolidation Agreement until we had received a total accumulated WUD of $6.8 million from these 230 EGM seats (representing the aggregate of $4.1 million commitment fee paid for the 200 EGM seats under the Consolidation Agreement, the $1 million commitment fee under the Supplemental Agreement and our 25% share of WUD from these 230 EGM seats).  All commitment fees under the Supplemental Agreement and Consolidation Agreement were fully recouped by us before the end of August 2010.

ELECTRONIC GAMING MACHINE (EGM) PARTICIPATION

Overview

Since September 2007, our primary business model has focused on the ownership and leasing of EGMs placed with venue owners on a revenue sharing basis within certain countries in Pan Asia with operations to date located in Cambodia and the Philippines.  Utilizing our developed operational experience and established market presence and key relationships, we identify and secure venues for the placement of EGMs and where warranted, casino management systems that track game performance and provide statistics on each installed EGM owned and leased by us.  We contract with the venue owners or operators for the placement of the EGMs on a revenue sharing basis. In addition, we acquire and install the EGMs and other gaming systems and peripherals at the relevant gaming venues.

EGM participation operations comprised 64% of our consolidated revenues for the year ended December 31, 2010.

Operations

We contract with the venue owners or operators for the placement of EGMs on a revenue sharing basis and directly acquire and install the EGMs and other gaming peripherals at the relevant gaming venues. The target market for our EGM participation business is hotels and resorts and various other gaming venues across Pan Asia.  We focus on underserved gaming markets that we believe are poised for significant growth, and many of the targeted venue owners have little or no gaming operations experience.

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We utilize EGMs from leading manufacturers, including Aristocrat Technologies, International Game Technology, and WMS Gaming. As of December 31, 2010, we had an inventory of 492 EGMs suitable for deployment and believe, given our casino development plans, that we will need to supplement our existing inventory with the purchase of a certain number of new and used EGMs from cash on hand and cash from operations over the next twelve months.

We help market, design and develop the gaming venues of the venue owners to whom we lease our EGMs and related systems.  We contract with the venue owner for the leasing and maintenance of the EGMs on a revenue sharing basis.  We provide the development and implementation of various related gaming services in the Pan Asia region which include:

·                  Developing the technical and network design, layout and overall space configuration of the gaming floor in order to best utilize and leverage the available space and present an appealing environment to customers; and

·                  Selecting the optimal mix of EGMs for the property to optimize the economic potential of the gaming floor and overall experience for the venue owner’s customers.

We assist the venue owner by providing training for its gaming floor personnel regarding the operation and maintenance of the EGMs and back-of-the-house accounting.  In addition, we maintain all performance data and provide ongoing technical and operations support in order to optimize game performance throughout the floor.

We expect that our EGM participation revenues and gross margins will be influenced by a number of factors, including the number and type of EGMs in service, the levels of play and the revenue sharing percentage.  In addition, we may initially install fewer EGMs than contracted for at a venue and increase the number of EGMs gradually as a way to build demand for our product.  Our cost of sales includes the depreciation, joint cost sharing (primarily, in the event our contract dictates we are involved in the management of the floor operations) and other installation and maintenance costs of the EGMs.

As of December 31, 2010, our EGM participation operations were concentrated in two countries, Cambodia and the Philippines. In Cambodia, we had a total of 680 EGM seats in operation in two venues.  In the Philippines, we had a total of 867 EGM seats in operation in six venues.

Competition

The global gaming industry is highly competitive.  Our competitors principally include private companies in Cambodia and both public and private companies in the Philippines with operations focused in Asia.  Part of our operating strategy includes addressing markets and customers where we face less competition and entry barriers are higher due to several factors including:

·                  United States Gaming Laws:  All of the major gaming equipment suppliers are licensed by a large number of United States regulatory agencies.  In order for one of these companies to enter the markets we serve in Asia on a direct revenue sharing model with a foreign operator, the operator would be required to comply with various United States regulatory procedures.  We are not subject to this requirement as we have surrendered all our gaming licenses in the United States.

·                  Local Knowledge:  Through our operating experience, we have an extensive database of contacts and relationships throughout the Pan-Asia region that provides us with a unique opportunity to penetrate these under-developed markets.

Gaming Regulations and Licensing of Gaming Machine Participation

The regulatory structures in the Asian countries where we operate our EGM participation business, including the Philippines and Cambodia, are not as developed or clearly defined as the United States.  In general, all of the countries in which we currently operate require the venue owner to obtain a gaming license in order to operate the EGMs leased by us and we demand that all venue owners to whom we lease EGMs, being our customers in the Philippines and Cambodia, hold the required gaming licenses to operate their venues.  Since our EGM participation business model primarily focuses on leasing the EGMs to the venue owner, technically, we are not considered to be an operator or owner of the gaming operations by the relevant authorities (although to a certain extent we have assumed some operator roles, including but not limited to the design of marketing programs, recruitment, training and management of floor staff, in certain of our venues) and thus, we are not required to obtain any form of gaming license in either the Philippines or Cambodia for our participation business in such jurisdictions.  However, current gaming laws, including licensing requirements and other regulatory obligations, could change or become more stringent resulting in additional regulations being imposed upon us and our EGM participation operations.  Any such adverse developments in the regulation of the gaming industry could be difficult to comply with and significantly increase our costs which, in turn, could cause our projects to be unsuccessful.

On May 21, 2010, we obtained a license to build and open a casino hotel in Takeo province of Cambodia from the Government of the Kingdom of Cambodia.  Pursuant to this gaming license, Dreamworld Leisure, one of our wholly-owned subsidiaries, is allowed to construct and open a casino-hotel for table games and EGMs with the proposed name of Dreamworld Casino and Resort in Takeo province of Cambodia.  Currently, we do not hold any gaming licenses in the United States.

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TABLE GAME PRODUCTS

Overview

During the year ended December 31, 2010, our table game products were focused on the development, manufacture and sale of gaming chips and plaques, which included:

·                  High-frequency RFID casino chips, which are traditional casino chips embedded with a RFID tag that allows casinos to identify counterfeit casino chips and track table play.  The high-frequency 13.56 MHz RFID casino chip is designed to provide real-time data capability, enhanced chip security, player tracking and accounting management benefits for casinos. The high-frequency RFID chips enable casinos to read 1,000 chips per second and have a memory capacity of over 10,000 bits.

·                  Traditional casino chips for various table games, including a wide range of American-style gaming chips with 30 different color combinations, various sizes and other personalized printing combinations.

·                  High-frequency RFID casino plaques, which use modern, efficient plastic thermoforming techniques and a process of printing graphics to polymer that provides for a broad range of colors or designs, including a full photographic finish. Our plaques have unique security features including a patented RFID inlay which is tamper-proof and identifies each plaque, a currency grade ceramic DNA strand embedded in the plastic, a multi-directional hologram and serialization. They are available in five rectangular and three square shapes or customized to buyer requirements.  The development of our high-frequency RFID gaming plaques was completed during the fourth quarter of 2009.

During a portion of 2009, our table game products also included the development, manufacture and sale, through our distributor network, of products which included automated playing card scanner, shuffler, and automated gaming chip washer. However, in March 2009 we sold to Shuffle Master our portfolio of playing card scanner and shuffler, all related intellectual property, and certain inventory of such products. In addition, as a result of closing down our China manufacturing facility during the three-month period ended June 30, 2009, we decided to exit the chip washer business and ceased the production of our ChipWasher product after evaluating the market opportunities for this product.

Marketing and Distribution

In an effort to derive greater value from our high-frequency RFID and traditional non-RFID gaming chips and plaques, we have directed greater resources to these operations in the form of marketing and product development and engaged a local marketing agent in Australia to promote and distribute these products for us in Australia, New Zealand and certain other Asian territories including Macau and Singapore.

At present, our casino customers include, amongst others, City of Dreams, Altira and Galaxy in Macau, Crown Casino in Melbourne, Burswood Casino in Perth and Star City Casino in Sydney, Australia.  However, since gaming chip products are generally regarded as a “gaming device” by the gaming authorities in most of the states of the United States, which therefore requires the manufacturer of these products to be licensed, we currently do not have the intention to market or sell our gaming chip and plaque products in the United States market.

Competition

The gaming products industry is competitive.  We compete with established gaming products companies, which have more substantial histories, backgrounds, experience and records of successful operations, greater technical, marketing and other resources, and more employees and extensive facilities than we have or will have in the foreseeable future.  During the year ended December 31, 2010, our most significant competitor for our gaming chips and plaques was Gaming Partners International Corporation.

Gaming Regulations and Licensing

Regarding our gaming chip and plaque products, in most jurisdictions outside the United States market, neither manufacturers nor distributors of gaming chip and plaque products are required to be licensed. However, since gaming chip and plaque products are generally regarded as “gaming devices” by the gaming authorities in most of the states of America, which

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therefore require the manufacturers of these products to be licensed we currently do not have the intention to apply for any license to sell our Dolphin’s gaming chip and plaque products in the United States market mainly due to the costly application process.

Product Development, Manufacturing and Assembly

The manufacture of RFID casino chips and plaques is performed at Dolphin, our subsidiary in Australia, which specializes in plastic injection molding. Dolphin has licensed certain RFID technology from a third party.

Suppliers

Dolphin has licensed certain RFID technology from a third party.

