Electronic Game Card (EGMI) 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

OR

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

For the transition period from to

Commission file number 000-25853

 
ELECTRONIC GAME CARD, INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada (State or Other Jurisdiction of Incorporation or Organization)   19^th Floor, 5^th Avenue, New York, NY (Address of Principal Executive Offices) 87-0570975 (I.R.S. Employer Identification No.)   10019 (Zip Code)

(646) 723-8946

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at October 31, 2008
Common Stock, $0.001 par value	54,955,975

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding future revenues, research and development programs, clinical trials and collaborations and our future cash requirements. The words or phrases “will”, “will likely result”, “are expected to”, “will continue”, “estimate”, “project”, “potential”, “believe”, “plan”, “anticipate”, “expect”, “intend”, or similar expressions and variations of such words are intended to identify forward-looking statements. Statements that are not historical facts are based on our current expectations, beliefs, assumptions, estimates, forecasts and projections for our business and the industry and markets related to our business. The statements contained in this report are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements.

The forward-looking statements in this Quarterly Report on Form 10-Q speak as of the date of this report. We expressly disclaim any obligations or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Quarterly Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based, except as may be required by law.

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ELECTRONIC GAME CARD, INC.

TABLE OF CONTENTS

		PAGE #
PART I.	FINANCIAL INFORMATION
	ITEM 1 - Financial Statements
	Consolidated Balance Sheets as of September 30, 2008 (Unaudited), and December 31, 2007	4
	Consolidated Statements of Operations and Comprehensive Loss for the Fiscal Three Months, and Nine months Ended September 30, 2008 and 2007 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Fiscal Nine Months Ended September 30, 2008 (Unaudited) and December 31, 2007	6
	Notes to Unaudited Consolidated Financial Statements	7
	ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk	19
	ITEM 4 - Controls and Procedures	19
PART II.	OTHER INFORMATION
	ITEM 1 - Legal Proceedings	20
	ITEM 2 - Changes in Securities	20
	ITEM 3 - Defaults Upon Senior Securities	20
	ITEM 4 - Submission of Matters to a Vote of Security Holders	20
	ITEM 5 - Other Information	20
	ITEM 6 - Exhibits	20
SIGNATURES		21

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ELECTRONIC GAME CARD, INC.

CONSOLIDATED BALANCE SHEETS

	September 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
Current assets:
Cash and Marketable Securities	$	8,1354,163		$	4,753,040
Accounts receivable		2,693,709			2,323,543
Inventory		70,071			70,071
Other receivables		169,078			92,100
VAT receivable		30,657			31,531
Deferred charges		76,238			190,595
Total current assets		11,173,916			7,460,880
Net property, plant and equipment		27,913			44,050
Intangible assets		269,377			183,034
Investments, at cost		4,926,564			2,886,427
Total assets	$	16,397,770		$	10,574,391
LIABILITIES AND SHAREHOLDERS’ EQUITY/(DEFICIT)
Current liabilities:
Accounts payable	$	636,457		$	659,891
Accrued liabilities		880,494			560,046
Total current liabilities		1,516,951			1,219,937
Deferred license fees		404,625			779,625
Total liabilities		1,921,576			1,999,562
Series A 6% convertible redeemable preferred stock, $.001 par value, 10,000,000 shares authorized; 6,549,922 and 7,582,806 shares issued and outstanding at of September 30, 2008 and December 31, 2007, respectively		6,549,922			7,582,806
Shareholders’ equity/(deficit)
Common stock, $.001 par value, 100,000,000 shares authorized; 53,205,975 and 48,011,851 and shares issued and outstanding at September 30, 2008 and December 31, 2007 respectively		53,206			48,012
Capital in excess of par value		29,876,745			27,264,272
Accumulated deficit		(20,998,971	)		(25,463,568	)
Accumulated other comprehensive loss		(1,004,708	)		(856,693	)
Total shareholders’ equity		7,926,272			992,023
Total liabilities and shareholders’ equity	$	16,397,770		$	10,574,391

