10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

Commission File Number 1-8250

WELLS-GARDNER ELECTRONICS CORPORATION

(Exact name of registrant as specified in its charter)

ILLINOIS (State or other jurisdiction of incorporation or organization) 36-1944630 (IRS Employer Identification Number)

9500 West 55th Street, Suite A

McCook, Illinois 60525-3605

(Address of principal executive offices)

Registrant’s telephone number, including area code: 708/290-2100

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

Common Stock, $1.00 par value	NYSE Amex
Title of each class	Name of each exchange on which registered

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

Indicate by check mark whether the registrant 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 x 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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a Smaller Reporting Company) Smaller Reporting Company x

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

The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant (assuming for the purposes hereof, that directors, executive officers and 10% or greater stockholders of the registrant are affiliates of the registrant), based upon the closing sale price of the registrant’s Common Stock on February 26, 2010 was approximately $25,933,000.

The number of shares of the registrant’s Common Stock outstanding as of February 26, 2010, was approximately 10,457,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2009 are incorporated into Part II of this Report on Form 10-K and filed as Exhibit 13.0 hereto. Portions of the Registrant’s definitive Proxy Statement relating to the Registrant’s 2010 Annual Meeting of Stockholders to be filed hereafter are incorporated into Part III of this Report on Form 10-K.

As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” and “the Company” mean Wells-Gardner Electronics Corporation, an Illinois corporation, and its subsidiaries, unless the context indicates a different meaning, and the term “common stock” means our common stock, $1.00 par value per share.

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  TABLE OF CONTENTS

PART I
	Item 1. BUSINESS
	Item 2. PROPERTIES
	Item 3. LEGAL PROCEEDINGS
	Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	Item 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS
	Item 6. SELECTED FINANCIAL DATA
	Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	Item 9A. CONTROLS AND PROCEDURES
	Item 9B. OTHER INFORMATION
PART III
	Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	Item 11. EXECUTIVE COMPENSATION
	Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
	Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
	Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Annual Report to Shareholders
Consent of Blackman Kallick LLP
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Statement of CEO and CFO Pursuant to Section 906

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PART I

OVERVIEW

Founded in 1925, Wells-Gardner Electronics Corporation®, an Illinois corporation (wellsgardner.com), is a global distributor and manufacturer of liquid crystal displays (LCDs), color video monitors and other related distribution products for a variety of markets including, but not limited to, gaming machine manufacturers, casinos, coin-operated video game manufacturers and other display integrators.  The Company has a subcontractor relationship with two different Taiwanese electronics companies to manufacture LCD video displays in China.  In addition, the Company owns American Gaming & Electronics, Inc. (“AGE”), a leading parts distributor, service center and a seller of refurbished gaming machines to the gaming markets. The Company has offices in Las Vegas, Nevada; Hammonton, New Jersey; Hialeah, Florida and McCook, Illinois.  With the acquisition of AG&E and the subcontract production relationships, the Company has transitioned from a coin-operated amusement supplier to a key supplier to the gaming industry.  Wells-Gardner’s common stock is publicly traded on the NYSE Amex exchange under the symbol WGA.

PRODUCTS

The Company’s primary business is the distribution, design, manufacture, assembly, service and marketing of electronic components which consist of LCD video color monitors, gaming supplies and components, and the integration of touch sensors to video monitors. These video products, gaming parts and services accounted for 100 percent of revenue in 2009, 2008, and 2007.

The Company offers a full line of video monitors, with LCD sizes ranging from 6.4” to 42” and CRT 13” and 27” sizes with horizontal scan frequencies from 15k Hz to 80kHz.  In addition to providing standardized products, the Company also customizes electrical and mechanical applications to meet specific customer requirements and integrates touch screen sensors to video displays to allow interaction with a computer program by touching a video screen. The Company also designs and sells LCD replacement kits to replace CRT monitors in existing games (primarily IGT) directly to casinos and sells used games to foreign casinos.

The Company sells into the following markets:

Market	2009		2008		2007
Gaming	93	%	90	%	83	%
Amusement	7	%	10	%	17	%
Totals	100	%	100	%	100	%

MANUFACTURING AND ASSEMBLY

The Company’s production activities consist primarily of circuit designs, assembling finished units (and to a limited extent subassemblies), aligning, testing and integrating touch sensors at its outsourced operations in China and in its McCook, Illinois plant.  The Company manufactures a limited range of subassemblies and relies on outside sources for the majority of its required components. A limited number of sources are available for such electronic components and the other raw materials. In 2009, the Company had two sources supplying the Company with almost all of the LCD chassis subassemblies. Chassis subassemblies are contracted offshore, based on custom designs and setup specifications developed by the Company.  The Company has three major sources of LCD panels, two major sources of its touch sensors and controllers, and one major source for its inverters.  As the Company believes is characteristic of other manufacturers in its industry, it has been confronted with long lead times and cost pressures.  Due to some of these extended lead times, the Company carries additional inventory of certain critical supply components.

The Company closed and liquidated its Malaysian joint venture partner (Wells East Asia Displays -WEA) in 2007.  The entire investment in WEA has been repatriated as of December 31, 2009.   In 2007, the Company recorded liquidation expense of $194,000 which was more than offset by a currency gain on the equity in the joint venture of $153,000 and current earnings of the joint venture of $64,000 for net income of $24,000 from the joint venture.  In 2009 and 2008, the Company recorded a currency gain of $1,200 and $2,500 from the joint venture liquidation assets.  In 2009, 2008 and 2007, respectively, the Company also received dividends of $9,000, $123,000 and $1,277,000 from WEA.  The Company produced its last CRT product at a subcontractor in China in November, 2009.

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MARKETING AND SALES

The Company sells products throughout the world. A portion of the Company’s products is sold through James Industries, Inc. under a Letter Agreement.  An earlier James Industries Sales Representation Agreement was terminated on November 29, 2007 and the Company ceased paying commissions on sales represented by the earlier Agreement on August 24, 2008.  The Company maintains its own internal sales staff primarily for sales of products not covered under the Letter Agreement and for repair and service of its products.

The Company’s business is generally not seasonal, although the Company closes its McCook production facility for two weeks in July and one week in December.  The Company’s subcontractors in China close for about 10 days at Chinese New Year and several days each for May Day and Golden Week each year.

The Company believes it has no unique or unusual practices or policies relating to working capital items and believes its practices are consistent with other comparable companies in its served markets. The Company currently believes that its financial requirements during the foreseeable future can be met with funds generated from operating activities and from its credit facility. The Company’s current credit facility expires August 21, 2013.

The Company has several major competitors based in Asia (Korea and Taiwan) and the United States. Competition is based upon price, product performance, service and warranty.  In 2009 the Company experienced significant competition based upon price, but it was able to reduce costs more than it reduced average selling prices, which resulted in higher margins compared to 2008. The Company believes that it is one of the two largest companies in the gaming and amusement video display market and there are approximately ten total competitors.

The Company’s largest customer, Aristocrat, accounted for 35%, 40%, and 35% of total revenues in 2009, 2008, and 2007, respectively, and 45%, 36%, and 37% of total accounts receivable in 2009, 2008, and 2007, respectively.  The second largest customer accounted for 15% of total revenue in 2009 and 21% of total accounts receivable in 2009.  The next largest customer accounted for 10% of total revenues in 2009 and 7% of total accounts receivable in 2009.  No other customers accounted for more than 10% of sales in 2009, 2008, and 2007, respectively.

The Company does not formally track backlog, but historically the Company has open orders, which represent two to three months’ sales. It is the Company’s experience that well over 90 percent of its open orders result in revenue recognition and management is not presently aware of any information indicating that this historical pattern will not be repeated.

No material portion of the Company’s business is subject to re-negotiation of profits or termination of contracts or subcontracts at the election of any governmental entity.

The Company’s market for its products and services is highly competitive with low barriers to entry.

During 2009, the Company spent approximately $1,344,000 for product engineering, research and development costs, compared to $1,425,000 in 2008 and $1,487,000 in 2007. The Company does not license any patents and it has eight US patent applications and nine foreign patent applications submitted with seventeen patents pending with two issued, nine software copyrights submitted with nine software copyrights issued, and three trademarks submitted with threetrademarks granted.

Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has had no material effect upon the capital expenditures, earnings and competitive position of the Company.

As of December 31, 2009, the Company employed a total of approximately 62 full time and 5 part-time employees at all its locations. The Company believes its relationship with its employees is satisfactory. Certain employees at the Company’s McCook, Illinois facility are covered under a collective bargaining agreement expiring on June 29, 2010.

The Company’s export sales accounted for total revenues of 27%, 24% and 26%, in 2009, 2008, and 2007, respectively, with the majority of these sales being shipped to Australia.

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RISK FACTORS RELATED TO OUR BUSINESS AND INDUSTRY

Technology changes as required by our customers could limit and impair our ability to produce products.