During the year ended December 31, 2010, most materials for our RFID casino chips and plaques were sourced in Australia. RFID casino chips and plaques were manufactured in Australia and shipped to our customers in Asia.

NON-GAMING OPERATIONS

Dolphin specializes in tool-making, custom injection molding and clean room manufacture of high-precision plastic products together with non-gaming product lines of high-quality products for the automotive industry.  From our facility in Melbourne, Australia, we produce various automotive components including inner remote door handles, fuel filler hinge assemblies, module brackets, steering wheel spoke covers, speaker grills, fasteners, safety products and vehicle cosmetic components. In addition to Australia, Dolphin supplies components to auto manufacturers in North and South America, Europe and the Asia Pacific region.

In addition, we are pursuing opportunities to leverage our existing operations to also serve other industries with a goal to further strengthen and diversify this business in the future.

Marketing and Distribution

We market our automotive products through automotive organizations and institutions and are a preferred supplier to General Motors Holden, Toyota, Autoliv and Bridgestone, all of whom typically include us among the suppliers from whom they solicit bids on supply contracts.

Competition

While the recent financial crisis has resulted in some consolidation of our competitor base, the automotive tool-making and injection molding products business remains highly competitive.  Our competitors include ITW Deltar, Hook Plastics, MHG Plastics, Rian Industries, Hasico and Sneddon & Kingston Plastics.

PRODUCT DEVELOPMENT

Dolphin is continuously engaged in production development to enhance its existing products and develop new products, for the gaming and non-gaming business lines, leveraging its internal resources and engaging external resources when warranted. During the years ended December 31, 2010 and 2009, we spent approximately $610,000 and $277,000, respectively on product development activities, principally related to our gaming chips and plaques.

INTELLECTUAL PROPERTY

In October 2005, we acquired the rights to U.S. Patent No. 6,659,875, which covers a unique process for manufacturing RFID chips and plaques. We also hold patents covering similar processes issued by Australia and the United Kingdom. In addition, in February 2007, we filed a new provisional specification in Australia to protect additional enhancements in the manufacture of RFID chips and plaques.

Many elements incorporated in our proprietary products are in the public domain or otherwise not amenable to legal protection and the steps taken by us will not, in and of themselves, preclude competition with our proprietary products.

EMPLOYEES

As of March 15, 2011, we had approximately 12 full-time employees in Hong Kong, 1 full-time employee in the United States, 20 full-time employees in the Philippines, 37 full-time employees and 163 contracted staff for floor operation at NagaWorld in Cambodia and 55 full-time employees in Australia. None of our employees are represented by labor unions, and we consider our relationship with employees to be satisfactory.

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AVAILABLE INFORMATION

Our website is located at www.EGT-Group.com.  The information on or accessible through our website is not part of this annual report on Form 10-K.  A copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

Item 1A.         Risk Factors

In this report we make, and from time-to-time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives.  For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties.  No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made.  Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision.  Except as required by law, we do not undertake any obligation to update or keep current either: (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement; or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.

In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors, include those set out below.

We are a defendant in a litigation matter that could result in substantial costs and divert management’s attention and resources.

On March 26, 2010, certain shareholders of the Company including Prime Mover Capital Partners L.P., Strata Fund L.P., Strata Fund Q.P. L.P., and Strata Offshore Fund, Ltd (collectively, the “Plaintiffs”) filed in the United States District Court for the Southern District of New York a complaint (as subsequently amended on May 28, 2010)(the “Complaint”) against certain defendants including us and certain of our current and former directors and officers.

The Complaint alleges claims related to disclosures concerning our EGM participation business (the “Participation Business”), including but not limited to the alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated there under, violations of Nevada Revised Statutes Sections 90.580(e) and 90.660(3), breach of fiduciary duty, and negligent misrepresentation.  The Plaintiffs allege that we and certain other defendants made false and misleading statements about the Participation Business in filings with the SEC, press releases, and other industry and investor conferences and meetings during the period from June 13, 2007 and August 13, 2008 and that the Plaintiffs then purchased the securities at the inflated prices and later suffered economic losses when the price of our securities decreased.

The Plaintiffs seek unspecified damages, as well as interest, costs and attorneys’ fees. We intend to vigorously defend ourselves against these claims. However, no assurances can be made that we will be successful in our defense of the pending claims. If we are not successful in our defense of such claims, we could be forced to, among other things, make significant payments to resolve these claims or post significant bonds to pursue appeals, and such payments and/or bonds could have a material adverse effect on our business, financial condition and results of operations. Further, regardless of the outcome of the foregoing matters, these litigation matters themselves may result in substantial costs and divert management’s attention and resources, all of which could adversely affect our business.

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We have achieved strong improvement in financial performance in recent quarters but have a history of significant operating losses. For the years ended December 31, 2010 and 2009, we have incurred net losses of approximately $5.2 million and $26.4 million, respectively, and our operations have provided and used approximately $11.4 million and $7.0 million of cash, respectively. We had no accumulated deficit as of December 31, 2010 as a result of the Quasi-Reorganization of stockholder equity. The Quasi-Reorganization was effective as of December 31, 2010 under which we eliminated our accumulated deficit account, with a commensurate reduction in our additional paid-in capital.  We have refocused our business operations and streamlined our cost structure, which has resulted in substantially improved financial performance and the generation of positive cash flow from operations.  While we will endeavor to continue to generate positive cash flows from operations, there can be no assurance that we will be successful in doing so.

Our revenues from our EGM participation operations are difficult to predict and may vary from our projections because the business model is new and the venues are not operated by us.  Our primary focus is currently on the ownership and leasing of EGMs on a revenue sharing basis across certain countries in Asia.  We focus on targeting venue owners in underserved gaming markets who have little or no gaming operations or experience.  Since we participate on a revenue sharing basis with these venue owners, our revenue generated from the revenue sharing arrangements will be dependent to a significant degree on the efforts and capabilities of the venue owners.  Our revenues and results from our EGM participation operations may be difficult to predict and may vary depending on the ability of the venue owners to manage the gaming operations of their venues.  Accordingly, there can be no guarantee that the venue owners will be able to manage the gaming operations successfully or that the gaming venues operated by them will perform at levels consistent with our financial projections and underlying forecasts and assumptions. Further, we have very limited past business relationships with the venue operators and, despite background checks and other due diligence that we may perform, the venue operators may not be reputable. In the event that any of the venue operators are not reputable this would expose us to the risk of being unable to collect the revenue to which we are entitled under the revenue share arrangements and protect our gaming machine assets.

We have dependence on NagaWorld.  For the year ended December 31, 2010, our operations at NagaWorld accounted for 49% of our consolidated revenues.   Although we believe we have a good relationship with NagaCorp., the owners of NagaWorld, and we have a contract with NagaWorld to jointly control the operation of a total of 670 EGMs for a term of six years commencing March 1, 2010, should material events occur that are detrimental to NagaWorld and its operations or cause the loss of this customer, it would have a significant negative impact our financial performance.

We could require additional funding in the future to execute our casino and gaming development plans.  As of December 31, 2010, we had working capital of approximately $9.0 million.  Since December 31, 2010, our working capital has been positively affected by the growth in our Cambodia operations at NagaWorld.

We believe we have sufficient cash on hand to fulfill all current obligations as they become due and to fund initial development for our Kampot Project and EGM purchase plans.  Based on our internal revenue projections, existing casino and gaming development and EGM placement rollout plans and our inventory of EGMs, we believe we have the needed capital to fund our operations over the next 12 months. However, if we were to commit to large casino and gaming development projects or the concurrent development of multiple casino and gaming projects; or should our revenue projections fail to meet our existing internal projections; or should we become required to procure additional EGMs for projects or due to reasons not currently contemplated, we may need to raise additional capital within the next 12 months.  We would endeavor to raise funds through various financing sources, including the sale of our equity and debt securities and the procurement of commercial debt financing. However, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Any debt financing will increase expenses and must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the following results can occur:

·                 the percentage ownership of our existing stockholders will be reduced;

·                  our stockholders may experience additional dilution in net book value per share; and/or

·                  the new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock.

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Intended expansion of gaming operations represent material addition to our business model which has not been proven by us.  In May 2010, we announced our intention to expand our gaming operations and become an owner and operator of regional casinos and gaming venues under the “Dreamworld” brand in select emerging gaming markets in Indo China.  While we believe that we can leverage our existing market presence and relationships to execute our casino and gaming development plans, there is no guarantee we will be successful in securing new casino and gaming projects, funding those projects and/or executing our plans to build and operate any of our casino and gaming projects.  Some of our assumptions will invariably not materialize and some unanticipated events and circumstances occurring subsequently may affect other assumptions. Therefore, the actual results achieved may vary from the pro forma projections considered by our management, and the variations may be material. No assurance can be given that the future results of our casino development operations will meet with consumer acceptance or market success.