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

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ELECTRONIC GAME CARD, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenue		3,043,566			1,785,330		$	7,823,870		$	4,250,224
Cost of sales		744,000			490,499			1,905,589			1,130,852
Gross profit		2,299,566			1,294,831			5,918,281			3,119,372
Operating expenses
Sales and marketing		13,600			1,232			54,954			5,204
General and administrative		123,639			146,326			451,237			431,541
Consulting expenses		282,865			125,727			560,014			282,585
Salaries and wages		104,407			109,556			277,397			312,135
Loss from joint venture		-			-			-			18,636
Total operating expense		524,511			382,841			1,343,602			1,050,101
Income from operations		1,775,055			911,990			4,574,679			2,069,271
Other income (expense)
Interest income		87,014			49,554			210,059			147,669
Interest expense		(147,747	)		(153,205	)		(443,241	)		(488,866	)
Gain on termination of joint venture		-			-			-			31,127
Gain on sale of investments		-			-			122,900			-
Total other income (expense)		(60,733	)		(103,651	)		(110,282	)		(310,070	)
Net income		1,714,322			808,339		$	4,464,597		$	1,759,201
Foreign currency translation (loss) gain		(28,947	)		9,289			(148,015	)		(58,520	)
Comprehensive income		1,685,375			817,628		$	4,316,582		$	1,700,681
Net income per common share ( basic )	$	0.03		$	0.02		$	0.08		$	0.04
Weighted average number of shares outstanding (basic)		52,041,416			44,168,683			51,604,503			44,168,683
Net income per common share ( diluted )	$	0.02		$	0.02		$	0.07		$	0.04
Weighted average number of shares outstanding (diluted)		65,707,416			44,168,683			64,674,490			44,168,683

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

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ELECTRONIC GAME CARD, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended
	September 30, 2008			September 30, 2007
Cash flows from operating activities:
Net income	$	4,464,597		$	1,759,201
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities
Depreciation		16,137			23,538
Amortization of deferred charges		114,357			114,357
Deferred license fees		(375,000	)		-
Expenses paid with common stock		192,000			-
Gain on sale of investments		(122,900	)		-
Gain on termination of joint venture		-			(31,127	)
Loss from joint venture		-			18,638
Change in operating assets and liabilities:
(Increase) accounts receivable		(1,770,166	)		(2,421,579	)
(Increase)Value Added Tax receivable		874			(19,708	)
(Increase) inventory		-			(29,370	)
(Increase) other receivables		(76,978	)		-
(Decrease) accounts payable		(23,434	)		77,290
Increase in accrued liabilities and interest		320,447			372,000
Increase in deferred license fees		-			904,625
Net cash provided by operating activities		2,739,934			767,865
Cash flows used in investing activities:
Purchase of property and equipment		-			(5,132	)
Purchase of investments		(958,207	)		(362,284	)
Purchase of intangible assets		(86,343	)		-
Proceeds from sale of investments		433,754			-
Net cash used in investing activities		(610,796	)		(367,416	)
Cash flows provided by financing activities:
Proceeds from issuance of common stock		-			-
Receipts from related party		-			79,275
Net cash provided by financing activities		-			79,275
Foreign currency exchange effect on cash		(148,015	)		(58,520	)
Net increase in cash and cash equivalents		1,981,123			421,204
Cash and cash equivalents at beginning of period		4,753,040			3,052,733
Cash and cash equivalents at end of period	$	6,734,163		$	3,473,937
Supplemental disclosure of cash flow information:
Cash paid during the period for :
Interest	$	-		$	-
Income taxes	$	-		$	-
Supplemental disclosure of cash flow information:
Shares issued for investments	$	1,083,673		$	-
Shares issued for redeemable preference shares	$	1,032,884		$	-

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

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ELECTRONIC GAME CARD, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization and Nature of Operations

The Company was incorporated under the laws of the England on April 6, 2000, under the name of Electronic Game Card, Ltd. Until 2002, the Company remained dormant and had no operations until August 8 2002. On May 5, 2003, the Company entered into an agreement whereby it acquired 100% of the outstanding stock of Electronic Game Card Marketing, a Delaware Company.

On December 5, 2003, the Company acquired 100% of the outstanding stock of the Electronic Game Card, Inc. (Nevada) in a reverse acquisition. At this time, a new reporting entity was created and the name of the Company was changed to Electronic Game Card, Inc.

The Company is engaged in the development, marketing, sale and distribution of recreational electronic software which is primarily targeted towards the global sales promotion, gaming and lottery markets. The Company’s patent protected technology was originally conceived for the global sales promotion and lottery industries and marketed under the name of EGC Electronic GameCard™. The shape of pocket Electronic GameCards is flexible to clients’ needs but is currently approximately the size of a credit card, operated electronically by touch and incorporating a microchip and LCD screen showing numbers or icons. Additional markets with considerable potential for the Company's reward based games products are Indian Gaming, general gaming outlets like bingo halls and casinos and private and social lotteries. The gaming outlets (customers) who purchase our products are liable for payment to the “winners” from their own sales proceeds. The Company also is launching its technology into new market sectors such as Education, Sports/Hobbies and Celebrations. The Company designs its Electronic GameCards to play game types, formats and prize structures as required by its customers and has built a software library of generic game formats of popular, widely recognized and understood themes. The current software library stands at 27 unique games.

Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-KSB of Electronic Game Card, Inc. for the year ended December 31, 2007 as amended.

In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for any other interim period or the entire year. For further information, these unaudited consolidated financial statements and the related notes should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2007 included in the Company’s Annual Report on Form 10-KSB as amended.

Principles of Consolidation

The consolidated financial statements include the accounts of the following companies:

· Electronic Game Card, Inc. (Nevada Corporation)

· Electronic Game Card (UK)Ltd. (English Corporation)

· Electronic Game Card Marketing US, Inc (A Delaware Corporation)

· Educational Game Card

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The results of subsidiaries acquired during the year are consolidated from their effective dates of acquisition. All significant inter-company accounts and transactions have been eliminated.

Certain amounts in the prior periods consolidated financial statements and notes have been reclassified to conform to the current period’s presentation.

Concentrations of Credit Risk

The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.

For the nine months ended September 30, 2008, the Company transacted its business with three customers which accounted for 60% of total revenues.   Total revenues from these distributors and their customers were $4,695,696 for the nine months ended September 30, 2008.  Total accounts receivable from the related distributors and their customers at September 30, 2008 were $775,000.

The Company maintains some of its cash in U.S and U.K. bank deposit accounts which, at times, exceed insured limits. No losses have been experienced related to such accounts. The Company believes it places its cash with quality financial institutions and is not exposed to any significant cash concentration credit risk.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.

Allowance for Doubtful Accounts

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. Accounts receivable are presented net of an allowance for doubtful accounts of $0 and $0 at September 30, 2008 and December 31, 2007, respectively.

Depreciation

Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:

Asset	Rate
Plant and Machinery Equipment	3 years
Office Equipment	3 years

Maintenance and repairs are charged to operations; betterments are capitalized. The cost of property sold or otherwise disposed of and the accumulated depreciation thereon is eliminated from the property and related accumulated depreciation accounts, and any resulting gain or loss is credited or charged to income.

Revenue recognition

Revenue is recognized from sales of product when persuasive evidence of an arrangement exits. This normally takes the form of a signed order confirmation from the customer which generates a work order from the company to our supplier. When the supplier has confirmed delivery and invoiced the company we invoice the customer and recognize the sale. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. Where products are configured to customer requirements, revenue is recorded upon the successful completion of the Company’s final test procedures. The company carries out credit worthiness checks on customers and asks for a deposit on new customer orders prior to placing work orders. In addition, under the license agreement with SGI (see note 7) the company is entitled to a minimum annual commission of $500,000 per year and one quarter of this minimum fee is recognized as revenue in each quarter.

Foreign Currency Translation

The Company's functional currency for its foreign subsidiary, Electronic Game Card Ltd., is the British (UK) Pound and the reporting currency is the U.S. Dollar. All elements of financial statements are translated using a current exchange rate. For assets and liabilities, the exchange rate at the balance sheet date is used. Stockholders’ Equity is translated using the historical rate. For revenues, expenses, gains and losses the weighted average exchange rate for the period is used. Translation gains and losses are included as a separate component of stockholders’ equity as other comprehensive income or loss. Gain and losses resulting from foreign currency transactions are included incomprehensive income or loss from operations.

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Pervasiveness of Estimates

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

The Company’s unaudited consolidated financial statements are based on a number of estimates, including accruals for accounts payable and interest expense, amortization of deferred charges, allowance for doubtful accounts, estimated useful lives of property and equipment, and fair value of investments.

Marketable Securities

The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase or acquisition and reevaluates such determinations at each balance-sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available-for-sale. Held-to-maturity securities are recorded as either short-term or long-term on the Balance Sheet based on contractual maturity date and are stated at amortized cost. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Debt and marketable equity securities not classified as held-to-maturity or as trading, are classified as available-for-sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in shareholders’ equity.

The fair value of substantially all securities is determined by quoted market prices. The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market.

The Company’s marketable securities are classified as available-for-sale as of September 30, 2008.

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Income (Loss) per Share

Basic income (loss) per share has been computed by dividing the income/(loss) for the year applicable to the common stockholders by the weighted average number of common shares outstanding during the period. As of September 30, 2008, the Company had options and warrants outstanding to purchase up to 5,349,633 shares of common stock.

Stock Compensation for Non-Employees

The Company accounts for the fair value of its stock compensation grants for non-employees in accordance with FASB Statement 123(R). The fair value of each grant is equal to the market price of the Company’s stock on the date of grant if an active market exists or at a value determined in an arms length negotiation between the Company and the non-employee.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)), which replaces SFAS 141, Business Combinations, requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This Statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values.

SFAS 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this Statement. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect this will have a significant impact on our financial statements.