We are currently predominantly dependent on LCD based technology. We are continuing to develop our expertise and broaden our product line in LCD based technology.  As we continue to participate in developing solutions for future technological applications for our customers such as 3D, organic light emitting diode (“OLED”), transmissive, flexible, and round LCDs, the need for us to be able to provide a value-added component to the technology remains a critical issue.

Technology changes may also negatively affect margins.

The Company may have to ramp up production in new technologies more rapidly than it is prepared to accomplish due to customer demand and experience very low margins as a result. Although this has not been a major problem for the Company during the last three years, 2009, 2008 and 2007, it could again become an issue in the future.

The loss or interruption of supply from our key suppliers could limit our ability to manufacture our products.

We purchase certain materials and components for our products from various suppliers, some of which are located outside of the U.S.  We are obtaining all our LCD chassis subassembly supply primarily from two sources.  Any loss or interruption of supply from our key suppliers may require us to find new suppliers. The number of suppliers for certain electronic components and raw materials is limited. We could experience production or development delays while we seek new suppliers and could have difficulty finding new suppliers, which would substantially impair our operating results and business.

Our growth could be impaired if we are not able to continue to develop and maintain the success of our Asian subcontract relationships.

Our Asian subcontract relationships for LCD video displays and chassis are an important part of our revenue and earnings plan. If we are unable to continue to successfully execute this strategy with our current LCD subcontractors, we may not be able to maintain our revenues and earnings as expected.

The loss of our significant customer Aristocrat would reduce our revenues and our profitability.

Our largest customer, Aristocrat Technologies Pty. Ltd., with whom we have an exclusive supply agreement for 19” LCDs through June, 2012, accounted for 35%, 40% and 35% of total revenues in 2009, 2008, and 2007, respectively, and 45%, 36%, and 37% of total accounts receivable in 2009, 2008, and 2007, respectively. A loss of this contract or customer would significantly reduce our revenues and profitability.

The goodwill of our American Gaming & Electronics acquisition in 2000 could become impaired.

The Company is required to measure the potential impairment of the goodwill related to our 2000 acquisition of American Gaming & Electronics per FASB ASC 350-20, Goodwill Subsequent Measurement, at least annually.  The goodwill amount on our balance sheet at December 31, 2009 and 2008 is $1,329,000.  The measurement of the American Gaming & Electronics reporting unit Fair Value requires certain management assumptions regarding future sales, gross margins, operating expense, effective tax rates, and net working capital requirements.  The 2009 year end analysis assumed that AGE was going to become a distributor in the Illinois Video Lottery terminal market in addition to its usual replacement kit, parts, service and used game distribution activities.  The analysis also requires the Company to determine appropriate discount rates for the next five years, the perpetuity growth and discount rate, and the perpetuity tax rate.  To the extent that the indicated Fair Value of a reporting unit is greater than its carrying value, then there is no indicated impairment.  Conversely, in the event that the carrying value of reporting unit exceeds it indicated Fair Value then some level of goodwill impairment has potentially occurred and additional analysis is necessary to quantify the level of impairment (i.e. Step II), if any.  The Company passed the step I test at December 31, 2009 and 2008; therefore there was no impairment.  However, there is no certainty in future periods that the Fair Value of the American Gaming & Electronics reporting unit will exceed its carrying value, particularly due to the recent volatility in the used game market and current general economic conditions.

Intense competition in our industry could impair our ability to grow and achieve profitability.

We may not be able to compete effectively with current or future competitors. The market for our products and services is intensely

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competitive and constantly attracts new competitors even as others leave the industry due to low barriers to entry to our business. We expect this competition to further intensify in the future. Some of our competitors are large companies with greater financial, marketing and product development resources. In addition, new competitors may enter our key markets. This may place us at a disadvantage in responding to our competitors’ pricing strategies, technological advances and other initiatives.

The gaming business is heavily regulated and we depend on our ability to obtain/maintain regulatory approvals.

The manufacture and distribution of parts for gaming machines are subject to extensive federal, state, local and foreign regulations, and the governments of the various gaming jurisdictions amend these regulations from time to time. Virtually all of these jurisdictions require licenses, permits, documentation of qualification, including evidence of financial stability, and other forms of approval for manufacturers and distributors of gaming machines and for their key personnel. The revocation or denial of a license in a particular jurisdiction could adversely affect our ability to obtain or maintain licenses in other jurisdictions. Also, there is always the potential that laws and regulations could be changed or repealed, even after their adoption. These changes could affect our business and results of operations.

The loss of our bank line would severely limit our ability to fund operations.

Our current bank line expires August 21, 2013 and requires the Company to maintain certain financial covenants. The Company fully intends to maintain compliance with the covenants under its bank line and expects it will be able to do so. If unsuccessful, the Company would be severely limited in its ability to fund operations.

The market price for our shares is susceptible to significant changes in market price.

Historically, the volume of trading of our shares has been small. As a result, larger than average buy or sell orders on a given day, or news about us or the gaming industry, has had and may in the future have a significant impact on the trading price for our shares.

The current economic conditions might cause sales to decline without warning making it difficult to reduce costs fast enough to maintain profitability.

The Company is concerned that our customers and their customers business might decline more than they currently are forecasting making it difficult for us to reduce our expenses as fast as our sales decline.  Although the Company will make every effort to keep our expenses in line with current sales, we could experience periods where the sales decline occurs so rapidly that we are unprofitable for a period of time.

Available Information

The Company files reports with the Securities and Exchange Commission and files all required reports under the Exchange Act of 1934, as amended. The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Because we want to provide you with more meaningful and useful information, this Annual Report includes forward-looking statements that reflect our current expectations and projections about our future results, performance, prospects and opportunities. You can find many of these statements by looking for words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate” and similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities in 2010 and beyond to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties and other factors include but are not limited to the factors described under the heading “Risk Factors” above. We caution you not to place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Annual Report.

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The Company’s current manufacturing and corporate headquarters is located at 9500 West 55th Street, Suite A, McCook, Illinois 60525. The Company’s leased McCook facility has approximately 104,000 square feet of floor space. Approximately 40,000 of the 104,000 square feet of the plant are dedicated to production and service and approximately 43,000 of the 104,000 square feet are devoted to warehousing. Offices for engineering, sales and administration are also located at that facility. The plant is in good condition, is well maintained, and currently has over 80% excess production capacity as the Company currently runs at 15% capacity on one shift and could run multiple shifts. The Company plans to reduce its production area to approximately 20,000 square feet and increase its warehousing space to 63,000 square feet in support of the new Illinois Video Lottery Terminal business for the second half of 2010.  The Company also has other smaller leased facilities to support the operations of AGE in Nevada, New Jersey and Florida.

As the Company sells its products and services to a broad customer base, from time to time it may be named in legal proceedings. The Company aggressively reviews all claims on a timely basis and in the opinion of management, any currently pending legal claims against the Company have no basis and no loss contingency reserves have been established.  The Company terminated its then foreign sales representative in December, 2008.  A wrongful termination suit was filed by the sales representative.  The Company settled this lawsuit in October, 2009 and paid the settlement amount in November, 2009.

No matters were submitted to a vote of the Company’s shareholders during the fourth quarter of 2009.

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Item  5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS

(a) Not applicable.

(b) Not applicable

(c) Not applicable

Item 6. SELECTED FINANCIAL DATA

The information required by this Item is set forth in Exhibit 13.0 hereto, the Company’s Annual Report to Shareholders for the year ended December 31, 2009, under the caption “Selected Financial Data,” which information is incorporated herein by reference.

The information required by this Item is set forth in Exhibit 13.0 hereto, the Company’s Annual Report to Shareholders for the year ended December 31, 2009, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation” section, which information is incorporated herein by reference.

The information required by this Item is set forth in Exhibit 13.0 hereto, the Company’s Annual Report to Shareholders for the year ended December 31, 2009, under the caption “Market and Credit Risks” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, which information is incorporated herein by reference.

The following financial statements together with the notes thereto are set forth in Exhibit 13.0 hereto, the Company’s Annual Report to Shareholders for the year ended December 31, 2009, which information is incorporated herein by reference:

- Consolidated Balance Sheets as of December 31, 2009 and 2008

- Consolidated Statements of Operations for years ended December 31, 2009, 2008, and 2007

- Consolidated Statements of Shareholders’ Equity for years ended December 31, 2009, 2008, and 2007

- Consolidated Statements of Cash Flows for years ended December 31, 2009, 2008, and 2007

- Notes to the Consolidated Financial Statements

- Independent Auditors’ Reports

Quarterly financial data for the four quarters ended December 31, 2009 and 2008 are set forth in Exhibit 13.0 hereto in Note 13 of “Notes to the Consolidated Financial Statements” as part of the Company’s Annual Report to Shareholders for the year ended December 31, 2009, which information is incorporated herein by reference.

None

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Evaluation of Disclosure Controls and Procedures.