Our EGM participation and casino development operations are focused on markets outside the United States exposes us to risks inherent in international business operations. We intend to pursue our gaming machine participation and casino development lines of business outside the United States. We also intend to focus our sales efforts for our table game products, namely the RFID and traditional non-RFID gaming chips and plaques, in Asia and Australia, but our international expansion efforts may not be successful. Our international operations expose us to risks and challenges that we would otherwise not face if we conducted our business only in the United States, such as:

·                  increased cost of enforcing our intellectual property rights;

·                  heightened price sensitivity from customers in emerging markets;

·                  our ability to establish local manufacturing, support and service functions, and to form channel relationships with resellers in non-U.S. markets;

·                 localization of our EGMs and components, including translation into foreign languages and the associated expenses;

·                  compliance with multiple, conflicting and changing governmental laws and regulations;

·                  foreign currency fluctuations;

·                  laws favoring local competitors;

·                  weaker legal protections of contract terms, enforce recoveries of receivables and intellectual property rights and mechanisms for enforcing those rights;

·                  market disruptions created by public health crises in regions outside the United States, such as Avian flu, SARS and other diseases;

·                  difficulties in staffing and managing foreign operations, including challenges presented by relationships with workers’ councils and labor unions; and

·                  changing regional economic, political and regulatory conditions.

We may be unable to adequately protect our intellectual property rights. Our success in businesses, in particular, in relation to our table game products and non-gaming business, is impacted by maintaining the confidentiality and proprietary nature of our intellectual property rights. Our ability to compete may be damaged, and our revenues may be reduced if we are unable to protect our intellectual property rights adequately. To protect these rights, we rely principally on a combination of:

·                  contractual arrangements providing for non-disclosure and prohibitions on use;

·                  patents and pending patent applications;

·                  trade secret, copyright and trademark laws; and

·                  certain built-in technical product features.

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Patent, trade secret, copyright and trademark laws provide limited protection. The protections provided by laws governing intellectual property rights do not prevent our competitors from developing, independently, products similar or superior to our products and technologies. In addition, effective protection of copyrights, trade secrets, trademarks, and other proprietary rights may be unavailable or limited in certain foreign countries. We may be unaware of certain non-publicly available patent applications, which, if issued as patents, could relate to our services and products as currently designed or as we may modify them in the future. Legal or regulatory proceedings to enforce our patents, trademarks or copyrights could be costly, time consuming, and could divert the attention of management and technical personnel.

It is possible that our table game products and/or, non-gaming products will be the subject of future patent litigation if the products are sold and installed in the United States and, if commenced, could subject us to continuing litigation costs and risks. To the extent that we introduce new products that incorporate the same or similar technology, it is likely that a competitor will bring one or more claims against us seeking damages, injunctive or other equitable relief, or both. We cannot predict the outcome of any future litigation that may occur.

If our future products incorporate technologies that infringe the proprietary rights of third parties and we do not secure licenses from them, we could be liable for substantial damages that would cause a material reduction in revenues and impair our prospects for achieving growth and profitability.

In furtherance of the development of our services or products, we may need to acquire licenses for intellectual property to avoid infringement of third-party rights or claims of infringement. These licenses may not be available on commercially reasonable terms, if at all. Claims for infringement, if made, could damage our business prospects, our results of operations and financial condition, whether or not the claims have merit, by:

·                  consuming substantial time and financial resources required to defend against them;

·                  diverting the attention of management from growing our business and managing operations;

·                  resulting in costly litigation; and

·                  disrupting product sales and shipments.

If any third party prevails in an action against us for infringement of its proprietary rights, we could be required to pay damages and either enter into costly licensing arrangements or redesign our products so as to exclude the infringing technology. As a result, we would incur substantial costs and delays in product development, sales and shipments, our revenues may decline substantially and we may not be able to achieve the growth required for us to achieve profitability.

EGT Entertainment Holding holds a significant interest in our common stock, and is our largest creditor giving EGT Entertainment Holding significant power over our management and all shareholder actions. As of March 15, 2011, EGT Entertainment Holding owned 45.8 million shares of our common stock, representing approximately 39% of our issued and outstanding common shares, and as of December 31, 2010 we were indebted to EGT Entertainment Holding in the approximate amount of $9.2 million (representing approximately 67% of our total liabilities as of such date).  Accordingly, given its equity ownership, EGT Entertainment Holding has significant control over our management and all matters requiring approval by our shareholders, including the power to elect our board members and effect the approval of mergers and other significant corporate transactions. This concentration of ownership will make it difficult for other shareholders to effect substantial changes in our Company, and also will have the effect of delaying, preventing or expediting, as the case may be, a further change in our control.

Our common stock may be delisted from the NYSE Amex and if this occurs you may have difficulty converting your investment into cash efficiently.  The NYSE Amex has established certain standards for the delisting of a security from the NYSE Amex.  The standards for delisting from the stock market include, among other things, common stock selling for a substantial period of time at a low price per share, if the issuer fails to effect a reverse split of such shares within a reasonable time after being notified that the stock exchange deems such action to be appropriate.  Our common stock has continuously traded below $1.00 since August 2008. While we have not received any communications to date from the NYSE Amex concerning the selling price of our common shares, there can be no assurance that the NYSE Amex will take action to delist our common stock from the exchange due to the low selling price of the shares.  If that were to occur, we would consider effecting a reverse split of our common stock in order to raise our share price to a level satisfactory to the NYSE Amex.  However, reverse splits of thinly traded shares have, at times, resulted in declining share prices after a proportional adjustment in share price to give effect to the split.  If our common stock were to be excluded from the NYSE Amex, or if we elected to conduct a reverse split in order to maintain the listing, the price of our common stock and the ability of holders to sell such stock could be materially adversely affected.

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Our board of directors may issue blank check preferred stock, which may affect the voting rights of our holders and could deter or delay an attempt to obtain control of us. Our board of directors is authorized, without stockholder approval, to issue preferred stock in series and to fix and state the voting rights and powers, designation, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. Preferred stock may rank prior to our common stock with respect to dividends rights, liquidation preferences, or both, and may have full or limited voting rights. Accordingly, issuance of shares of preferred stock could adversely affect the voting power of holders of our common stock and could have the effect of deterring or delaying an attempt to obtain control of us.

Item 1B.                          Unresolved Staff Comments

Not applicable.

Item 2.                                   Properties

We also lease the following offices throughout Asia and in Australia:

In the United States, we do not have an office but we have a mailing address at 40 E. Chicago Avenue, #186, Chicago, Illinois.

Item 3.                                   Legal Proceedings

We are a party to certain legal matters as discussed below.

Prime Mover/Strata Litigation

On March 26, 2010, a complaint (as subsequently amended on May 28, 2010) (the “Complaint”) was filed by certain of our shareholders including Prime Mover Capital Partners L.P., Strata Fund L.P., Strata Fund Q.P. L.P., and Strata Offshore Fund, Ltd (collectively, the “Plaintiffs”) in the United States District Court for the Southern District of New York against certain defendants including us and certain of our other current and former directors and officers.

The Complaint alleges claims related to disclosures concerning our EGM participation business (the “Participation Business”), including but not limited to the alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, violations of Nevada Revised Statutes Sections 90.580(e) and 90.660(3), breach of fiduciary duty, and negligent misrepresentations.  The Plaintiffs allege that we and certain other defendants made false and misleading statements about the Participation Business in filings with the SEC, press releases, and other industry and investor conferences and meetings during the period from June 13, 2007 to August 13, 2008 and that the Plaintiffs then purchasedt the securities at inflated prices and later suffered economic losses when the price of our securities decreased.

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The Plaintiffs seek unspecified damages, as well as interest, costs and attorney fees.  We have engaged legal counsel to consider the claims set forth in the Complaint and we intend to defend vigorously and respond to the Complaint in a time and manner consistent with applicable federal and state laws. As the litigation is at a preliminary stage, it is not possible to predict the likely outcome of the case or the probable loss, if any, and, accordingly, no accrual has been made for any possible losses in connection with this matter.

We believe that the Plaintiffs’ claims against us and our present and former officers and directors are covered by our directors and officer insurance policies, which provide the covered parties with up to $15 million of potential insurance coverage, subject to a retention amount payable by the Company in the amount of $150,000.  We paid the said retention amount in full in September 2010.

PART II

Market Information

Our common stock currently trades on the NYSE Amex under the symbol “EGT”.

The following table sets forth the high and low closing sale prices of our common stock, as reported by the NYSE Amex, for each quarter during the past two fiscal years:

Holders of Record

As of December 31, 2010, we had outstanding 116,189,394 shares of common stock, held by approximately 190 shareholders of record.

Dividend Policy

We have never declared or paid cash dividends on our common stock. We presently intend to retain earnings to finance the operation and expansion of our business.

Equity Compensation Plan Information

On July 23, 2010, shareholders approved an amendment of our 2008 Stock Incentive Plan (the “2008 Plan”), to increase the number of common shares authorized for issuance under the plan from 5,000,000 to 10,000,000.  The 2008 Plan was adopted by our stockholders on September 8, 2008.  We previously had two other stock options plans, our Amended and Restated 1999 Stock Option Plan and our Amended and Restated 1999 Directors’ Stock Option Plan, both of which expired in January 2009.  However, those options previously granted under our expired stock option plans which were outstanding as of the plans’ expiration remain outstanding.  Pursuant to the aforementioned plans, as of December 31, 2010, there were options outstanding to purchase 11,507,767 shares of our common stock with a weighted average exercise price per share of $1.39 and options available for future issuance to purchase 7,000,000 shares of our common stock.

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The following table sets forth certain information as of December 31, 2010 about our stock plans under which our equity securities are authorized for issuance.

The first column reflects outstanding stock options to purchase: (i) 5,026,167 shares of common stock pursuant to our Amended and Restated 1999 Stock Option Plan; (ii) 91,600 shares of common stock pursuant to our Amended and Restated 1999 Directors’ Stock Option Plan; (iii) 3,390,000 shares of common stock pursuant to certain non-plan options approved by our stockholders in September 2007; and (iv) 3,000,000 shares of common stock pursuant to our 2008 Stock Incentive Plan.