In December 2007, FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, which amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This statement also requires the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly identified and presented on the face of the consolidated statement of income. Changes in a parent’s ownership interest while the parent retains its controlling financial interest must be accounted for consistently, and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any non-controlling equity investment. The Statement also requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This Statement applies prospectively to all entities that prepare consolidated financial statements and applies prospectively for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently evaluating the impact on our financial statements, if any

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (SFAS 159), which is effective for fiscal years beginning after November 15, 2007. SFAS 159 permits the Company to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. The Company adopted the provisions of this statement on January 1, 2008.

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In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 was effective as of the beginning of the Company’s 2008 year. The provisions of SFAS 157 were adopted January 1, 2008. In February 2008, the FASB staff issued Staff Position No. 157-2 “Effective Date of FASB Statement No. 157” (FSP FAS 157-2). FSP FAS 157-2 delayed the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The provisions of FSP FAS 157-2 are effective for the Company’s fiscal year beginning January 1, 2009.

SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are described below:

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

2. Going Concern

The accompanying unaudited consolidated financial statements have been prepared on the basis of accounting principles applicable to a “going concern”, which assume that the Company will continue in operation for at least one year and will be able to realize its assets and discharge its liabilities in the normal course of operations.

These unaudited consolidated financial statements do not reflect adjustments that would be necessary if the Company were unable to continue as a “going concern”. While management believes that the actions already taken or planned, will mitigate any adverse conditions and events which raise doubt about the validity of the “going concern” assumption used in preparing these financial statements, there can be no assurance that these actions will be successful.

If the Company were unable to continue as a “going concern”, then substantial adjustments would be necessary to the carrying values of assets, the reported amounts of its liabilities, the reported expenses, and the balance sheet classifications used.

3. Income Taxes

The Company is subject to income taxes in the United States of America, United Kingdom, and the state of New York. As of September 30, 2008, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $13,810,558 in the United States and $7,044,540 in the United Kingdom that may be offset against future taxable income through 2023. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited. Accordingly, the potential tax benefits of the loss carry-forwards are offset by a valuation allowance of the same amount.

For the years ending December 31, 2007 and 2006, income tax expense was $0 and $0.

SFAS No.109 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities.

4. Related Party Transactions

During the three months ended September 30, 2008 and the nine months ended September 30, 2008 the Company incurred rent expense for the London office of $ 0and $0 compared with $20,000 and $40,000 in the same periods in the prior year.

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5. Fair Value Accounting

The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by SFAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	Fair Value at September 30, 2008
	Total		Level 1		Level 2		Level 3
Assets:
Investments	$	6,326,564	$	1,400,000	$	—	$	4,926,564
	$	6,326,564	$	1,400,000	$	—	$	4,926,564
Liabilities:
	$	—	$	—	$	—		—
		—		—		—	$	—

The Company’s marketable securities are classified within Level 1 since they are from quoted prices in active markets.

The Company’s investments (at cost) are classified within Level 3 of the fair value hierarchy because they are privately held companies with no market activity or quoted prices.

6. Stock Options / Warrants

In accordance with the fair value recognition provisions of SFAS 123(R), we estimate the stock-based compensation cost at the grant date based on the fair value of the award and recognize it as an expense on a graded vesting schedule over the requisite service period of the award.

The Company has adopted a stock compensation plan entitled the 2007 Equity Compensation Plan. Pursuant to this 2007 Equity Compensation Plan, grants of shares can be made to:

(i) designated employees of Electronic Game Card Inc. (the “Company”) and its subsidiaries including Electronic Game Card Ltd,

(ii) certain advisors who perform services for the Company or its subsidiaries, and

(iii) non-employee members of the Board of Directors of the Company (the “Board”) with the opportunity to receive grants of incentive stock options, nonqualified options, share appreciation rights, restricted shares, dividend equivalent rights and cash awards. The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company, thereby benefiting the Company’s shareholders, and will align the economic interests of the participants with those of the shareholders. The 2007 Equity Compensation Plan provides for options equivalent up to 10% of the issued share capital of the company to be offered to those qualifying under the scheme. On February 6, 2007 the Company issued 2,000,000 options to management and staff at an exercise price of 17.5c per share and 2,000,000 at an exercise price of 25c per share.

The company has a total of 5,349,633 options and warrants outstanding at September 30 2008.

