Operating lease obligation. We lease our offices from a related party that is connected with our CEO. We entered into a lease effective September 1, 2010 for a period of two years with a monthly rental payment of $10,359. Rent expense was $124,319 and $143,551 for the years ended December 31, 2011 and 2010, respectively. Rent to be paid under the lease agreement is summarized as follows:

Legal proceedings. Our current material litigation is briefly described below. We assume no obligation to update the status of pending litigation, except as required by applicable law, statute or regulation.

Sherron settlement – In 2008, Sherron Associates, Inc. (“Sherron”) filed a suit against us claiming they were the assignee of a judgment against our CEO and further claiming we were the alter-ego of our CEO and therefore responsible for payment of the judgment. We denied all liability in the Sherron matter. In order to reduce the costs and uncertainties associated with litigation, the parties executed a settlement agreement on October 25, 2011. In connection with the settlement agreement we agreed to pay Sherron the sum of $150,000. Monthly installments in the amount of $7,500 per month commenced November 1, 2011, with scheduled increases in phases over the course of one year to a maximum of $17,500 per month. The obligation was memorialized by a promissory note, at zero percent interest. The note has default interest of 12% per annum, secured by a confession of judgment in the amount of $150,000, which can be filed by Sherron immediately upon a default in any payment. Our obligation is personally guaranteed by our CEO. We recorded a provision for litigation settlement of $150,000 during the quarter ended September 30, 2011.

Our CEO agreed to pay Sherron the sum of $350,000 by June 1, 2012. If he fails to make the payment by that date, he is obligated to pay Sherron the sum of $375,000 by November 1, 2012. If our CEO fails to make that payment on the specified due date, we have agreed to make the payment by November 15, 2012. In the event payment is not made by November 15, 2012, Sherron may file a confession of judgment for $375,000 against our CEO and us with interest accruing at the rate of 12% per annum from November 15, 2012. If our CEO fails to make the $350,000 payment to Sherron by June 1, 2012, then our CEO and we will meet by August 1, 2012, to discuss whether or not he has the means to pay Sherron $375,000 by November 1, 2012. If, after the August 1, 2012, meeting, our CEO and we agree that he does not have the means to pay the $375,000 by November 1, 2012, then he will assign 1.5 million or more of shares of our stock held by Triangulum Partners, LLC (depending on the trading price of our shares as of August 1, 2012) to us and such assignment shall provide us the power and authority to sell such shares on the open market in order to satisfy the $375,000 owed to Sherron. If we are unable to raise the full amount of $375,000 through the sales of shares by November 15, 2012, or we are unable to sell any shares by that date, then our CEO guarantees and owes either $375,000 or any remaining balance thereof to us.

California administrative licensing action – In March 2003, Galaxy Gaming of California, LLC (“GGCA”), then a subsidiary of GGLLC, submitted an application to the California Gambling Control Commission (the “Commission”) for a determination of suitability for licensure to do business with tribal gaming operations in California. At the time, our CEO was a member of GGCA and was required to be included in the application process. The Division of Gambling Control of the California Department of Justice (“Division”) processed the application and in 2005 made an initial recommendation to the Commission alleging GGCA was unsuitable. Claiming the information compiled by the Division was inaccurate and the process seriously flawed and biased, GGCA and our CEO, requested the Commission assign an administrative law judge (“ALJ”) to further adjudicate the process in December 2006. The Commission granted their request and required the Division to first submit a statement of issues (“SOI”) against GGCA, which was filed in October 2009.

In February 2009, we independently applied to the Commission for a finding of suitability. We also sought the abandonment of the GGCA application. Since the Division (subsequently renamed the “Bureau of Gambling Control”), named our CEO in the SOI, the Commission decided to not process our application until resolution of the administrative action relating to GGCA. It also did not act upon our request to abandon the GGCA application. During these proceedings, we are entitled to conduct business in California, provided that, we obtain the requisite authorization with each tribe in California either through obtainment of an appropriate license or an exempt status determination. Total revenues derived from California for the year ended December 31, 2011, was $177,402. Our ability to continue to conduct business in California could be contingent upon a successful resolution of the action against GGCA. Accordingly, we decided to vigorously defend the administrative action, to seek the abandonment of the GGCA application and to seek an independent finding of suitability with the Commission.

The GGCA administrative action remains pending. Hearings before the ALJ concluded in January 2012, and closing briefs are expected to be filed by the third quarter of 2012. The ALJ will present her findings to the Commission, which will ultimately decide the matter, subject to judicial review. An adverse decision could prevent us from conducting business in California and also potentially pay reasonable costs of the investigation and prosecution of the case. Although the action is against our CEO and GGCA, it is unknown whether the Bureau will attempt to seek reimbursement against us or whether such reimbursement would be granted. An adverse finding of suitability could also influence other gaming regulatory agencies and negatively affect our ability to conduct business in those jurisdictions. We believe the allegations against GGCA and our CEO are baseless and entirely without merit and intend to continue to vigorously respond to this action.

Reel Games, Inc. – On November 10, 2011, we were served with a summons and complaint by Reel Games, Inc. in the United States District Court Southern District of Florida, alleging amongst other things, misappropriations of trade secrets, breach of confidence, fraud and intentional interference with contract. Reel Games, Inc. has claimed that the value of the information misappropriated alone is in excess of $1 million. The allegations stem from a mutual non-disclosure and non-circumvention agreement executed by the parties in May 2010, in connection with us evaluating the acquisition of certain assets of Reel Games, Inc. In December 2011, we filed a Motion for Dismissal, which remains pending. We believe that the claims are entirely without merit and intend to defend this matter vigorously.

Unax Gaming – On March 14, 2012, we filed a complaint for patent infringement against Unax Service, LLC, a Washington limited liability company and Xuming Shangguan a.k.a. Sean Shangguan d.b.a. Unax Gaming in the United States District Court, Western District of Washington. We claim that the defendants’ games known as “Double Action Blackjack” and “Squeezit Blackjack” infringe on several patents held by us. We seek a permanent injunction against the infringing games, actual and exemplary damages, court costs and attorney fees. We intend to vigorously pursue all remedies available to us in the matter.

Washington administrative notice – On March 19, 2012, we received a notice of administrative charges from the Washington State Gambling Commission ("Commission") as a result of a routine audit conducted by them in 2010.  The notice involves alleged untimely notifications, predominantly by predecessor companies.  Since receiving the notice, we have had preliminary discussions with Commission officials to resolve the matters raised in the notice. Our executive management currently believes the matter will be resolved expeditiously and without material effect to our business operations in Washington. If unresolved, we could be subject to fines, reimbursement of the Commission's investigative costs or harsher sanctions. Total revenues derived from Washington for the year ended 2011 were $1,154,925.

In the ordinary course of conducting our business, we are, from time to time, involved in other litigation, administrative proceedings and regulatory government investigations including but not limited to those in which we are a plaintiff.