The third column reflects 7,000,000 shares remaining for issuance under our 2008 Stock Incentive Plan as of December 31, 2010.

Item 6.                                                           Selected Financial Data

Not applicable.

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

OVERVIEW

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.  The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole.  This discussion should be read in conjunction with our consolidated financial statements and accompanying notes as of and for the years ended December 31, 2010 and 2009 included elsewhere in this report.

During the year ended December 31, 2010, we successfully completed the refocusing of our business model and streamlining of our operational structure, which has resulted in dramatic improvement in our financial performance, greater operating efficiency and the establishment of quality recurring cash flow.  As such, we have established a solid base from which to maximize returns from our core operations and to pursue our future growth strategy.

We currently conduct business in three operating segments: (i) electronic gaming machine (EGM) participation operations; (ii) table game product operations, which consist of gaming chips and plaques; and (iii) non-gaming product operations, which consist primarily of the design, manufacture and distribution of automotive components.

Our current primary focus is on leasing EGMs on a revenue sharing basis to gaming establishments within Pan-Asian markets.  We identify and secure venues for the placement of EGMs and, where warranted, casino management systems that track game performance and provide statistics on each installed EGM owned and leased by us.  We contract with the venue owners or operators for the placement of the EGMs on a revenue sharing basis. In addition, we acquire and install the EGMs and other gaming systems and peripherals at the relevant gaming venues.

As of March 15, 2011, our EGM participation operations were concentrated in two countries, Cambodia and the Philippines. In Cambodia, we had a total of 729 EGM seats in operation in two venues.  In the Philippines, we had a total of 885 EGM seats in operation in six venues.

In Cambodia, our EGM participation operations currently focus primarily on operating a substantial portion of the gaming machine area in prime casino floor locations at NagaWorld, a wholly-owned subsidiary of Hong Kong listed NagaCorp Ltd. (HKSE: 3918).  NagaWorld is Cambodia’s premier luxury destination gaming resort and the only licensed full service casino in a designated area around the capital city of Phnom Penh.  Our gaming operations at NagaWorld, which we brand as “Dreamworld” and jointly operate with NagaWorld, have provided us strong growth in EGM participation revenue and cash flow.  Since our first EGM installations in January 2009 of approximately 200 seats, we have dramatically grown our installed base at this venue to approximately 670 seats in operation.

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We have also continued to selectively pursue additional EGM participation opportunities.  In January 2011, we completed the installation of 60 EGM seats, which were sourced from our existing inventory of EGMs, at a new casino in the Kampong Cham province of Cambodia (north east of Phnom Penh) near the Vietnam border.    The official opening of this new casino is currently scheduled for April 2011 pending the completion of the facility by the owner.

In the Philippines, we have strategically managed our EGM placements to focus on growing win per day at our most promising venues and, with the support of our venue partners, are implementing targeted marketing programs in an effort to improve our growth potential in this market.

In addition to our core gaming business, we are focused on deriving greater value from our gaming chip and plaque operations.  We have directed further resources to these operations in the form of marketing and product development to strengthen our existing customer relationships and better penetrate our key markets of Macau and Australia.  Based on these marketing efforts, we believe we have better positioned ourselves to capitalize on the future growth opportunities for the gaming chip and plaque market in our target markets.

With regard to our non-gaming operations, Dolphin auto component sales volumes continue to modestly strengthen driven by the improvement in the automotive parts industry in Australia for the year ended December 31, 2010 compared year ended December 31, 2009.  As a designated tier 1 and tier 2 supplier to several major manufacturers, we believe Dolphin is better positioned to gain market share and increase sales orders in the future as the Australian automotive parts industry continues to improve.  In addition, we are pursuing opportunities to leverage our existing operations by expanding our customer base to other industries with a goal to further strengthen and diversify this business in the future.

Our consolidated revenue for the year ended December 31, 2010 was approximately $22.2 million, of which revenue from our EGM participation, table games and non-gaming operations comprised 64%, 6% and 30%, respectively, of consolidated revenue.  This compares to consolidated revenue of approximately $15.6 million for the year ended December 31, 2009, of which revenue from our EGM participation, table games and non-gaming operations comprised 45%, 29% and 26%, respectively, of consolidated revenue.

Revenue from our EGM participation operations was approximately $14.3 million for the year ended December 31, 2010, more than double the $7.0 million recorded in the prior year.  Gross margin for the gaming participation business improved to 39% in the year ended December 31, 2010 compared to negative gross margin of 59% in the prior year.  Excluding non-cash items such as EGM depreciation and asset write-downs, gross margin for the EGM participation business improved to 95% from 85%, respectively.

We have also implemented cost reduction initiatives, which resulted in a 23% decline in cash-based selling, general, and administrative expenses for the year ended December 31, 2010 compared to the prior year.  We continue to exercise strict cost control measures and, as a result, for the year ended December 31, 2010, we maintained cash-based selling, general and administrative expenses below our annualized guidance range of $6.0 to $7.2 million.  Importantly, we believe we have effected these reductions without hindering our operational capabilities and while remaining flexible enough to act on our growth plans.

Based on the solid revenue performance, particularly from our operations at NagaWorld, and our continued strict cost control efforts, we have significantly improved our ability to generate and grow positive cash flow from operations.  We achieved positive Adjusted EBITDA (as defined below) of approximately $8.2 million for the year ended December 31, 2010, up substantially from approximately $33,000 in the prior year.  Cash flow provided from operations amounted to approximately $11.4 million for the year ended December 31, 2010 compared with cash used in operations of approximately $7.0 million in the prior year.

In addition, we have improved our liquidity and financial flexibility and streamlined our balance sheet to better reflect the future progress of our refocused business operations.  In May 2010, we entered into another agreement with EGT Entertainment Holding to further amend the unsecured promissory note originally issued in April 2008.  Under these new terms, which became effective July 1, 2010, we deferred the repayment of principal on the outstanding principal balance of the note of approximately $9.2 million until July 2011 and agreed to make interest-only payments on the principal amount on a monthly basis at a rate of 5% per annum.  In July 2011, we will resume monthly payments of principal and interest for a period of 18 months.  The amended terms also required that we pay all the accrued interest for the period of July 1, 2009 to June 30, 2010, which had accrued at a rate of 5% per annum on the principal amount of approximately $9.2 million, in the total amount of approximately $458,000 on July 1, 2010.  We made such payment on that date.

We effected an elective accounting Quasi-Reorganization as of December 31, 2010, which eliminated our accumulated deficit in retained earnings against additional paid-in capital.  The adjustments from this “fresh start” accounting method have no effect on our cash flow and provide us with a further streamlined balance sheet, which will better reflect the progress in our current and future business operations. (Please see Part II Item 8. Financial Statements — Note 1 for more details.)

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With our improved financial performance, flexibility and operational efficiency, we believe we are better positioned to invest in our existing operations and pursue growth opportunities that enable us to leverage our established market presence and relationships and capitalize on what we perceive to be attractive economic and socio demographic trends in our target markets.

In May 2010, we announced our intention to expand our gaming operations and become an owner and operator of regional casinos under our “Dreamworld” brand in select emerging gaming markets in the Indo-China region.  We believe this expanded business strategy will allow us the potential for higher long-term incremental returns on our operations given the ability to collect up to 100% of the gaming revenue compared to our existing EGM participation contracts.  In addition, it provides us greater long-term control over our operations.

Pursuant to this growth strategy, we have secured two casino projects in Cambodia near the Vietnam border. These projects are strategically located in two separate provinces in southern Cambodia in order to capitalize on what we believe are attractive target markets in the nearby respective major cities and towns.

On May 26, 2010, we formed a new company in Cambodia, Dreamworld (Takeo) Investment Holding Limited (“Dreamworld Holding”), which entered into a Land Sale & Purchase Agreement (the “S&P Agreement”) for the acquisition of a parcel of land in Takeo province of Cambodia (the “Land”) with the owner of the Land (the “Seller”).

The Land has a total area of approximately seven acres (30,000 square meters) and is located in the Takeo province, a border area of Cambodia and Vietnam, which is approximately 125 miles (200 kilometers) south of Cambodia’s capital city Phnom Penh and connects the major cities of southern Vietnam and Phnom Penh. The total consideration for the Land was $1.76 million, of which $850,000 was paid to the Seller in May 2010 as a deposit. The registration of the title for the Land under the name of Dreamworld Holding by the land office and the relevant authorities in Cambodia was completed on June 28, 2010 and, accordingly, we paid the balance of $910,000 to the Seller in mid-July 2010.

On May 21, 2010, a license to build and open a casino hotel in Takeo province of Cambodia (the “Takeo Project”) was granted by the Government of the Kingdom of Cambodia to Dreamworld Leisure (Cambodia) Limited (“Dreamworld Leisure”), another new wholly-owned subsidiary of the Company. Pursuant to the license, Dreamworld Leisure is allowed to construct and open a casino-hotel for table games and EGMs with the proposed name of Dreamworld Casino and Resort (“Dreamworld Casino (Takeo)”). It is anticipated that Dreamworld Casino (Takeo) will be constructed on the Land and, upon its completion, a formal casino license will be granted to Dreamworld Leisure, which will be the operating company of Dreamworld Casino (Takeo). As discussed below, we intend to slow development of the Takeo Project in order to divert our available capital to certain potential new projects, which we believe will offer greater short-and medium-term return potential. As a result, we presently do not have a timeline for the development of the Takeo Project and do not expect to commit significant capital to the project in 2011.