The Company maintains internal controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The Disclosure Committee, which is made up of the Company’s Chief Executive Officer, Chief Financial Officer and other management staff meets on a quarterly basis and has overview responsibility for this process. The Committee reviews a checklist of items during its meetings to document the review of any unusual items or issues raised.  The Disclosure Committee conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal year ending December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Management, with the participation of the Chief Executive and Chief Financial Officers, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on this evaluation, management, with the participation of the Chief Executive and Chief Financial Officers, concluded that, as of December 31, 2009, the Company’s internal control over financial reporting was effective.

None

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The information required by this Item is incorporated by reference under the captions “Election of Directors”, “Executive Officers”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Committees of the Board of Directors”, "Audit Committee" and “Notice of Business to be Conducted at a Special or Annual Meeting” in the Company’s definitive proxy statement related to its 2010 Annual Meeting of Shareholders.

The Company maintains a Code of Business Conduct & Ethics governing the behavior of the Company’s employees, including its Executive and Corporate Officers, which is available for review on the Company’s website (www.wellsgardner.com) under its Investor Relations Corporate Governance section.

The information required by this Item is incorporated by reference under the captions “2009 Summary Compensation Table,  “2009 Outstanding Equity Awards at Fiscal Year-End Table”, and “2009 Director Compensation Table” in the Company’s definitive proxy statement related to its 2010 Annual Meeting.

The information required by this Item is incorporated by reference under the caption “Securities Beneficially Owned by Principal Shareholders and Management” in the Company’s definitive proxy statement related to its 2010 Annual Meeting and in Exhibit 13.0 hereto, Company’s 2009 Annual Report, in Note 5 of “Notes to the Consolidated Financial Statements.”

The Information required by this Item is incorporated by reference under the captions “Certain Transactions with Management” and “Committees of the Board of Directors” in the Company’s definitive proxy statement related to its 2010 Annual Meeting.

The information required by this Item is incorporated by reference under the caption “Proposal for Ratification of Appointment of Independent Certified Public Accountants” in the Company’s definitive proxy statement related to its 2010 Annual Meeting.

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(a)(1) The following financial statements required by Part II, Item 8 of this annual report and are included in Exhibit 13.0 hereto:

- Consolidated Balance Sheets as of December 31, 2009 and 2008

- Consolidated Statements of Operations for years ended December 31, 2009, 2008, and 2007

- Consolidated Statements of Shareholders’ Equity for years ended December 31, 2009, 2008, and 2007

- Consolidated Statements of Cash Flows for years ended December 31, 2009, 2008, and 2007

- Notes to the Consolidated Financial Statements

- Independent Auditors’ Reports

(3) (c) The following exhibits are incorporated by reference or filed herewith:

3.1	Articles of Incorporation of the Company, as amended, filed as Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.
3.2	By-Laws of the Company, as amended and restated and in force February 18, 2010, filed as Exhibit 3.2 of the Company’s Current Report on Form 8-K dated February 23, 2010 and incorporated herein by reference.
4.1	Form of Warrant filed as Exhibit 4.1 of the Company’s Current Report on Form 8-K dated September 23, 2004 and incorporated herein by reference.
4.2	Form of Warrant filed as Exhibit 4.2 of the Company’s Current Report on Form 8-K dated September 23, 2004 and incorporated herein by reference.
10.1	Employment Agreement dated February 29, 1996 between the Company and Anthony Spier, as amended, filed as Exhibit 10.1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.
10.2	First, Second, Third and Fourth Amendment to the Employment Agreement between the Company and Anthony Spier filed as Exhibit 10.15 of the Company's Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
10.3	Fifth Amendment to the Employment Agreement between the Company and Anthony Spier filed as Exhibit 10.3 of  the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
10.4	Wells-Gardner Electronics Corporation Employee 401K Plan dated January 1, 1990, as amended, filed as Exhibit 10.10 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference.
10.5	Wells-Gardner Electronics Corporation 1996 Nonemployee Director Plan filed as Annex A to the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 23, 1996 and incorporated herein by reference.
10.6	Wells-Gardner Electronics Corporation Amended and Restated Incentive Stock Plan, as amended and filed as Exhibit 4.1 of the Company’s Form S-8, dated August 21, 1998 and incorporated herein by reference.
10.7	Acquisition of Certain Assets of American Gaming and Electronics dated January 12, 2000, filed as Exhibits 2.1, 2.2 and 2.3 to the Company’s Current Report on Form 8-K, dated January 27, 2000 and incorporated herein by reference.

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10.8	Executive Stock Award Plan, filed as Exhibits 4.1 and 4.2 of the Company’s Form S-8, dated May 12, 2000 and incorporated herein by reference.
10.9	Agreement dated July 3, 2006, between the Company and Local 1031, I.B.E.W., AFL-CIO filed as Exhibit 10.9 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10.10	Agreement dated July 2, 2009 between the Company and Local 1031, I.B.E.W., AFL-CIO filed as Exhibit 10.13 of the Company's 10-Q for the quarter ended June 30, 2009 and incorporated herein by reference.
10.11	Securities Purchase Agreement dated as of September 20, 2004 by and among the Company and the purchasers identified on the signature page thereto filed as Exhibit 10.1 of the Company’s Current Report on Form 8-K dated September 23, 2004 and incorporated herein by reference.
10.12	Credit and Security Agreement with Wells-Fargo Bank, National Association, dated August 21, 2006 filed as Exhibit 10.1 to the Company’s Form 8K/A dated August 25, 2006 and incorporated herein by reference.
10.13	Third Amendment to Credit and Security Agreement with Wells-Fargo Bank, National Association, dated September 15, 2009 filed as Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference.
10.14	Audited financial statements of the Company’s joint venture, Wells-Eastern Asia Displays (m) Sdn. Bhd. for the year ended October 5, 2007 filed as Exhibit 10.12 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.
10.15	Employment Agreement dated as of May 13, 2008 between the Company and James F. Brace, filed as Exhibit 10.13 of the Company's Current Report on Form 8-K dated May 14, 2009 and incorporated herein by reference.
13.0	Company’s Annual Report to Shareholders for the year ended December 31, 2009.
14.0	Wells-Gardner Code of Business Conduct and Ethics filed as Exhibit 14.0 of the Company's Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference.
23.0	Consent of Blackman Kallick LLP.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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The following press releases have been issued during the Company's fiscal year ended December 31, 2009, which are available for review on the Company's website (www.wellsgardner.com) under its Investor Information section:

DATE	TITLE
01/27/09	Wells-Gardner Announces The Granting of Its First LCD Patent
02/09/09	Wells-Gardner Announces Delay of its Fourth Quarter Conference Call
02/18/09	Wells-Gardner Reports Improved Fourth Quarter and Fiscal 2008 Earnings
03/31/09	Wells-Gardner Ships First Order of Flip Video Products
04/30/09	Wells-Gardner Electronics to Report First Quarter 2009 Results and Host Conference Call and Webcast
05/06/09	Wells-Gardner Reports First Quarter 2009 Earnings
07/14/09	Wells-Gardner Updates Expectations on 2nd Quarter 2009
08/04/09	Wells-Gardner Reports Second Quarter Earnings Increased by 185 Per Cent to $484,000 or $0.05 Per Share
08/11/09	Wells-Gardner Announces It Has Been Selected as One of Two Approved Suppliers of 22 Inch LCDs by Aristocrat
09/09/09	Wells-Gardner Announces It Has Developed the Only 3D Product With True 2D Capabilities
09/16/09	Wells-Gardner Announces Credit Agreement Extension With Wells Fargo to August 2013
10/23/09	Wells-Gardner Announces Investor Presentation at the Deutsche Bank 2009 Gaming Investment Forum at G2E
11/10/09	Wells-Gardner Reports Third Quarter Earnings Increased by $450,000
11/17/09	Wells-Gardner Reports Its Subsidiary American Gaming & Electronics Has Signed a Letter of Intent to Distribute SPIELO Terminals Into Illinois VLT Market

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

WELLS-GARDNER ELECTRONICS CORPORATION

By:	/s/ ANTHONY SPIER	Chairman of the Board, President
	Anthony Spier	& Chief Executive Officer	March 10, 2010
	/s/ JAMES F. BRACE	Executive Vice President, Secretary, Treasurer
	James F. Brace	& Chief Financial Officer
		(Principal Accounting Officer)	March 10, 2010

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

/s/ ANTHONY SPIER	Chairman of the Board, President
Anthony Spier	& Chief Executive Officer	March 10, 2010
/s/ MERLE BANTA
Merle Banta	Director	March 10, 2010
/s/ MARSHALL L. BURMAN
Marshall L. Burman	Director	March 10, 2010
/s/ FRANK R. MARTIN
Frank R. Martin	Director	March 10, 2010

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FINANCIAL SCHEDULE

Schedules not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

UNAUDITED VALUATION AND QUALIFYING ACCOUNTS (in $000’s)