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7. License Agreement

Pursuant to a License Agreement dated April 27, 2007, Scientific Games International (SGI) shall have the exclusive right, for a period of three years (subject to extension as discussed below), to produce, market, sell and distribute the EGC Electronic GameCard ™ in compliance with all applicable laws, to all public lotteries operated by national, state or provincial governmental entities or private entities operating such public lotteries on behalf of such governmental entities (the “Public Lotteries”) in the U.S., Canada, Mexico and Italy. SGI also shall have a non-exclusive license to produce, market, sell and distribute the EGC Electronic GameCard ™ worldwide during the ten year term of the License Agreement and any extensions thereof. For purposes of the License Agreement, the term “Public Lotteries” does not include lotteries conducted by charitable entities or lotteries conducted by other persons, entities or bodies that are not operated on behalf of national, state or provincial governmental entities. SGI agreed to package and label EGC Electronic GameCard ™ as requested by the Company at a reasonable rate of compensation to be mutually agreed by the parties. EGC retained all other rights with respect to the intellectual property which is the subject of the License Agreement. In connection with the sale, marketing, production and distribution of the EGC Electronic GameCard ™, EGC shall provide SGI full access to EGC’s producers, manufacturers and suppliers of all components for and assembly of the EGC Electronic GameCard ™.

SGI may extend its exclusive rights with respect to “Public Lotteries” in the U.S., Canada, Mexico and Italy during the term of the License Agreement on a yearly basis beyond the first three years of the License Agreement. To affect such an extension of exclusivity, SGI must pay to EGC in cash, the sum of at least $500,000 in license fees for the year preceding the extension.

During the term of the License Agreement, SGI have agreed to pay to the Company as a royalty fee (“Royalty Fee”) on a quarterly basis the greater of $.05 per EGC Electronic GameCard ™ and five percent (5%) of the gross selling price without deduction of taxes, expenses or promotions, for EGC Electronic GameCard ™ sold by SGI or its affiliates. SGI may not assign, sublicense or otherwise transfer the License Agreement to a third party without the prior written consent of EGC.

8. Series A Preferred Convertible Redeemable Stock

On March 24, and April 6^th, 2005 the Company sold a total of $8,666,000 Convertible Promissory Notes to accredited investors in a private placement of securities. This note was payable upon written demand which may be made on or after March 31, 2007, and was converted into Series A Preferred Convertible Redeemable Stock (“Series A”) at the Company’s election on November 29, 2006. Each share of Series A is convertible into one share of Common Stock at no cost by stockholder and is redeemable by the Company not later than March 15, 2010. Series A pays interest at 6% per annum. Dividends payable are included within accrued liabilities on the Company’s balance sheet. Also, the Registrant issued one (1) warrant (a "Warrant") to acquire one (1) share of Series A Preferred Stock for every two shares of Series A stock. The Warrants shall be exercisable to acquire shares of Series A upon the effectiveness of actions by the Registrant's shareholders to authorize the Series A. The Warrants shall be exercisable at $0.50 per share of Series A, subject to adjustment, and shall be exercisable for a period of 5 years. In addition, at the option of the holder, each Warrant is also immediately exercisable directly to acquire, instead of shares of Series A, shares of Common Stock on an as-converted-from-Series-A basis. Unexercised Warrants shall expire earlier upon notice by the Company to the holders of the Warrants following any consecutive 30-day trading period during which the Common Stock trades on its principal market at a price at or above three (3) times the then applicable exercise price with average daily volume of at least 100,000 shares (subject to adjustment of such trading volume threshold in the event of stock splits, reverse stock splits, stock dividends, recapitalizations or similar events). Currently there are 6,549,922 Series A shares outstanding there were no conversions in the period presented. During the nine months ended September 30 2008 1,022,657 shares of Series A stock have been converted to common stock.

9. Common Stock Transactions

 

During the nine months ended September 30, 2008 the company issued 400,000 shares of common stock to consultants for development work to enhance the companies platform technologies.

During the three months ended, 1,766,342 shares were issued for the exercise of options.

10. Available-for-Sale Securities

Available-for-sale securities consist of the following:

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	September 30, 2008
	Estimated Fair Value		Gains in Accumulated Other Comprehensive Income		Losses in Accumulated Other Comprehensive Income
Current:
Common Stock	$	1,400,000		5,000		-
Total current securities		1,400,000		5,000		-
Total available-for-sale securities	$	1,400,000		5,000		-

Net unrealized holding losses on available-for-sale securities in the amount of approximately $5,000 for the period ended September 30, 2008 have been included in accumulated other comprehensive income.

11. Investments

 At September 30, 2008, the Company had investments in the following various entities:

Prize Mobile Ltd.	$	1,860,235
XOGO Ltd.		1,314,736
Pharma Digital Solutions Ltd.		1,001,593
Avatar Gateways		500,000
DG2L Technologies		250,000
Total cost	$	4,926,564

The Company currently holds less than 10% of each of the respective privately-held entities which approximates the Company’s pro rata share of their underlying value. It is not practicable to estimate the fair value of the Company’s investment in the common stock of these entities because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. However, management believes that the carrying amount (on the cost method) of $4,926,563 was not impaired as of September 30, 2008.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q.