On March 4, 2011, we entered into a shareholders agreement (the “Agreement”) with a local partner to form a joint venture company with the tentative name of “Dreamworld Leisure (Kampot) Limited” (the “JVC”) for the development, ownership and operation of a casino project  to be located in the Kampot province of Cambodia near the Vietnam border (the “Kampot Project”).

The local partner is the owner of a parcel of land measuring approximately 108,000 square feet (10,000 square meters) located in a prominent area of southern Cambodia in the Kampot province near the Vietnam border and the casino, which will be operated under the name Dreamworld Casino (“Dreamworld Casino (Kampot)”) will be constructed thereon.  The initial phase of Dreamworld Casino (Kampot) is expected to include up to 14 table games, such as baccarat, roulette and dice games, and 25 EGMs and, subject to the timely receipt of the required gaming licenses, to open in the fourth quarter of 2011. Depending on demand and the availability of capital, we may add at a future date additional casino floor space and equipment as well as complementary facilities such as hotel rooms, a spa and other entertainment amenities.

Under the terms of the shareholders agreement, the JVC will apply for its own casino license and the local partner will lease to the JVC the land for a period of 25 years for an annual fee of $1.00 and EGT shall provide funding for all development, construction and pre-opening costs of the Kampot Project; provide all necessary EGMs and gaming tables to Dreamworld Casino (Kampot) as well as pay the local partner a lump sum of $260,000 as balance consideration for his contributions.  We and the local market partner will share the net revenue of the JVC (the total gross revenue of the casino less any payouts paid to customers, operating expenses, and gaming and non-gaming taxes on the JVC’s revenue) on a 60/40 basis, respectively.  The initial project term is 25 years with renewal options.  Development of the casino is subject to the JVC’s receipt of the required gaming license and relevant construction permits, for which the JVC is in the application process.

Capital expenditures for the initial phase of the Kampot Project are projected to be less than $1 million as the EGMs will be sourced from our existing inventory.  Subject to any early termination of the Kampot Project pursuant to the terms of the Agreement, the Kampot Project is for an initial term of 25 years commencing from the date of the Agreement and is subject to renewal by the parties in writing.

We continue to actively pursue additional casino and gaming development projects with a focus on the Indo-China region and are building a pipeline of potential projects.  Currently, we are pursuing several strategic projects which include a casino resort, an entertainment center with slot venue and a standalone slot venue.    While there is no guarantee we will successfully conclude these negotiations, given our constrained capital resources at present, we are slowing the project timeline for the Takeo Project in order to divert certain capital to these potential new projects, which we believe offer greater short- and medium-term return potential.   This adjustment to the Takeo Project development timeline does not place our gaming license or any rights to own and operate a casino in the Takeo province at risk.

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RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2010 AND 2009

The following is a schedule showing summarized operating results on a consolidated basis and separately by each of our three operating segments, namely, EGM participation, table game products and non-gaming products for the years ended December 31, 2010 and 2009.

On March 16, 2009, we entered into a Purchase and Settlement Agreement with Shuffle Master, Inc. (the “Purchase and Settlement Agreement”) pursuant to which we sold Shuffle Master our portfolio of automated card verification machines and electronic card shuffling systems, all related intellectual property, including but not limited to, the trademarks of Random Plus™, PokerOne™, ShufflePro™ and Deck Checker™, and certain inventories of such products.  All historical revenues and expenses from these assets sold to Shuffle Master have been reclassified as discontinued operations.

(1)          “Adjusted EBITDA” is earnings before interest, taxes, depreciation, amortization, stock-based compensation, and other non-cash operating income and expenses. Adjusted EBITDA is presented exclusively as a supplemental disclosure because our management believes that it is widely used to measure the performance, and as a basis for valuation, of gaming companies. Our management uses Adjusted EBITDA as a measure of the operating performance of its segments and to compare the operating performance of its operations with those of its competitors. We also present Adjusted EBITDA because it is used by some investors as a way to measure a company’s ability to incur and service debt, make capital expenditures and meet working capital requirements. Gaming companies have historically reported EBITDA as a supplement to financial measures in accordance with generally accepted accounting principles in the United States (“GAAP”). Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of our performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure determined in accordance with GAAP. Unlike net income/(loss), Adjusted EBITDA does not     include depreciation or interest expense and,  therefore, does not reflect current or future capital expenditures or the cost of capital. We compensate for these limitations by using Adjusted EBITDA as only one of several comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include operating income, net income, cash flows from operations and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in Adjusted EBITDA.  Our calculation of Adjusted EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

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A reconciliation of EBITDA, as adjusted, to the net loss for the years ended December 31, 2010 and 2009 is provided below.

Total revenue increased approximately $6.6 million to approximately $22.2 million for the year ended December 31, 2010 compared to approximately $15.6 million in the prior year due to an increase in EGM participation and non-gaming products revenue partially offset by a decrease in table game revenue.  Revenue from EGM participation increased as a result of higher average net win per machine and EGMs in operation. Revenue from non-gaming products increased as a result of increased orders from major customers. Revenue from table game products decreased as a result of lower chip volumes compared to the year ended December 31, 2009 when we delivered a large RFID gaming chip order for a new casino in Macau during the three-month period ended June 30, 2009.

Gross profit increased approximately $8.8 million to approximately $6.5 million for the year ended December 31, 2010 compared to a gross loss of approximately $2.3 million in the prior year as a result of higher revenue and gross margin from the EGM participation and non-gaming operations partially offset by lower gross margin from the table games products division. Gross profit from EGM participation operations increased due to higher revenue for this business segment and lower depreciation expense on the EGMs, which is recorded in cost of operations, as a result of impairment charges recorded at the end of 2009.  Gross profit from non-gaming products increased primarily due to higher revenue and improved production efficiencies resulting from higher sales volumes in the year ended December 31, 2010 compared to the prior year.  Gross profit from table game products decreased primarily due to lower sales volumes and loss of production efficiencies relating to the sales volumes during the year ended December 31, 2010 compared to the prior year, which included a large RFID gaming chip order for a new casino in Macau.

Operating losses from continuing operations decreased approximately $22.3 million to approximately $5.5 million for the year ended December 31, 2010 compared to an operating loss of approximately $27.8 million in the prior year primarily due to reduced impairment charges on assets by approximately $11.2 million, higher overall gross profit and reduced operating expenses.  Net loss from continuing operations decreased approximately $21.1 million to approximately $5.2 million compared to a net loss of approximately $26.3 million in the prior year primarily due to the improvement in operating income and a tax benefit compared to a tax expense in the prior year partially offset by a legal settlement gain of approximately $656,000 in the prior year.

Electronic Gaming Machine (EGM) Participation

In September 2007, we began our EGM participation operations in Asia as part of our primary focus on placing EGMs on a revenue sharing basis.

(1)          Average net win figures exclude EGM seats in operation during venue soft launch opening periods, if applicable, and EGM seats in venues where revenues are recognized on a cash basis.  During the year ended December 31, 2010, one venue in Cambodia operated during a soft launch from September 19, 2010 to December 31, 2010 with a total of 10 EGM seats.  For the year ended December 31, 2009, one venue in the Philippines operated during a soft launch from July 3, 2009 to October 23, 2009 with 150 EGM seats and one venue in the Philippines recognized revenue on a cash basis from January 1, 2009 to September 30, 2009 with 164 EGM seats.

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Revenue from EGM participation operations increased approximately $7.3 million to approximately $14.3 million for the year ended December 31, 2010 compared to revenue of approximately $7.0 million in the prior year.  The increase in revenue was primarily a result of higher average net win per machine and number of EGM seats in operation compared to the year ended December 31, 2009.

Gross profit from EGM participation operations increased approximately $9.6 million to approximately $5.5 million for the year ended December 31, 2010 compared to a gross loss of approximately $4.1 million in the prior year primarily due to an increase in EGM participation revenue and a decrease in EGM depreciation as a result of impairment charges recorded at the end of 2009.  Cost of goods sold for the year ended December 31, 2010 included approximately $8.0 million of depreciation expense on EGMs and approximately $759,000 of other expenses.

As of December 31, 2010, we had a total of 2,039 EGM seats of which 492 were held in inventory and 1,547 were in operation.  Of the 1,547 EGM seats in operation, 680 were in operation in two venues in Cambodia and 867 were in operation in six venues in the Philippines.

*As of December 31, 2010, the carrying value of EGMs and systems were adjusted to a new cost basis as a result of fresh-start accounting and are not comparable with the December 31, 2009 carrying value.

In Cambodia, regulatory changes at the end of 2008 and early 2009 impacted the competitive landscape of gaming operations in this market.  Due to directives issued by the Cambodian government in December 2008 and February 2009, all slot clubs in the Phnom Penh area, including our ten contracted venues, were closed with the exception of the slot operations within NagaWorld.  In December 2008, we established a relationship to place EGMs on a participation basis at NagaWorld hotel casino resort in the capital city of Phnom Penh.  NagaWorld operates under an exclusive casino license in Phnom Penh and our operations within NagaWorld are currently our principal operations in Cambodia.