	Year Ended December 31,
ALLOWANCE FOR DOUBTFUL ACCOUNTS		2009			2008			2007
Beginning balance		$	160		$	154		$	253
Additions charged to expense		$	101		$	31		$	79
Deductions		$	(13	)	$	(25	)	$	(178	)
Balance at end of year		$	248		$	160		$	154
INVENTORY OBSOLESCENCE RESERVE:
Beginning balance		$	2,734		$	2,145		$	1,935
Additions charged to expense		$	970		$	1,671		$	549
Deductions		$	(1,155	)	$	(1,082	)	$	(339	)
Balance at end of year		$	2,549		$	2,734		$	2,145
DEFERRED TAX ASSET VALUATION ALLOWANCE:
Beginning balance		$	3,166		$	3,361		$	3,711
Additions charged (credited to) to expense		$	(153	)	$	(195)		$	(350	)
Balance at end of year		$	3,013		$	3,166		$	3,361
WARRANTY RESERVE:
Beginning balance		$	183		$	200		$	206
Additions		$	160		$	334		$	336
Payments		$	(253	)	$	(351	)	$	(342	)
Balance at end of year		$	90		$	183		$	200

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EX-23

REPORT AND CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Wells-Gardner Electronics Corporation:

The audits referred to in our report dated March 10, 2010, included the related financial statement schedule for the years ended December 31, 2009, 2008 and 2007, included in Form 10-K.  This financial statement schedule is the responsibility of the company’s management.  Our responsibility is to express an opinion on this financial statement schedule based on our audits.  In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We consent to the incorporation by reference in the registration statements (Nos. 2-72090, 2-09137, 33-63920, 3361535, 33,02981, and 333-72629) on Form S-8 of Wells-Gardner Electronics Corporation of our report dated March 10, 2010, with respect to the consolidated balance sheets of Wells-Gardner Electronics Corporation as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years ended December 31, 2009, 2008, and 2007 and our report in the preceding paragraph regarding the related financial statement schedule, which reports appear in or are incorporated by reference in this annual report on Form 10-K of Wells-Gardner Electronics Corporation.

Blackman Kallick, LLP

Chicago, Illinois

March 10, 2010

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EX-13

SELECTED FINANCIAL DATA

(in $000’s except for per share data, unaudited)

		2009		2008		2007		2006		2005
Net sales	$	52,526	$	53,839	$	59,308	$	64,748	$	60,774
Gross margin	$	9,148	$	8,356	$	866	$	10,349	$	6,893
Operating earnings (loss)	$	1,377	$	582	$	546	$	1,095	$	(2,745)
Net earnings (loss)	$	1,097	$	204	$	195	$	343	$	(2,996)
Basic net earnings (loss) per common share	$	0.11	$	0.02	$	0.02	$	0.03	$	(0.30)
Diluted net earnings (loss) per common share	$	0.11	$	0.02	$	0.02	$	0.03	$	(0.30)
Total assets	$	24,305	$	25,848	$	26,601	$	30,187	$	29,077
Long-term liabilities	$	2,178	$	5,185	$	6,709	$	9,234	$	8,187
Working capital	$	15,569	$	17,302	$	18,376	$	18,863	$	$16,626

COMMON SHARE MARKET PRICE

The Company’s common shares are traded on the NYSE Amex Stock Exchange under the symbol WGA.  On December 31, 2009, there were approximately 459 holders of record of the common shares.  A five percent (5%) stock dividend was issued in 2008.  High and low prices, reflecting this dividend, for the last two years, unaudited, were:

	2009 Prices		2008 Prices
	High	Low	High	Low
Quarter ended:
March 31	$0.71	$0.35	$1.81	$1.27
June 30	$1.28	$0.42	$1.88	$1.19
September 30	$2.30	$0.80	$1.75	$0.95
December 31	$3.12	$1.80	$1.09	$0.35

CORPORATE PROFILE:

Founded in 1925, Wells-Gardner Electronics Corporation is a distributor and manufacturer of color video monitors and other related distribution products for a variety of markets including, but not limited to, gaming machine manufacturers, casinos, coin-operated video game manufacturers and other display integrators. The Company has the majority of its LCDs manufactured in Mainland China. In addition, the company’s American Gaming & Electronics, Inc. subsidiary (“AGE”), a leading parts distributor to the gaming markets, sells parts and services to over 700 casinos in North America with offices in Las Vegas, Nevada, Hammonton, New Jersey, Hialeah, Florida and McCook, Illinois. AGE also sells refurbished gaming machines on a global basis.

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2009 PRESIDENT’S REPORT

TO OUR SHAREHOLDERS, CUSTOMERS, SUPPLIERS & EMPLOYEES:

Wells-Gardner had an outstanding financial performance in the extremely difficult economic environment of 2009.

·   The Company was profitable for the fourth consecutive year with net earnings of $1.1 million or $0.11 per share compared to $204,000 or $0.02 per share in 2008. The 2009 earnings included non recurring tax charges of $168,000.

·   This was the best fiscal earnings in this decade.

·   Sales for fiscal 2009 were $52.5 million, a decrease of 2% or $1.3 million compared to the sales of $53.8 million in the prior year. This sales decline was due almost entirely to the decline in LCD prices of around 7%, which resulted in a sales decline of over $3 million. If LCD prices had held steady, the Company’s sales would have increased by around $2 million.

·   The reason for this increase in net earnings was the improvement in gross margin to 17.4% from 15.5% and the reduction of interest expense of $143,000 or 40 percent. This more than offset the loss of margin of $225,000 caused by the sales decline. The margin improvement was driven by improved design and purchasing cost control as well as moving more production to Mainland China.

·   The Company’s Balance Sheet strengthened considerably with the generation of $3 million of free cash flow. Bank debt declined to $2.2 million from $5.2 million at year end 2008. This resulted in the interest reduction of 40 percent. The Company’s debt/equity ratio was reduced to 14 percent from 37 percent at year end 2008. The positive cash flow was driven by an inventory reduction of $3.8 million.

·   LCD sales continue to drive our business and the Company sold almost 104,000 LCDs in 2009, an increase of 19 percent compared to almost 87,000 sold in 2008. The Company sold its 350,000th LCD in January 2010.

·   The Company has been granted two LCD patents. The Company believes that one of these patents has royalty income potential. We have another 6 LCD patent applications filed. This is a continuation of our push to broaden the scope of our Intellectual Property (IP).

·   The Company has embarked on two new directions, namely introducing new 3D technology to the gaming industry and entering the new Illinois Video Lottery Terminal market, two opportunities that have huge potential for Wells-Gardner for the next several years.

3D and Other New Technologies

The cover page of this annual report highlights the push by Management to enter the exciting 3D market with new innovative technology. The Company has a global exclusive license for the gaming and amusement markets for a patented 3D/2D switch technology developed by Dimension Technologies Inc. of Rochester, NY. Many industry experts believe that with the dominance of 3D technology at the 2010 Consumer Electronics Show as well as the overwhelmingly successful 3D movie "Avatar", that 3D will be a key technology for the gaming industry in 2010 and that our switchable technology has the potential to be very successful. The reason for this is that the current 3D technology requires glasses, which are impractical for casinos, whereas our switchable technology does not require glasses. This is all part of the Company’s ongoing program to develop innovative products for our customers and to protect our IP. The Company is also aggressively working on several other new technologies.

Illinois Video Lottery Market

The Company has decided to enter the new Video Lottery Terminal (VLT) market in Illinois as a distributor through its wholly-owned subsidiary, American Gaming & Electronics (AG&E), since AG&E already holds an Illinois gaming license.

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The Video Gaming Act was passed by the Illinois Legislature in July 2009 and industry experts anticipate approximately 40,000 to 60,000 video lottery terminals being operated in the State by the end of 2013. This would represent a total sales value in the Illinois VLT market of between $600 and $900 million. The Company has signed a Letter of Intent, and is now negotiating a definitive agreement, with Spielo Manufacturing ULC, a subsidiary of GTECH Corporation, to distribute their products into the Illinois market. Management has hired Michael Rudowicz, the former President of the Amusement Trade Association to be the Executive Vice President in charge of the Video Lottery Terminal (VLT) Division of AG&E and Michael Mazzaroli, a highly successful long time Midwest Regional Manager of AG&E, to be the Vice President of Sales of the VLT Division, reporting to Rudowicz. The Company expects the first sales of the VLTs in the fourth quarter of 2010.

American Gaming & Electronics (AG&E)

AG&E, which is a wholly owned subsidiary of Wells-Gardner, has direct sales operations in Las Vegas and Reno, Nevada, California, New Jersey, New York, Pennsylvania, Connecticut, Florida and throughout the Midwest. AG&E also has distributors in New Mexico, Arizona, Mississippi and Louisiana and has added distributors covering Southeast Asia, Europe, the Middle East and Africa. The Company has distribution relationships with Optera, GE, JCM, and others. AG&E pioneered the LCD replacement kit market for replacing CRT monitors with LCDs in casinos, and has now sold over 25,000 LCD replacement kits. AG&E has decided to enter the Illinois VLT market as a distributor as noted above and may consider entering other VLT markets in the future. AG&E also purchases, refurbishes and markets used gaming devices out of the New Jersey facility of Par 4, our partner, to both national and international customers. AGE now sells to virtually every casino in North America.