General

Electronic Game Card, Inc. (referred to as "EGC", "us", "we" or "Company") is a supplier of innovative games to the promotional, gaming and lottery markets worldwide. The Company’s lead product is the EGC, Electronic GameCard ™ a unique credit card-sized pocket game combining interactive capability with "instant win" excitement.

The Company

Electronic Game Card, Inc. is an emerging international corporation developing reward based games for the sales promotions, casino and lottery and incentive markets. EGC’s core product is the EGC Electronic GameCard™, a unique and innovative proprietary technology adapted to a platform, with patents pending worldwide and with the technology that can be adapted to other markets. The EGC Electronic GameCard™ was designed by us to be rich in functionality, customizable, portable, and cost efficient. The EGC Electronic GameCard platform is currently embedded in a credit card size digital device with an LCD window, touch pad controls and microchip, allowing for many game formats to be programmed to suit a variety of applications in several industry sectors.

EGC’s GameCards are used in the sales promotion market as an incentive or loyalty sales promotion tool to be given away by the brand promoter to the consumer with prizes given as rewards for winning simple fun games designed specially for the brand. The Jack Meyers Media Business Report states that the global media market for 2007 is $752 billion of which sales promotion and consumer incentives are $136 billion. www.jackmyers.com

An opportunity exists for the Company to sell EGC Electronic GameCards for re-sale to the public as a gaming device in selected areas of the casino market in which blackjack, poker, bingo or similar games may be played. In other areas of the world, however, re-sale is permitted and EGC expects to start marketing its range of game formats as soon as they are developed during the year. EGC also intends to leverage its gaming, manufacturing and technology IP knowledge to the wider market place anticipated from rapidly expanding areas of digital communications offering reward based games opportunities. To this end the company has purchased a small shareholding in DG2L, an interactive television set top box (STB) manufacturer and in February 2005 set up a division to investigate opportunities in mobile phones and the Prize Mobile investment in this area has now applied for a public listing on the Plus exchange in London.

Sales Promotion Market

The sales promotion prize and competition market is one in which the promoter (usually a well known brand) must not be seen to obtain money for entry, and where no purchase of the brand's goods is necessary in order not to fall under the laws by which lotteries are regulated, Our EGC Electronic GameCards can be applied to a broad range of potential promotional opportunities although introducing a new product into the sales and promotion marketing arena, despite its demand for novelty products and innovative ideas, takes time and adaptability to market needs.

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Within the sales promotion market, the Poker sector has developed into a distinct and vibrant opportunity. In Europe, Australasia and South Africa playing and watching Poker at tournaments and, on-line or on television has moved from a specialist area to mainstream entertainment and gaming in the last 12 months.

The large number of Poker players and viewers form a substantial and dynamic opportunity for the gaming sector, and the profile being generated by marketers is of a vibrant and expanding sector with increased promotional budgets. The Company is currently working on development of specialist EGC Electronic GameCards and promotions to extend the interest and impact of Poker to maximize this opportunity.

Lottery Market

Lottery operators currently make use of paper scratch cards to give players an "instant" win or lose reward experience. Over the last several years, scratch cards have become increasingly large and complex to accommodate consumer demand for multiple plays and multiple chances to win. The EGC Electronic GameCard™ offers the potential to simplify the scratch card while giving the opportunity to raise the selling price to consumers and increase sales. Our product has been seen by some leaders in the lottery industry as potentially providing the next contemporary digital evolution of the scratch card, offering multiple plays and multiple chances to win in an entertaining and secure manner while using existing methods of distribution as with scratch cards.

On April 27, 2007 (the “Effective Date”), Electronic Game Card, Inc. (the "Company" or “EGC”) entered into a license agreement (the “License Agreement”) with Scientific Games International, Inc. ("SGI"). The parties agreed to terminate their joint venture agreement dated October 12, 2004 (the “Joint Venture Agreement”), settling outstanding amounts due to each party and owed by each party to the joint venture or to each other. Pursuant to the License Agreement, SGI have the exclusive right, for a period of three years (subject to extension as discussed below), to produce, market, sell and distribute the EGC Electronic GameCard™ in compliance with all applicable laws, to all public lotteries operated by national, state or provincial governmental entities or private entities operating such public lotteries on behalf of such governmental entities (the “Public Lotteries”) in the U.S., Canada, Mexico and Italy. SGI also have a non-exclusive license to produce, market, sell and distribute the EGC Electronic GameCard™ worldwide during the term of the License Agreement and any extensions thereof. For purposes of the License Agreement, the term “Public Lotteries” does not include lotteries conducted by charitable entities or lotteries conducted by other persons, entities or bodies that are not operated on behalf of national, state or provincial governmental entities. SGI agreed to package and label EGC Electronic GameCard™ as requested by the Company at a reasonable rate of compensation to be mutually agreed by the parties. The Company retained all other rights with respect to the intellectual property which is the subject of the License Agreement. SGI may extend its exclusive rights with respect to “Public Lotteries” in the U.S., Canada, Mexico and Italy during the term of the License Agreement on a yearly basis beyond the first three years of the License Agreement. To effect such an extension of exclusivity, SGI must pay to EGC in cash, the sum of at least $500,000 in license fees for the year preceding the extension. 