During the year ended December 31, 2009, we placed 440 EGM seats in prime locations at NagaWorld’s casino resort pursuant to three contracts between us and NagaWorld.  On December 30, 2009, we entered into another contract with NagaWorld entitled Machines Operation and Participation Consolidation Agreement (the “Consolidation Agreement”).  The Consolidation Agreement: (a) provided for our exercise of the option granted by NagaWorld pursuant to an option deed dated July 25, 2009 to place an additional 200 EGMs on a participation basis at NagaWorld’s casino resort; and (b) with effect from the date of the Consolidation Agreement, superseded and replaced the three previous agreements executed with NagaWorld dated December 13, 2008 (“December 08 Agreement”), June 15, 2009 (“June 09 Agreement”) and July 25, 2009 (“July 09 Agreement”) (collectively, the “Previous Agreements”) which covered the operation of 440 EGMs at the NagaWorld Casino.

Under the Previous Agreements: (i) we and NagaWorld shared the win per unit per day from the existing 440 EGMs and certain operating costs related to marketing and floor staff at a weighted average of 22.4% / 77.6% split, respectively; (ii) win per unit per day from only 200 out of 440 existing EGMs was settled and distributed daily to us; and (iii) both the term of the December 08 Agreement and the June 09 Agreement were to expire in the first quarter of 2014 while the term of the July 09 Agreement was to expire at the end of the third quarter of 2014.

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Pursuant to the terms of the Consolidation Agreement, we and NagaWorld have joint control over the operation of a total of 640 EGMs (comprising the 200 additional EGMs and the existing 440 EGMs placed and in operation pursuant to the Previous Agreements), including floor staff and respective audit rights. We and NagaWorld share the win per unit per day from all the 640 EGMs and certain operating costs related to marketing and floor staff on a 25% / 75% split, respectively (subject to our right to receive 100% of the win per unit per day from certain EGMs during a certain period of time as described below). Win per unit per day from all the 640 EGMs are settled and distributed daily to us. The Consolidation Agreement is for a term of six years commencing March 1, 2010.

In consideration for entering into the Consolidation Agreement with NagaWorld, we paid to NagaWorld a $1.38 million one-time non-refundable contract amendment fee and a commitment fee of $4.1 million. Both the one-time contract amendment fee and commitment fee were to be paid in three installments. The first 50% installment was due and paid by us on December 30, 2009, the second 25% installment was due and paid by us on January 15, 2010, and the third and final 25% installment was due and paid by us on January 28, 2010.

On May 25, 2010, we entered into a supplemental agreement (the “Supplemental Agreement”) with NagaWorld to place an additional 30 EGMs on a participation basis at NagaWorld casino resort.  Pursuant to the terms of the Supplemental Agreement, our area of operation on the lobby gaming floor of NagaWorld was expanded to include two new areas and the maximum number of EGMs that we are permitted to operate and manage in this operation area was increased by 30 seats from 640 seats to 670 seats. Save for certain modifications in relation to the aforesaid expansion of the operation area and increase in the machines number, all the existing operation terms under the Consolidation Agreement continue to apply to the 670 EGMs including the newly added 30 seats.  In consideration for entering into the Supplemental Agreement, we paid NagaWorld a commitment fee of $1.0 million on June 15, 2010.

While we and NagaWorld share the win per unit per day from the 670 EGMs at a 25%/75% split, respectively, we were entitled to 100% of the win per unit per day from the recently added 30 EGMs and the 200 EGMs placed under the Consolidation Agreement until we had received a total accumulated win per unit per day of $6.8 million from these 230 EGMs (representing the aggregate of the $4.1 million commitment fee paid for the 200 EGMs under the Consolidation Agreement, the $1.0 million commitment fee under the Supplemental Agreement and our 25% share of win per unit per day from these 230 EGMs).  We received the total accumulated win per unit per day of $6.8 million from these 230 EGMs during the period up to and including August 2010.

Below is a table showing the various agreements with NagaWorld and the respective commitment fees paid. All commitment fees were fully recouped over the period up to the third quarter of 2010.

In April 2010, we entered into a Machine Participation Agreement with a new partner in Cambodia to place approximately 60 EGM seats on a participation basis at its new casino in the Kampong Cham province of Cambodia near the Vietnam border.  Under the terms of this agreement, we have joint control over the operation of all our EGM seats, including full audit rights. We and the venue owner share the revenue and marketing costs, on a 30% / 70% split, respectively, and we receive on a monthly basis our relevant portion of the daily win in cash. The contract duration is five years, commencing January 2011.

As of March 15, 2011, we had 1,614 EGM seats in operation of which 729 were in operation in two venues in Cambodia and 885 EGM seats were in operation in six venues in the Philippines.  We will selectively pursue additional new projects for our EGM participation operations in the Indo-China region and continue to reallocate our gaming assets within the Philippines to focus on higher-performing venues in this market. Total company-wide EGM placements can fluctuate due to our strategic efforts to optimize average daily net wins.  In the event EGM performance at our contracted venues does not meet expectations, we may discuss with the relevant venue owners withdrawing all or a portion of our EGMs from such venues for future redeployment in new or existing venues with better performance prospects.

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Table Game Products

Revenue from table game products decreased approximately $3.2 million to approximately $1.3 million for the year ended December 31, 2010 compared to approximately $4.5 million in the prior year.  The decrease was a result of lower sales volumes compared to the prior year, which included a large RFID gaming chip order to a new casino in Macau during the three-month period ended June 30, 2009.

Gross profit from table game products decreased approximately $1.5 million to approximately $487,000 in the year ended December 31, 2010 compared to a gross profit of approximately $2.0 million in the prior year due to lower revenue and sales volume for our RFID gaming chips resulting in reduced production efficiencies.

Non-Gaming Products

Revenue from non-gaming products increased approximately $2.5 million to approximately $6.6 million for the year ended December 31, 2010 compared to approximately $4.1 million in the prior year due to an increase in sales to our largest customer as they increased their production for the year due to the improving economy.

Gross profit increased approximately $601,000 to approximately $490,000 for the year ended December 31, 2010 compared to a gross loss of approximately $111,000 in the prior year due to the increase in sales orders from our major customer and resulting improvements in production efficiencies.

Operating Expenses

The following is a schedule showing expenses on a consolidated basis:

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased approximately $2.1 million to approximately $5.9 million for the year ended December 31, 2010 compared to approximately $8.0 million in the prior year due to our cost reduction initiatives.  Salaries and wages expense declined approximately $752,000 as a result of headcount reductions.  Rent and office expenses decreased approximately $260,000 mainly due to closure of the United States and China offices during the year ended December 31, 2009. Travel, utilities, and board of directors’ fees decreased approximately $308,000 due to concerted efforts to reduce expenses to the bare minimum. Other taxes decreased approximately $606,000 mainly due to the reversal of withholding taxes overprovided in prior years and improved tax planning. Bad debt expenses declined approximately $313,000 mainly as a result of enhanced management of accounts receivable. However, external consultancy and accounting fees increased by approximately $122,000 primarily as a result of new entities in Cambodia, payment of our insurance deductible associated with current litigation matters, as well as the costs associated with the Quasi-Reorganization. Advertising and other expenses also increased by approximately $17,000 primarily due to increased marketing activities.

Stock-based Compensation Expense

Stock-based compensation expense increased approximately $11,000 to approximately $887,000 for the year ended December 31, 2010 compared to approximately $876,000 in the prior year primarily due to the issuance of new stock compensation grants during 2010, net of a decrease as a result of the departure of certain employees in 2009 and 2010 and the complete vesting of certain stock options granted in 2007 and 2008.

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Impairment of Goodwill, Intangibles and Other Long-Lived Assets

As a result of “fresh-start” reporting, the asset carrying values of intangible assets were adjusted to a new cost basis and the accumulated amortization was also removed to adjust the basis as of December 31, 2010. Based on the impairment analysis at December 31, 2010, goodwill of approximately $84,000 was written off. Intangible assets consist of patents, customer relationships, trademarks and goodwill. They are amortized, except for goodwill, on the straight-line basis over the period of time the asset is expected to contribute directly or indirectly to future cash flows, which range from 10 to 13 years. The straight-line amortization method is utilized because we believe there is not a more reliably determinable method of reflecting the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up.

We measure and test goodwill and intangible assets for impairment in accordance with ASC 350, Intangibles-Goodwill and Other, and ASC 360, Property, Plant, and Equipment, at least annually on December 31, or more often if there are indications of impairment.

During the year ended December 31, 2010, as a result of our annual impairment review, we recorded a $2.4 million write-down of goodwill and intangible assets associated with our Dolphin operations in Australia as the current carrying value of the assets was higher than the expected value of the projected future cash flows.

During the year ended December 31, 2009, we closed our China manufacturing facility and decided to exit the chip washer business after evaluating the market opportunities for this product. Due to lack of future demand, we determined the carrying value of related patents may not be recoverable. As a result, we recorded an impairment loss of $425,000, which related to the write-down of an intangible asset associated with the chip washer patents.

The following table summarizes the impairment of goodwill and intangible assets:

Long-lived assets and definite-life intangible assets are reviewed for impairment annually or whenever events or circumstances indicate that the carrying amounts of assets may not be recoverable in accordance with ASC 360 Property, Plant and Equipment.  We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Such reviews assess the fair value of the assets based upon our estimates of the future cash flows we expect the assets to generate. In response to changes in industry and market conditions, we may be required to strategically realign our resources in the future which, in turn, could result in impairments of long-lived assets.