Asian Manufacturing

Asian manufacturing is essential to our strategy of being a globally competitive manufacturer of LCDs. The Company has two long-term contracts to manufacture its LCDs at our subcontractors’ China facilities, both in the Shenzhen area, near Hong Kong. In 2009, 90% of the Company’s sales were derived from LCD production in China compared to 75% in 2008 and 59% in 2007. Chinese-manufactured LCDs are over $30/unit cheaper than those made in the US.

Gaming Strategy

Wells-Gardner is continuing its strategy of using its strengths in one area of the gaming market to provide leverage and increase our market penetration in other areas. The Company is now participating in five areas of the gaming market:

·   LCD manufacturing in Mainland China and the US, primarily for the gaming industry.

·   Distributing products to the Illinois Video Lottery Terminal market.

·   Distributing Wells-Gardner’s and other manufacturers’ parts to casinos throughout North America, Central America, South America, Europe, Southeast Asia, including Macau, the Middle East and Africa.

·   Servicing game parts for casinos in North America.

·   Refurbishing and selling used gaming equipment to customers worldwide.

The strategy is proving successful as gaming revenue accounted for approximately 93 percent of the Company’s total revenue in 2009 compared to 52 percent in 2000.

Quality Continues To Be the Top Priority

Wells-Gardner remains committed to being the “best-in-class” quality supplier in all our served markets.  The Company has a defect rate for its LCD installed base of around 350,000 units of 0.35 percent, compared to the industry standard of 1.0 percent, which few if any of our competitors can match. That means only 3.5 defects for every 1,000 LCDs installed. Our team of American and Taiwanese engineers has developed extremely high quality and highly reliable LCDs.

-3-

Strategic Plan

Management is committed to a new strategic plan in 2010. Management believes that the Company must develop a new direction focusing on technology, patents and other Intellectual Property to distinguish the Company from its competitors and hence earn improved profits from technological value-added products. As mentioned above, the Company has been granted two LCD patents and has an additional six LCD patent applications currently pending. In addition the Company has invested in several new technologies including 3D. Management is also focused on releasing several new products which are expected to generate additional revenue in 2010.

2010 Global Gaming Outlook

After three years of a declining global slot market in 2007, 2008 and 2009, industry experts are predicting a more favorable climate by the middle of 2010. The second half of 2010 and all of 2011 could include benefits from an accelerating replacement cycle, breakthroughs in the delays that have hampered construction and openings of new casinos in Kansas, Maryland, Pennsylvania, Ohio and New York along with potential new casino markets in Massachusetts, Kentucky, Hawaii and New Hampshire, where casinos could soon be legalized. In addition, there may be a wave of new video lottery terminal legislation similar to the Act that was passed in Illinois last year. VLT legislation could be passed in Iowa, Ohio and other states, which would add considerably to the overall slot market and could become a major new legislative trend if VLTs generate income for states faster than new casinos. Another anticipated bright spot is the increase in slot machine sales to international markets.  Historically these markets have not been a steady source of business, but with the growth in Macau, the start-up of operations in Singapore, the legalization of casinos in Taiwan, and the expansion of facilities in South Korea and the Philippines, we are expecting international markets to become more consistent in the future. All this is driven by a belief among many legislators throughout the world that the taxation of gaming revenue is among the most publicly accepted and least invasive, forms of taxation.

2010 and 2011 Wells-Gardner Outlook

Wells-Gardner expects 2010 to continue to be a challenging environment. While sales are expected to increase by around 15 percent, this increase will come primarily from the sales into the new Illinois Video Lottery market that is expected to start in the fourth quarter of 2010. However the Company will have expenses during all twelve months of 2010, incurred in preparation for entry into this new market. Management is cautiously optimistic as new 3D and signage products are being developed that are expected to generate additional income. Management will continue to exercise intense cost and interest expense control.

2011 is expected to be a strong year for the Company due to the combination of a full year of sales to the Illinois Video Lottery Terminal market, a strong pickup in the slot replacement cycle and the opening of new casinos both domestically and internationally.

We believe that the major risk is the uncertain global economic and political climate.

I thank all of you for your continued support as we complete the implementation of our plans. I am confident that this will lead to increased profitability and improved shareholder value.

Anthony Spier

Chairman of the Board, President

& Chief Executive Officer

March 5, 2010

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Net sales decreased 2% to $52.5 million in 2009 compared to $53.8 million in 2008.  The decrease in sales was attributable primarily to lower average display selling prices, which averaged about 7% or $3.5 million less display revenue compared to 2008.  Total unit volume actually increased by almost 5% or $1.9 million, partially offsetting the average display selling price decline.  LCD unit volume increased 19% to almost 104,000 units while CRT unit volume declined 74% to only a little over 4,000 units.  Parts sales increased by $0.8 million and used games sales decreased $0.5 million in 2009 compared to 2008.  In 2009 and 2008, gaming related sales accounted for 93% and 90% of total sales respectively, while amusement sales accounted for 7% and 10% of total sales respectively.

Gross margin for 2009 increased almost $0.8 million to over $9.1 million or 17.4% of sales compared to $8.4 million or 15.5% in 2008 for a 1.9 percentage point year over year increase.  The primary factors contributing to the gross margin increase were increase in display margins and parts margins partially offset by a decline in used game margins.  The Company was able to achieve the higher display margins through product design and purchasing cost reductions in excess of the average display selling price reductions, even though the market remains quite competitive.

Operating expenses were flat at $7.8 million in both 2009 and 2008.  This resulted in the higher gross margin flowing through to operating income.  Notwithstanding that operating expenses were flat, compensation expense increased about $200,000 and occupancy expense increased $45,000. However these increases were completely offset by a $115,000 reduction in engineering sample expense, an $80,000 reduction in legal and audit expenses, and a $60,000 reduction in commission expense.  The Company continues to place great emphasis on operating expense control.

Operating results were earnings of $1,377,000 in 2009 compared to $582,000 in 2008.

Interest expense was $213,000 in 2009 compared to $356,000 in 2008 due to lower average debt balances.  Joint venture income was $1,000 in 2009 compared to $3,000 in 2008.  The final distribution of the liquidation of Wells Gardner East Asia occurred in December, 2009 and this will be the last activity for this line item.  Other expense was $170,000 in 2009 compared to $0 other expense in 2008.  The other expense was related to state tax charges.

Income tax benefit was $102,000 in 2009 compared to income tax expense of $25,000 in 2008.  The Company has available a net operating loss carry forward of approximately $5.2 million as of December 31, 2009.

Net income was $1,097,000 in 2009 compared to net income of $204,000 in 2008.  For 2009 basic and diluted earnings per share was $0.11 compared to basic and diluted earnings per share of $0.02 in 2008.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net sales decreased 9.1% to $53.8 million in 2008 compared to $59.3 million in 2007.  The decrease in sales were attributable to a 24% unit volume or $5.2 million increase in LCD sales and a 63% unit volume decline or $8.9 million decrease in CRT sales resulting in a net monitor unit volume decline of 10% or $3.7 million.  Parts sales increased by $0.6 million and used games sales decreased $2.4 million in 2008 compared to 2007.  In 2008 and 2007, gaming related sales accounted for 90% and 83% of total sales respectively, while amusement sales accounted for 10% and 17% of total sales respectively.

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Gross margin for 2008 decreased $1.5 million to $8.4 million or 15.5% of sales compared to $9.9 million or 16.6% in 2007 for a 1.1 percentage point year over year decline.  The primary factors contributing to the gross margin decline were declines in used game and monitor sales margins partially offset by an increase in parts margins.  The market remained quite competitive resulting in average selling price reductions greater than the product cost reductions the Company was able to achieve in 2008.

Operating expense decreased by 16.6% or $1.5 million to $7.8 million in 2008 compared to $9.3 million in 2007.  The decrease in operating expense completely offset the lower gross margins for the year.  Compared to the prior year salaried compensation expense was $0.3 million less, depreciation and occupancy was $0.3 million less, and other operating expenses were $0.9 million less.  The primary decreases in other operating expense were significantly lower travel expense and engineering sample / agency expense, and lower advertising expense, bank fees, and insurance expense.  The Company has aggressively reduced its headcount and continues to place great emphasis on operating expense control.

Operating results were earnings of $582,000 in 2008 compared to $546,000 in 2007.

Interest expense was $356,000 in 2008 compared to $683,000 in 2007 due to lower average debt balances and lower interest rates.  Joint venture income was $3,000 in 2008 compared to $24,000 in 2007.  Other income was zero dollars in 2008 compared to other income of $314,000 in 2007.  All major foreign customers requested to be changed to US dollar billing in late 2007 resulting in no foreign currency gains in other income for 2008.

Income tax expense was $25,000 in 2008 compared to $6,000 in 2007.  The Company has available a net operating loss carry forward of approximately $6.0 million as of December 31, 2008.