During the term of the License Agreement, SGI has agreed to pay to the Company as a royalty fee (“Royalty Fee”) on a quarterly basis the greater of $.05 per EGC Electronic GameCard™ and five percent (5%) of the gross selling price without deduction of taxes, expenses or promotions, for EGC Electronic GameCard™ sold by SGI or its affiliates. SGI may not assign, sublicense or otherwise transfer the License Agreement to a third party without the prior written consent of EGC.

Indian Gaming Market

The Indian Gaming on Native American Tribal Lands covers parts of 28 States within the United States of America and represents a significant portion of the total gaming industry. The National Indian Gaming Commission (NIGC) report that the market was $25.7 billion dollars in revenue in 2006 with 415 casinos operated by more than 200 tribes across the United States.

The Company has a legal opinion from the NIGC that the EGC Electronic GameCard™ is a Class II device under IGRA (Indian Gaming Regulatory Act). The Class II designation is significant because it exempts the Company from becoming subject to the state license procedures and requirements.

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The success of sales promotion in the Gaming sector, and in particular the sale to the Santa Ana Star Casino, New Mexico demonstrates the interest in the EGC Electronic GameCard™ in this sector. Therefore, EGC continues its sales and marketing activity to generate sales around Class II gaming.

Sovereign Game Card LLC

On September 16, 2008 the company announced that it had signed a five-year license agreement containing established yearly minimum royalty payments with Arizona based Sovereign Game Cards, LLC (“Sovereign”) for distribution of the EGC Electronic GameCard™ into Native American Indian-owned casinos within the United States and Canada.  Tom L. Darwin, founder and managing principal of Sovereign, with his affiliates and distributors have a 20-year history of service to the Native American Indian community, and has financed numerous projects, including Native American casinos.  Mr. Darwin recently established Sovereign specifically to introduce, sell and distribute the EGC Electronic GameCard™ into Native American Indian territories. 

Business Strategy

During 2007, the Company expanded its volume production of the EGC Electronic GameCards™. This necessitated the cost effective and secure design of EGC Electronic GameCards from the manufacturers, involving quality control practices of an extremely high standard. The Company marketed the EGC Electronic GameCard™ during 2007 in conjunction with Scientific Games International, Inc. through the distribution agreement for North America, Mexico and Italy. Staff are responsible for either selling the EGC Electronic GameCards direct (via Agents) in the case of sale promotion products or in the case of lotteries, through an exclusive distribution license.

We market our products through agents in the US, Europe and the rest of the World. We currently have outlets in New York and London (U.K.). Our management team has relevant experience in their appropriate markets to contract agents and distributors to sell and our products.

Indian Gaming appertains solely to the sale of EGC Electronic GameCards as gaming devices directly to the public in casinos and reservations owned and operated by Indian Tribes in the USA. The Company has received Class II classification for its products from the National Indian Gaming Council (NIGC)National Indian Gaming Association states that in 2006 Tribal Governments gaming revenue was $25.7 billion dollars. www.indiangaming.org/library/indian-gamingfacts/index.shtml

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Product Development

The company continues its focus on game development with the emphasis on improvements in game behavior, reliability and flexibility as well as expanding the existing game portfolio with a series of engaging, innovative concepts.

During the last quarter the company directed creative resources on developing game concepts for our new target markets in Children’s Education, Greetings Card and Collectible product

New game concepts have now been produced as flash versions and will be tested for integrity, accuracy and suitability in Q4.

Q4 will see further resource directed at product enhancement as we look to maximize the potential of the gamecard through the implementation of even more sophisticated components, such as HTN & STN LCD screens into the game platform. This will allow for even greater flexibility in terms of performance and behavior in new areas such as screen animation.