For the year ended December 31, 2010, we recorded an impairment charge of approximately $665,000 in relation to property and equipment of our Dolphin operations in Australia. We also recorded an impairment of approximately $388,000 mainly due to the write-off of gaming assets primarily related to the closure of a non-performing venue during the year and write-down of certain EGMs held for sale to zero values.

For the year ended December 31, 2009, we recorded an impairment charge of approximately $14.3 million for non-performing EGMs and the write-down of gaming assets for our Philippine operations as the current carrying value of the EGMs in operation exceeded the expected cash flows to be generated from the Philippines operations.

The following table reflects the components of the impairment of assets included in the consolidated statement of operations:

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Flood Damage Losses

Flood damage losses during the year ended December 31, 2009 related to damages to our EGMs in certain of our venues in the Philippines due to flooding from severe typhoons in the Metro-Manila area.  While our property insurance policy covered the related damages on our EGMs, we recorded the insurance deductible amount of approximately $83,000 during the year.

Product Development Expenses

Product development expenses increased approximately $333,000 to approximately $610,000 for the year ended December 31, 2010 compared to approximately $277,000 in the prior year as a result of additional costs incurred associated with the development of new plaques for the table game business.

As a result of the completed sale to Shuffle Master of our portfolio of automated card verification machines and electronic card shuffling systems in April 2009, all related intellectual property and certain inventory of such products pursuant to the Purchase and Settlement Agreement were written off.

It is anticipated that future product development will focus on potential gaming and/or non-gaming product enhancements.

Depreciation and Amortization Expenses

Depreciation and amortization expenses decreased approximately $152,000 to approximately $885,000 for the year ended December 31, 2010 compared to approximately $1.0 million in the prior year.  The decrease was mainly a result of the closure of our United States office and our China table games product manufacturing facility during the year ended December 31, 2009.

Restructuring Charges

During the year ended December 31, 2010, we incurred restructuring charges of approximately $310,000 for severance wages and benefits related to the termination of employees. The amount represents the contractual and other agreements with employees.

During the year ended December 31, 2009, we incurred restructuring charges of approximately $623,000 for the write-down of the remaining China plant equipment and the severance wages and benefits related to the termination of employees. The amount represents the contractual and other agreements with employees.

Other (Expense)/Income

Interest Expense and Finance Fees

Interest expense and finance fees decreased approximately $126,000 to approximately $411,000 for the year ended December 31, 2010 compared to approximately $537,000 in the prior year primarily due to the elimination of interest on withholding tax, capitalizing of certain interest expense to the casino development project in the year ended December 31, 2010 and a favorable settlement on accrued interest expense related to withholding tax.

Interest Income

Interest income increased approximately $7,000 to approximately $92,000 for the year ended December 31, 2010 compared to approximately $85,000 in the prior year as a result of a higher weighted average balance of cash and cash equivalents held.

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Foreign Currency Transactions

Foreign currency losses decreased approximately $17,000 to $72,000 for the year ended December 31, 2010 compared to losses of approximately $89,000 for the prior year primarily due to smaller exchange rates fluctuation between United States Dollar and Philippine Peso relating to the United States Dollar denominated payables from our Philippines operations, whose functional currency is the Philippine Peso.

Legal Settlement Gains

We recorded a settlement gain of approximately $656,000 from the Purton litigation during the year ended December 31, 2009.  On June 17, 2009, we entered into a deed of release with William Purton and other plaintiffs over which he had control for the settlement of all legal claims, disputes and proceedings between the parties. No such gain occurred in 2010.

Loss on Dispositions of Assets

Loss on disposition of assets increased approximately $57,000 to approximately $164,000 for the year ended December 31, 2010 compared to a loss of approximately $107,000 in the prior year primarily due to write-downs of leasehold improvements with regard to office relocations.

Other

Other income decreased approximately $166,000 to approximately $202,000 for the year ended December 31, 2010 compared to approximately $368,000 in the prior year due to a one-time benefit resulting from the write-off of an unclaimed debtor’s credit balance from the year ended December 31, 2009.

Income Tax Provision

Effective tax rates for the years ended December 31, 2010 and 2009 were approximately 11.3% and (1.9)%, respectively. We recorded a one-time tax benefit of approximately $775,000 in relation to the release of deferred tax liabilities due to impairment of assets and discharge of potential tax exposures following the deregistration of a foreign subsidiary. We obtained a tax incentive arrangement for our Cambodia operations in September 2010.  The tax arrangement was effective for the period January 1, 2010 through December 31, 2010.  Under this tax arrangement, we are required to pay only a fixed obligation tax to the Cambodian government instead of paying income tax based on the profits of our Cambodia operations. We will endeavor to obtain a similar tax arrangement for our Cambodia operations with the Cambodian government in 2011 subject to an annual review and negotiations.

Discontinued Operations

Net income from discontinued operations was approximately $1.5 million for the year ended December 31, 2009 primarily related to the sale of our portfolio of automated card verification machines and electronic card shuffling systems, all related intellectual property, and certain inventories of such products to Shuffle Master in April 2009. All historical revenues and expenses from these assets sold to Shuffle Master were reclassified as discontinued operations.

FINANCIAL CONDITION

Liquidity and Capital Resources

On April 21, 2008, we entered into a Trade Credit Facility Agreement (the “Facility Agreement”) with Elixir International Limited (“Elixir International”), a company which used to be a wholly-owned subsidiary of EGT Entertainment Holding, our principal shareholder. Upon entering into the Agreement, we immediately issued the first note pursuant to the terms of the Facility Agreement in the then principal amount of $15.0 million (the “Initial Advance”).  The Initial Advance extinguished a then trade payable of an equivalent amount to Elixir International with respect to EGMs previously acquired.

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As a result of the disposal of Elixir International by EGT Entertainment Holding, Elixir International assigned and novated all its rights and obligations under the Facility Agreement and the related promissory note (as amended) to EGT Entertainment Holding in April 2010.

Subsequent to its origination, the Facility Agreement has been amended three times, most recently on May 25, 2010 on which date we entered into Amendment No.3 to the Facility Agreement with EGT Entertainment Holding (the “Third Amendment”), pursuant to which we issued another new note (the “Third Amended Note) to replace previous terms.  Under the payment schedule of the Third Amended Note, the outstanding principal balance of $9.2 million and the interest accrued thereon were restructured in the following manner: (a)  the total interest accrued on the Outstanding Principal Balance during the period from July 1, 2009 to June 30, 2010 in the amount of $458,000 to be paid by us in a lump sum payment on July 1, 2010; (b) on the first day of each calendar month during the period from August 1, 2010 to June 1, 2011, we will pay interest in arrears on the Outstanding Principal Balance at the same rate of 5% per annum for the preceding month; and (c)  we will repay the Outstanding Principal Balance and interest accrued thereon at the rate mentioned above in 18 equal monthly installments commencing on July 1, 2011. Pursuant to the terms of the Third Amendment, we paid total interest of $649,000 to EGT Entertainment Holding during the year ended December 31, 2010.

As of December 31, 2010, we had total cash and cash equivalents of approximately $10.2 million and a working capital balance of approximately $9.0 million. Our cash and working capital during the year ended December 31, 2010 was positively impacted by the cash received from our operations at NagaWorld and by the repayment deferral of principal on the Trade Credit Facility. Working capital during the year ended December 31, 2010 was negatively impacted by the final payment of $1.76 million for the purchase of land in Cambodia for the development of the Takeo Project, the purchase of EGMs for our expansion at NagaWorld under the December 30, 2009 and May 25, 2010 contracts and the payment of $649,000 interest expense pursuant to the Third Amendment as discussed above.

In 2011, as part of our growth strategy for our gaming operations, we intend to incur initial planning and construction costs related to our casino and gaming development plans.  In addition, we expect to purchase EGMs to supplement existing inventory and source future targeted deployment plans.  Our casino and gaming development plans for 2011 include the Kampot Project, for which we expect the initial phase, which includes the construction, purchase of gaming equipment and initial working capital needs, will require expenditure of approximately $1 million capital costs.  This does not include the cost of EGMs as they will be sourced from our existing inventory.  We are also currently in discussions on several significant new gaming projects.

While there is no guarantee we will successfully conclude these negotiations, given our constrained capital resources at present, we intend to slow development of the Takeo Project in order to divert our available capital to these potential new projects, which we believe will offer greater short- and medium-term return potential. As a result, we presently do not have a timeline for the development of the Takeo Project and do not expect to commit significant capital to the project in 2011.

We presently expect that our capital expenditures in 2011 for our existing plans as of the date of this report, which include the development of our Kampot Project, the purchase of EGMs and general maintenance for our current operations will be approximately $2 million to $4 million. Given our current and projected future cash flow generation capability from our operations at NagaWorld, our ability to source previously-owned EGMs at attractive prices relative to new EGMs and our strong relationships with gaming equipment manufacturers, we anticipate funding the above-mentioned capital expenditures for 2011 from cash on hand and expected net cash flow from operations.