Net income was $204,000 in 2008 compared to net income of $195,000 in 2007.  For 2008 basic and diluted earnings per share was $0.02 compared to basic and diluted earnings per share of $0.02 in 2007.

2010 Outlook

The Company anticipates 2010 sales to be between $60 million and $62 million, an increase of over 15% due entirely to the anticipated revenue from the new Illinois Video Lottery Terminal business expected to occur later in the year.  Total display unit sales are expected to be flat to slightly higher, while the average monitor selling price is expected to be slightly lower than in 2009.  Parts sales are expected to be flat and used game sales are expected to be slightly lower than in 2009.    As a result, the Company expects 2010 to be a challenging year. In addition, the Company expects revenue from the Video Lottery market to begin in the early fourth quarter of 2010, while the Company will have expenses throughout the year in preparation of our entry into this new market.  The Company is working on many new products in 3D, new uses that would add a third display to gaming machines, and new replacement kits for the casino and amusement markets.

Market & Credit Risks

The Company is subject to certain market risks, mainly interest rates.  On August 21, 2006, the Company entered into a four-year credit facility with Wells Fargo Bank NA.  On September 15, 2009, the Company amended the term of the credit agreement extending it to August 21, 2013.  The amended credit agreement is a $12 million revolving credit facility and has an interest rate of three month LIBOR plus 500 basis points.  The credit facility has several financial covenants including a minimum book net worth, minimum net earnings, maximum capital expenditures and maximum compensation increases.  The financial covenants, which remained the same, now include a provision that any future write off of goodwill will be an add back to the net worth and earnings covenants.  As of December 31, 2009, the Company had total outstanding bank debt of $2.2 million at an average interest rate of 5.25%.  In addition, the Company pays $40,000 credit insurance on selected foreign receivables.  An adverse change in interest rates during the time that this debt is outstanding would cause an increase in the amount of interest paid.  

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The Company may pay down the loans at any time, however, monthly interest charges are not less than $15,000 per month for the first year of the credit agreement extension and not less than $10,000 per month for the next two years of the extension.  All bank debt is due and payable on August 21, 2013.

Critical Accounting Policies

The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires the Company’s management to adopt accounting policies and to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses.  Management periodically evaluates its policies, estimates and assumptions related to, among others: revenue recognition, receivables and provision for bad debt, inventory obsolescence and costing methods, provision for warranty, goodwill, income taxes and valuation allowance for deferred taxes, and contingencies.  The Company’s management bases its estimates on historical experience and expectations of the future.  Actual reported and future amounts could differ from those estimates under different conditions and assumptions.

Revenue Recognition

In general, the Company recognizes revenue when the following criteria are met: evidence of an arrangement between the Company and its customer exists, shipment has occurred or services have been rendered, the sales price is fixed and determinable and collectability is reasonably assured.

Receivables & Provision for Bad Debt

The Company is exposed to credit risk on certain assets, primarily accounts receivable.  The Company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations.  Concentrations of credit risk with respect to trade receivables are limited except for the Company’s five largest customers.  The Company currently believes its allowance for doubtful accounts is sufficient to cover customer credit risks.

Inventory Obsolescence & Costing Methods

Inventory is stated at the lower of cost (first-in, first-out) or market.  The Company provides an allowance for estimated obsolete or excess inventory based on assumptions about future demands for its products.  During 2009 the Company’s slow moving and obsolescence reserve decreased approximately $185,000.

Provision for Warranty

The Company offers certain warranties on its products and has a general reserve for potential future charges incurred in connection with in-warranty repairs and services.  This reserve is based on historical actual repairs, which declined significantly in 2009 due to significantly lower CRT sales.

Goodwill

The Company accounts for its goodwill resulting from the acquisition of American Gaming & Electronics in conformity with FASB ASC 350-20 Goodwill Subsequent Measurement. This ASC section requires that goodwill not be amortized, but instead be tested for impairment at least annually, which the Company does annually in the fourth quarter. The Company determined that there was no impairment of goodwill in 2009 and 2008 by utilization of a discounted cash flow analysis.  However, there is no certainty in future periods that the fair value of the reporting unit will exceed its carrying value.

Income Taxes & Valuation Allowance for Deferred Taxes

The Company uses the asset and liability method of accounting for income taxes.  Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.  We record a valuation allowance to reduce deferred tax assets to an amount for which the realization is more likely than not.

Contingencies

When applicable, the Company assesses its exposures to loss contingencies including legal and other matters and provides for an exposure if it is judged to be probable and estimable.  If the actual loss from a contingency differs from management’s estimates, operating results could be impacted.

Liquidity & Capital Resources

Accounts receivable increased to $7.1 million in 2009 compared to $6.3 million in 2008. This $0.8 million use of cash is attributed to one customer ending our vendor managed inventory program in exchange for an extra 30 days accounts receivable terms.  Accounts receivable for all other customers actually declined year over year. 

-7-

Accounts receivable due from subcontractors increased to $6.2 million in 2009 compared to $4.8 million in 2008, or a $1.4 million use of cash, as the Company increased the percentage of its products built in Mainland China.

Inventory decreased to $8.0 million in 2009 compared to $11.8 million in 2008 or $3.8 million.  This provided an increase in cash due to one customer ending our vendor managed inventory program in exchange for an extra 30 days accounts receivable terms and to very good production scheduling to forecast at year end 2009.

Accounts payable decreased to $1.3 million in 2009 compared to $1.8 million in 2008, or a $0.5 million use of cash, due to slightly lower days outstanding.  Accounts payable to subcontractors increased to $4.3 million in 2009 compared to $3.8 million in 2008, or $0.5 million of cash provided, due to a higher percentage of the Company’s products being built in Mainland China.

The net of prepaid and accrued expenses increased cash flow by $0.1 million.  The net of our 2009 earnings, depreciation and amortization, and other non cash adjustments to earnings resulted in $1.3 million of cash provided in operations.

These changes resulted in $3.0 million of cash being provided by operations.

Capital additions for IT equipment were $0.1 million of cash used by investing activities.

Long-term liabilities decreased to $2.2 million in 2009 compared to $5.2 million in 2008, which used $3.0 million of cash.  Cash provided by sales of stock issued under the employee stock option plan and stock grants was zero dollars in 2009.  These two items resulted in $3.0 million of net cash used in financing activities.  Cash at the beginning of the year was $0.2 million and at the end of the year was $0.1 million.

Shareholders’ equity was $15.2 million in 2009 compared to $14.0 million in 2008 or an increase of $1.2 million.  This increase was attributed to the Company’s net earnings in 2009 and the amortization of unearned compensation relating to the employee stock grant plan.

The Company is dependent on its credit facility to fund operations, as some critical inventory requires long lead times.  Under its current credit facility, the Company is required to maintain certain financial covenants that the Company must meet each quarter during the term of the agreement.  While the Company currently expects to meet these financial covenants during 2010, its liquidity could be adversely affected if it is unable to do so. Overall, the Company currently believes that its future financial requirements can be met with funds generated from operating activities and from its credit facility during the foreseeable future.

Contractual Obligations

The following table summarizes the Company’s contractual commitments as of December 31, 2009.     The commitments are discussed in the indicated notes to the Company’s consolidated financial statements:

	Payments Due In year Ending December 31,
(in $000’s)	Total		2010		2011		2012		2013		2014			2015	+
Note Payable (Note 4)	$	2,178	$	---	$	---	$	---	$	2,178	$	---	$	---
Operating Leases (Note 11)	$	2,085	$	766	$	572	$	561	$	186	$	---	$	---
	$	4,263	$	766	$	572	$	561	$	2,364	$	---	$	---

Inflation

In 2009 and 2008, inflation has not had a material effect on the Company’s results of operations.

-8-

 CONSOLIDATED BALANCE SHEETS

As of December 31,

(in $000’s except for share information)

	2009			2008
ASSETS
Current Assets:
Cash	$	131		184
Accounts receivable, net of allowances of $248 in 2009 & $160 in 2008		7,148		6,289
Accounts receivable, subcontractor		6,167		4,811
Inventory		8,008		11,786
Prepaid expenses & other assets		1,080		913
Total current assets	$	22,534		23,983
Property, Plant & Equipment (at cost):
Leasehold improvements		389		389
Machinery, equipment & software		8,665		8,612
less: Accumulated depreciation & amortization		(8,789	)	(8,528	)
Property, plant & equipment, net	$	265		473
Other Assets:
Investment in joint venture		0		8
Deferred tax asset, net		177		55
Goodwill		1,329		1,329
Total other assets	$	1,506		1,392
Total Assets	$	24,305		25,848
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable		1,345		1,794
Accounts payable, subcontractor		4,327		3,822
Accrued expenses		1,293		1,066
Total current liabilities	$	6,965		6,682
Long-Term Liabilities:
Note payable		2,178		5,185
Total long-term liabilities	$	2,178		5,185
Total Liabilities	$	9,143		11,867
Shareholders' Equity:
Common shares:
$1 par value; 25,000,000 shares authorized;
10,420,965 shares issued and outstanding at December 31, 2009
10,348,965 shares issued and outstanding at December 31, 2008		10,421		10,349
Capital in excess of par value		5,968		6,007
Accumulated deficit		(1,107	)	(2,204	)
Unearned compensation		(120	)	(171	)
Total Shareholders' Equity	$	15,162		13,981
Total Liabilities & Shareholders’ Equity	$	24,305		25,848

See accompanying notes to the consolidated financial statements.