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Results of Operations

The company has recorded $3,043,566 of revenues this quarter compared with $1,785,330 in the same period in 2007 and $ 7,283,870 and $4,250,224 in the comparable nine months period to September 30, 2008.This represents revenue growth of 70% and 84% respectively coming from additional orders from existing customers and also new customers in sales promotion, poker and charity lotteries as the company has widened its range of games to attract new customers. Gross margins were maintained at 76% of revenue compared with 73% in the comparable period. The company purchases its manufactured stock in USD and the relative strength or weakness of the currency can affect the cost of raw material prices however the company has been able to hold the price of raw materials and chips at previous levels by negotiating improved terms on higher volumes.

Sales and Marketing costs were $13,600 compared with $1,232 for the comparable quarter and $54,954 and $5,204 for the comparable nine months. There has been a slight reduction in activity during this quarter following an intensive marketing effort on new products in the first half year.

General and Administration expenses were $ 123,639 September 30, 2008 compared with $146,326 for the same period in 2007 and $451,237 and $431,541 for the comparable nine month period. The reduction in this expense during the quarter follows the disposal of non core activities referred to in the June 10Q report.

Consultancy costs were higher at $282,865 compared with $125,727 for the three months to September 30, 2008 and 2007 and for the comparable nine month period $560,014,and $282,585. Higher costs were due to continuation of development work on new product areas for the EGC Electronic Gamecard and as reported in the June filing these will continue at similar levels while new products are developed.

Salaries and payroll costs were $104,407compared with $109,556 and $277,397 and $312,135 for the comparable three months and nine months to September 30, 2008 and 2007 respectively. Salary costs have reduced slightly in the September quarter as a result of disposals referred to above. We consider that as product moves through development into production and sales that payroll costs will increase.

Income from operations excluding the interest for the three months to 30^th September 2008 improved to $1,775,055 compared with $911,990 and for the nine month to September 30 2008 $4,574,679 compared with $2,069,271 in 2007. Higher revenues and continued control of expenses combined to produce a cash increase of $1,981,123 for the nine months to September 2008.

Total comprehensive income for the three months to September 30 2008 was $1,685,375 compared with $817,628 for the same period in 2007 and $4,316,582 compared with $1,700,681 for the comparable nine month periods.

Basic earnings per share for the quarter were were $0.03 compared with $0.02 in the same period of 2007 and $0.08 compared with $0.04 for the nine months. Fully diluted earnings were $0.02 and $0.07 for the quarter and year to date respectively.

Liquidity and Financial Resources

The Company had cash and cash equivalents of $6,734,163 at September 30, 2008 compared with S6,885,351 at June 30, 2008 and $3,473,937 a year ago. Operating expenses are approximately $400,000 per quarter. As of September 30, 2008, current assets were $11,173,916 and current liabilities were $1,516,951. Stockholders’ equity at September 30, 2008 was $7,926,272. We had net cash provided by (used in) operating activities for the three months ended September 30, 2008 and 2007 of $4,139,934and $767,865, respectively.

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Off-Balance Sheet Arrangements

As of the date of this Report, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk since December 31, 2007.

We have Series A Redeemable convertible stock which carries a 6% dividend and is redeemable in May 2010. There are currently 6,549,922 shares of Series A outstanding These instruments are not leveraged and are held for purposes other than trading.

Interest Rate Risk

We do not engage in trading market risk sensitive instruments or purchasing hedging instruments or “other than trading” instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk. We have not purchased options or entered into swaps, or forward or future contracts. We do consider that we have any significant exposure to interest rate variations.

ITEM 4.CONTROLS AND PROCEDURES

At the end of the period covered by this report the Company carried out an evaluation under the supervision and with the participation of the Company’s management including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15e and 15d -15-e under the Securities Exchange Act of 1934 as amended). Based on this evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer the Company concluded that information is recorded, processed, summarized and reported within the time period specified by the Commission’s rules and forms, and that information is accumulated and communicated to our management, including our Chief Executive Officer (or Acting Chief Executive Officer, as the case may be) and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our Chief Executive Officer (or acting Chief Executive Officer, as the case may be) and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2008, the end of the period. Following the review by our Chief Executive Officer (or acting Chief Executive Officer, as the case may be) and our Chief Financial Officer, each of them has determined that our disclosure controls and procedures are effective.

Changes in Internal Controls over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

None.

ITEM 2.CHANGES IN SECURITIES

None.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.OTHER INFORMATION

On October 2, 2008 The Company announced the appointment of Paul Farrell as a Director.

ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K

(a)The following exhibits are included as part of this report:

Exhibit Description

31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereby duly authorized.

	ELECTRONIC GAME CARD
Date: November 14, 2008	By:	/s/ Lee Cole
		Lee Cole
		Acting President and Acting Chief Executive Officer

Date: November 14, 2008	By:	/s/ Linden Boyne
		Linden Boyne
		Secretary / Treasurer (Principal Financial Officer)

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