We anticipate our available working capital, along with cash expected to be generated from operations, will allow us to meet our capital expenditures for our Kampot Project and the purchase of EGMs for 2011, based on:

As noted above, however, we are currently pursuing additional casino and gaming projects. While there is no guarantee we will successfully conclude these negotiations, if we were to secure these projects we would require additional capital expenditure in 2011 beyond the $2 million to $4 million currently contemplated.   At this time, we are unable to predict the amount of additional capital that could be required in 2011 from these potential projects.  Where possible, we intend to fund our casino and gaming projects from our cash flow from operations and cash on hand.  Further, we will seek to structure the development of these projects in phases to better control and pace the related expenditure of capital.  However, should we commit to large projects or to the concurrent development of multiple casino and gaming projects, we may endeavor to obtain any required additional capital from various financing sources including commercial debt financing and the sale of our debt or equity securities.

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Cash Flow Summaries

Operations

Cash provided by operations was approximately $11.4 million for the year period ended December 31, 2010 compared with cash used in operations of approximately $7.0 million in the prior year. The increase in cash provided by operations was primarily due to a significant improvement in gross profit before depreciation and amortization as a result of the increase in EGM participation revenue as well as improvement in net working capital primarily due to the recoupment of commitment fees and a reduction in operating expenses.

Investing

Cash used in investing activities was approximately $5.3 million for the year ended December 31, 2010 compared to cash used in investing activities of approximately $761,000 in the prior year.   The increase in cash used in investing activities was a result of the purchase of land for the Takeo Project, EGMs for our expansion at NagaWorld under the contracts dated December 30, 2009 and May 25, 2010 and general EGM upgrades.

Financing

Cash used in financing activities was approximately $171,000 for the year ended December 31, 2010 compared with cash used in financing activities of approximately $3.2 million in the prior year.  The decrease was a result of the deferral of the repayment of principal on the Trade Credit Facility until July 2011.

Financial Condition

Changes from December 31, 2009 to December 31, 2010 were primarily due to the following:

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Contractual Cash Obligations and Off Balance Sheet Arrangements

Our contractual cash obligations under debt agreements, capital leases and operating leases including interest payments for the next five years as of December 31, 2010 are as follows:

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States. Accordingly, we are required to make estimates incorporating judgments and assumptions we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole, as well as information available from other outside sources. Our estimates affect amounts recorded in the financial statements and actual results may differ from initial estimates.

We consider the following accounting estimates to be the most critical to fully understanding and evaluating our reported financial results. They require us to make subjective or complex judgments about matters that are inherently uncertain or variable. Senior management have discussed the development, selection and disclosure of the following accounting estimates, particularly those considered most sensitive to changes from external factors, with the audit committee of our board of directors.

Quasi-Reorganization

We effected an elective accounting quasi-reorganization as of December 31, 2010, which eliminated our accumulated deficit in retained earning against additional paid-in-capital. The consolidated balance sheet as of December 31, 2010 gives effect to adjustments to fair value of assets and liabilities that are necessary when adopting “fresh-start” reporting. As a result, the consolidated balance sheet as of December 31, 2010 are presented on a different basis of accounting and, therefore, are not comparable to prior periods.

Inventory

The determination of obsolete or excess inventory requires us to estimate the future demand for our products within specific time horizons, generally one year or less. If we experience a significant unexpected decrease in demand for our products or a higher occurrence of inventory obsolescence because of changes in technology or customer requirements, we could be required to increase our inventory provisions.

Electronic Gaming Machines (EGM) and Systems

As a result of the Quasi-Reorganization, the carrying values of EGMs and systems were adjusted to a new cost basis and the accumulated depreciation was also removed to adjust the new basis as of December 31, 2010.  We depreciate new EGMs and systems over a five-year useful life and depreciate refurbished EGMs over a three-year useful life once placed in service.  Trends in market demand and technological obsolescence may require us to review and evaluate the recoverability of our investment, as well as the estimated useful lives used to depreciate these assets.

Property and Equipment

As a result of the Quasi-Reorganization, the carrying values of property and equipment were adjusted to a new cost basis and the accumulated depreciation was also removed to adjust the new basis as of December 31, 2010.  We are required to estimate salvage values and useful lives for our property and equipment.  Trends in market demand and technological obsolescence may require us to record impairment charges in accordance with the provisions of ASC 360.

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Revenue Recognition

We recognize revenue when all of the following have been satisfied:

·                  persuasive evidence of an arrangement exists;

·                  the price to the customer is fixed and determinable;

·                  delivery has occurred and any acceptance terms have been fulfilled;

·                  no significant contractual obligations remain; and

·                  collection is reasonably assured.

EGM Participation Revenues

We earn recurring revenue by providing customers with EGMs and casino management systems which track game performance and provide statistics on installed EGMs owned by us and leased to venue owners.  Revenues are recognized on the contractual terms of the participation agreements between ourselves and the venue owners and are based on our share of net winnings.

Commitment fees paid to the venue operator where the agreement stipulates that the fees will be recovered from the daily net win sharing are capitalized as assets. As required by ASC 605-50, Customer Payments and Incentives, the cash consideration received for the portion of net winnings relating to the commitment fees is amortized as a reduction of revenue if the expected benefit from commitment fees cannot be separately identified or reasonably estimated. We had prepaid commitment fees of $NIL and approximately $4.8 million as of December 31, 2010 and December 31, 2009, respectively.

Commitment fees paid to the venue operators relating to contract amendments which are not recoverable from daily net win are also capitalized as assets and amortized as a reduction of revenue over the term of the amended contracts.  We had commitment fees related to contract amendment fees of approximately $558,000 and $688,000 as of December 31, 2010 and December 31, 2009, respectively.

Gaming and Non-Gaming Product Revenues

We recognize revenue from the sale of our products to end users upon shipments against customer contracts or purchase orders.

We recognize revenue from our sales to independent distributors upon shipments to the distributors against distributor contracts or purchase orders for our products.  We recognize revenue on consignment inventory when ownership of the product and title passes to the distributor which occurs upon the distributor’s use of the product in its service organization or on sale to an end user.

Intangible Assets, including Goodwill

As a result of the Quasi-Reorganization, the carrying values of intangible assets were adjusted to a new cost basis and the accumulated amortization was also removed to adjust the new basis as of December 31, 2010. Based on the impairment analysis at December 31, 2010, goodwill of approximately $84,000 was written off. Intangible assets consist of patents, customer relationships, trademarks and goodwill. They are amortized, except for goodwill, on the straight-line basis over the period of time the asset is expected to contribute directly or indirectly to future cash flows, which range from 5 to 13 years. The straight-line amortization method is utilized because we believe there is not a more reliably determinable method of reflecting the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up.

We apply ASC 350, Intangibles- Goodwill and Other and ASC 360, Property, Plant and Equipment.  Under ASC 350, goodwill, prior to its write off, was no longer amortized but was subject to periodic impairment tests. Other intangible assets with finite lives, such as patents, customer relationships and trademarks will continue to be amortized over their useful lives.

Stock-Based Compensation

We apply ASC 718, Compensation-Stock Compensation, to account for stock-based compensation. Under the fair value recognition provisions of ASC 718, we recognize stock-based compensation expense for all service-based awards to employees and non-employee directors with graded vesting schedules on the straight-line basis over the requisite service period for the entire award.  For restricted stock awards with performance conditions, the Company evaluates if performance conditions are probable in each reporting period. The compensation expense of restricted awards is recognized ratably over the implicit service period if achieving performance conditions is probable. Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered.  Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation costs of a change in the estimated forfeitures is recognized in the period of the change.  For non-employee awards, we remeasure compensation costs each period until the service condition is complete and recognize compensation costs on the straight-line basis over the requisite service period.  Option valuation models require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value estimate. Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options remain outstanding.  Stock-based compensation expense totaled approximately $887,000 and $876,000 for the years ended December 31, 2010 and 2009 in the accompanying consolidated statements of operations.

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Income Taxes

We are subject to income taxes in the United States (including federal and state) and several foreign jurisdictions in which we operate. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. ASC 740, Income Taxes, requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the tax loss carry-forward periods available to us for tax reporting purposes, and other relevant factors.

Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We applied the provisions of ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

We are subject to income tax examinations by tax authorities from 2003 through the present period in jurisdictions in which we operate. There are currently no income tax returns under examination by the U.S. Internal Revenue Service or any other major tax authorities.

At the date of the Quasi-Reorganization, defered taxes were reported in conformity with applicable income tax accounting standards described above, net of applicable valuation allowances. Deferred tax assets and liabilities were recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities. In accordance with the Quasi-Reorganization requirements tax benefits realized in periods after the Quasi-Reorganization that were not recognized at the date of the Quasi-Reorganization will be recorded directly to equity.

Recently Issued Accounting Standards

In January 2010, the FASB issued guidance that requires new disclosures, and clarifies existing disclosure requirements, about fair value measurements. The clarifications and the requirement to separately disclose transfers of instruments between level 1 and level 2 of the fair value hierarchy was effective for interim reporting periods in 2010; however, the requirement to provide purchases, sales, issuances and settlements in the level 3 roll forward on a gross basis becomes effective in 2011. Since this new guidance only amends the disclosures requirements, it did not impact our consolidated balance sheet, statement of operations or statement of cash flows.

In October 2009, the FASB amended the accounting and disclosure requirements for revenue recognition.  These amendments, effective in 2011, modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The implementation of this guidance is not expected to have a material impact on our consolidated financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements.

Item 7A.                 Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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Item 8.                    Financial Statements and Supplementary Data

Index To Financial Statements