-9-

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,

(in $000’s except for share & per share data)

	2009			2008			2007
Net sales	$	52,526		$	53,839		$	59,308
Cost of sales		43,378			45,483			49,442
Gross margin		9,148			8,356			9,866
Engineering, selling & administrative		7,771			7,774			9,320
Operating earnings		1,377			582			546
Other (income) expense:
Interest		213			356			683
Joint Venture income		(1	)		(3	)		(24	)
Other expense (income)		170			0			(314	)
Earnings before income tax		995			229			201
Income tax (benefit) expense		(102	)		25			6
Net earnings	$	1,097		$	204		$	195
Basic net earnings per common share	$	0.11		$	0.02		$	.02
Diluted net earnings per common share	$	0.11		$	0.02		$	.02
Basic common weighted shares outstanding		10,417,031			10,349,778			10,309,114
Diluted common weighted shares outstanding		10,417,031			10,349,778			10,342,076

See accompanying notes to the consolidated financial statements.

-10-

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in $000’s)

			Capital In									Total
	Common		Excess Of			Accumulated			Unearned			Shareholders'
	Shares		Par Value			Deficit			Compensation			Equity
December 31, 2006	$	9,255	$	6,755		$	(2,603	)	$	(201	)	$	13,207
Net earnings							195						195
Stock dividend issued		467		(467	)								0
Issuance / forfeiture of stock awards (net)		31		85						(116	)		(0	)
FAS 123R Option compensation				3									3
Stock options exercised		82		127									209
Amortization of unearned compensation										90			90
December 31, 2007	$	9,835	$	6,503		$	(2,408	)	$	(227	)	$	13,704
Net earnings							204						204
Stock dividend issued		493		(493	)								0
Issuance / forfeiture of stock awards (net)		20		(3	)					(17	)		0
Amortization of unearned compensation										74			74
December 31, 2008	$	10,349	$	6,007		$	(2,204	)	$	(171	)	$	13,981
Net earnings							1,097						1,097
Issuance / forfeiture of stock awards (net)		72		(39	)					(33	)		0
Amortization of unearned compensation										84			84
December 31, 2009	$	10,421	$	5,968		$	(1,107	)	$	(120	)	$	15,162

See accompanying notes to the consolidated financial statements.

-11-

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

(in $000’s)

	2009			2008			2007
Cash flows from operating activities:
Net earnings	$	1,097		$	204		$	195
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization		268			171			444
Bad debt expense		101			31			79
Amortization of unearned compensation		84			74			90
Share of earnings of joint venture		(1	)		(2	)		(30	)
Retained earnings dividend from Joint Venture		0			0			770
Deferred income tax		(122	)		0			(55	)
Changes in current assets & liabilities:
Accounts receivable, net		(960	)		(299	)		1,082
Inventory		3,778			1,127			905
Prepaid expenses & other		(167	)		393			(145	)
Accounts payable, net		(449	)		166			(453	)
Due to/from subcontractor		(851	)		(389	)		(1,301	)
Accrued expenses		227			(69	)		284
Net cash provided by operating activities	$	3,005		$	1,407		$	1,865
Cash flows (used in) provided by investing activities:
Capital dividend from Joint Venture		9			123			507
Additions to property, plant & equipment, net		(60	)		(121	)		(94	)
Net cash (used in) provided by investing activities	$	(51	)	$	2		$	413
Cash flows from financing activities:
(Repayments) from note payable		(3,007	)		(1,524	)		(2,525	)
Proceeds from stock issued, options exercised
& employee stock purchase plan		0			0			212
Net cash (used in) financing activities	$	(3,007	)	$	(1,524	)	$	(2,313	)
Net (decrease) in cash		(53	)		(115	)		(35	)
Cash at beginning of year		184			299			334
Cash at end of year	$	131		$	184		$	299
Supplemental cash flows disclosure:
Income taxes paid	$	0		$	33		$	15
Interest paid	$	213		$	356		$	683

See accompanying notes to the consolidated financial statements.

-12-

NOTES TO THE FINANCIAL STATEMENTS

Note 1. DESCRIPTION OF THE BUSINESS

Wells-Gardner Electronics Corporation is a global distributor and manufacturer of liquid crystal displays (LCDs), color video monitors and other related distribution products for a variety of markets including, but not limited to, gaming machine manufacturers, casinos, coin-operated video game manufacturers and other display integrators. The Company’s primary business is the distribution, design, manufacture, assembly, service and marketing of color LCD (liquid crystal display) video monitors, gaming supplies and other components, with facilities in the United States and a manufacturing subcontract relationship with two separate Taiwanese electronics companies to manufacture LCD video displays in China.  Prior to October 2007, the Company also had a manufacturing joint venture in Malaysia.  This joint venture was closed and liquidated in 2007.

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The financial statements of the Company include the accounts of Wells-Gardner Electronics Corporation and its wholly-owned subsidiary, American Gaming & Electronics, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

In general, the Company recognizes revenue when the following criteria are met: evidence of an arrangement between the Company and its customer exists, shipment has occurred or services have been rendered, the sales price is fixed and determinable and collectability is reasonably assured.

Financial Instruments

The fair value of the Company’s financial instruments does not materially vary from the carrying value of such instruments.

Receivables

Receivables are carried at original invoice or closing statement amount less estimates made for doubtful receivables. Management determines the allowances for doubtful accounts by reviewing and identifying troubled accounts on a monthly basis and by using historical experience applied to an aging of accounts. A receivable is considered to be past due if any portion of the receivable balance is outstanding past terms which are normally 30 to 60 days. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received.

Inventory Obsolescence & Costing Methods

Inventory is stated at the lower of cost (first-in, first-out) or market. The Company provides an allowance for estimated obsolete or excess inventory based on assumptions about future demands for its products.

Provision for Warranty

The Company offers certain warranties on its products and has a general reserve for potential future charges incurred in connection with in-warranty repairs and services. This reserve is based on historical actual repairs. If the actual charges incurred exceed management’s estimates, operating results could be impacted.

-13-

Property, Plant & Equipment

Property, plant and equipment are stated at cost and are depreciated and amortized for financial reporting purposes over the estimated useful lives on a straight-line basis as follows: machinery & equipment - five to fifteen years & leasehold improvements - shorter of lease term or estimated useful life.

Internal Use Software

Certain costs incurred in the planning and development stage of internal use computer software projects are expensed, while costs incurred during the application development stage are capitalized. Capitalized software costs are amortized over the expected economic life of the software. Total capitalized costs as of December 31, 2009 and 2008 were $1.8 million and are included in property, plant & equipment on the face of the balance sheets. During the years ended December 31, 2009, 2008 and 2007, amortization expense related to the capitalized software was $12,000, $52,000 and $236,000, respectively.

Goodwill

The Company accounts for its goodwill resulting from its purchase of American Gaming and Electronics, Inc. in conformity with GAAP USA. GAAP USA requires that goodwill not be amortized, but instead be tested for impairment at least annually, which the Company does annually in the fourth quarter. The Company determined that there was no impairment of goodwill in 2009 and 2008 by utilization of a discounted cash flow analysis.  However, there is no certainty in future periods that the fair value of the reporting unit will exceed its carrying value, particularly due to the recent volatility in the used game market and current general economic conditions.

Engineering Research & Development

Engineering research and development costs for the years ended December 31, 2009, 2008 and 2007 were approximately $1,344,000, $1,425,000, and $1,487,000, respectively, which were 2.6%, 2.6%, and 2.5% of annual sales, respectively. These costs are recorded in engineering, selling & administrative expenses on the statement of operations.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under the asset and liability method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not.

Earnings (Loss) Per Share

Basic earnings (loss) per share is based on the weighted-average number of common shares outstanding whereas diluted earnings per share includes the dilutive effect of unexercised common stock options and warrants. Potentially dilutive securities are excluded from diluted earnings per share calculations for periods with a net loss. For all periods reported, earnings per share have been retroactively restated to reflect the stock dividends issued in 2008 and 2007.

Stock Based Compensation

At December 31, 2009, the Company has two stock-based compensation plans, which are described more fully in Note 5. The Company accounts for these plans under the recognition and measurement principles of GAAP USA.

Reclassifications

Certain amounts in previously issued financial statement footnotes have been reclassified to conform to the current year’s presentation.

Subsequent Events

The Company evaluated subsequent events through the date the financial statements were issued.

Recently Issued Accounting Pronouncements

None.

-14-

Note 3. INVENTORY

Net inventory, which includes a valuation reserve of $2,549, $2,734 and $2,145 in 2009, 2008 and 2007, respectively, consisted of the following components:

		December 31,
(in $000's)		2009		2008		2007
Raw materials	$	3,112	$	3,706	$	4,525
Work in progress	$	0	$	52	$	580
In transit finished goods	$	1,116	$	1,593	$	1,521
Finished goods	$	3,780	$	6,435	$	6,287
Total	$	8,008	$	11,786	$	12,913

Note 4. DEBT

On September 15, 2009, the Company signed an amendment to extend the term of the credit agreement with Wells Fargo Bank to August 21, 2013.  The amended credit agreement is a $12 million revolving credit facility.  The amended credit facility has an interest rate of three month LIBOR plus 500 basis points, plus other fees including annual maintenance and exam fees.  Substantially all assets of the Company are secured as collateral for this credit facility and the Company must maintain certain financial covenants including minimum book net worth, minimum net earnings, maximum capital expenditures and maximum compensation increases. The financial covenants, which remained the same, now include a provision that any future write off of goodwill will be an add back to the net worth and earnings covenants.  All cash dividends must be approved by the bank.  At December 31, 2009 and 2008, the Company had total outstanding bank debt of $2.2 million and $5.2 million, respectively, at a combined average interest rate of 5.25% and 6.0%, respectively. As of December 31, 2009 the Company had availability of $6.2 million in addition to the $2.2 million outstanding. Availability is 85% of eligible accounts receivable and 55% of eligible inventory less outstanding debt. All bank debt is due and payable on August 21, 2013.

Note 5. STOCK PLANS

The Company maintains an Incentive Stock Option and Stock Award Plan under which officers and key employees may acquire up to a maximum of 1,954,674 common shares.

Stock Options

Options were granted through December 31, 2008 at an option price not less than fair market value on the date of grant and are exercisable not earlier than six months nor later than ten years from the date of grant. Options vest over two and three year periods. As of December 31, 2009, 6 persons held outstanding options and were eligible to participate in the plans. Such options expire on various dates through April 8, 2014.

Under the stock option plans, the exercise price of each option equals the market price of the Company’s stock on the date of grant. For purposes of calculating the compensation cost per GAAP USA, the fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model.  The Company has not issued any Incentive Stock Options since 2004, except for adjustments to previous grants for the 5% dividend declared in subsequent years.  It is the Company’s policy to issue new stock certificates to satisfy stock option exercises.

Stock options exercisable at December 31, 2009, 2008 and 2007 were 48,454, 66,862 and 131,360, respectively.  No options were granted in 2009, 2008 or 2007. The total intrinsic value of shares exercised in 2009, 2008 and 2007 were $0, $0 and $316,000, respectively. The total cash received in 2009, 2008 and 2007 for the exercise of stock options was $0, $0 and $209,000, respectively.

-15-

The following table summarizes information about stock options activity for the twelve months ending December 31, 2009:

					Weighted average	Aggregate
			Weighted average		Remaining	Intrinsic
	Options		exercise price		Contractual Life	Value
Outstanding at beginning of year	66,862		$	1.85
Granted	0		$	-
Forfeited	(18,408	)	$	1.40
Exercised	0		$	-
Outstanding, December 31, 2009	48,454		$	2.02	2.1
Exercisable, December 31, 2009	48,454		$	2.02	2.1	12,000

Restricted Shares

The employees will earn the restricted shares in exchange for services to be provided to the Company over a three year or five-year vesting period. All shares granted are governed by the Company’s Stock Award Plan, which was approved by shareholders in 2000.  The fair value of restricted shares is based on market price on the grant date.  In 2009 and 2008, the Company granted 72,000 and 44,100 restricted shares, respectively, with weighted average grant date fair values of $0.46 and $1.66, respectively. The Company recorded $83,000, $74,000 and $90,000 in related net compensation expense for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, 165,935 restricted shares are outstanding on a dividend adjusted basis. Total unrecognized compensation cost related to unvested stock awards is approximately $120,000 and is expected to be recognized over a weighted average period of 2 years.

The following table summarizes information regarding Restricted Share activity for the twelve months ending December 31, 2009:

				Weighted average
				Grant Date
	Shares			Fair Value
Unvested at December 31, 2008		104,961		$	2.73
Granted		72,000		$	0.46
Vested		(11,026	)	$	3.37
Forfeited		0		$	0
Unvested, December 31, 2009		165,935		$	1.70

Warrants

On September 23, 2004, the Company completed a $5.5 million private equity placement pursuant to separate agreements for the issuance of 1,216,816 (unadjusted) shares of its common stock, $1.00 par value, to certain institutional investors at a price of $4.52 per share (unadjusted), and issued warrants to those investors which will allow them to purchase up to an additional 486,726 (unadjusted) shares of common stock at $6.24 per share (unadjusted). These warrants became exercisable on March 21, 2005 and expire on March 20, 2010. As a result of the private equity placement, the Company raised approximately $5.0 million (net of $463,000 in expenses) through the sale of the common stock. The Company used the proceeds to pay down its bank debt. As of December 31, 2009 there has been no activity related to the outstanding warrants.   The current exercise price of the 591,554 warrants after stock dividends as of December 31, 2009 is $5.13.

-16-

Note 6. ACCRUED EXPENSES

Accrued expenses consisted of the following items:

	December 31,
(in $000's)	2009		2008
Payroll & related costs	$	497	$	142
Sales commissions	$	71	$	54
Warranty	$	90	$	183
Other accrued expenses	$	635	$	687
Total	$	1,293	$	1,066

Warranty reserve roll forward:

	Year Ended December 31,
Warranty Reserve:		2009		2008
Beginning Balance	$	183	$	200
Additions	$	160	$	334
Payments	$	(253)	$	(351)
Balance at end of year	$	90	$	183

Note 7. SIGNIFICANT CUSTOMERS

The Company’s largest customer accounted for 35%, 40% and 35% of total revenues in 2009, 2008 and 2007, respectively, and 45% and 36% of total accounts receivable as of December 31, 2009 and December 31, 2008, respectively. No other customer accounted for more than 10% of sales in 2008 and 2007, respectively.  The second largest customer accounted for 15% of the total revenue in 2009 and 21% of the total accounts receivable.  The next largest customer accounted for 10% of total revenue in 2009 and 7% of the total accounts receivable.  No other customer accounted for more than 10% of sales in 2009.

Note 8. INCOME TAXES

The effective income tax rates differed from the expected Federal income tax rate (34%) for the following reasons:

(in $000's)	2009			2008			2007
Computed expected tax expense	$	338		$	70		$	66
State income tax expense, net of Federal tax effect	$	48		$	10		$	9
Distribution from Joint Venture	$	4		$	48		$	368
Reduction of valuation allowance	$	(122	)	$	0		$	(55	)
Other, net  (primarily permanent differences)	$	64		$	92		$	(87	)
Change in valuation allowance (regarding utilization of NOL)	$	(434	)	$	(195	)	$	(295	)
Income Tax Expense (Benefit)	$	(102	)	$	25		$	6

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and as measured by income tax regulations. Temporary differences which gave rise to deferred tax assets and deferred tax liabilities consisted of:

-17-

	December 31:
(in $000's)	2009			2008			2007
Deferred tax assets:
Allowance for doubtful accounts	$	96		$	62		$	60
Warranty reserve	$	35		$	71		$	78
Inventory reserve	$	990		$	1,061		$	833
Property, plant, equipment and software, principally depreciation	$	87		$	15		$	0
Net operating loss carry forwards*	$	2,118		$	2,498		$	2,871
Alternative minimum tax credit carry forwards	$	74		$	74		$	74
General business credit carry forwards	$	129		$	129		$	129
Other	$	52		$	75		$	101
Total gross deferred tax assets	$	3,581		$	3,985		$	4,146
Less valuation allowance	$	(3,013	)	$	(3,569	)	$	(3,764	)
Total deferred tax assets	$	568		$	416		$	382
Deferred tax liabilities:
Property, plant, equipment and software, principally depreciation	$	0		$	0		$	6
Goodwill	$	391		$	361		$	321
Total deferred tax liabilities	$	391		$	361		$	327
Net deferred taxes	$	177		$	55		$	55

*As a result of a recent state audit and the determination that the nature of the adjustment was a clerical error in 2001, the 2008 and 2007 net operating loss carry forwards and the valuation allowance have been increased by $403,000. Due to a 100% offset against the valuation allowance, this adjustment has no impact on the 2008 and 2007 consolidated balance sheets or statements of operations.

A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has historically provided a 100% valuation allowance on its net deferred tax benefits.  However, the Company reduced the valuation allowance by $122,000, $0, and $55,000 in the 2009, 2008 and 2007 years, respectively, in order to recognize the portion of deferred tax assets expected to be realized in the near future.  This change represents the Company’s belief that it is more likely than not that a profit will be generated through the end of the succeeding year, which will allow them to use a portion of the current net operating loss carry forwards.  As of December 31, 2009, the Company has net operating loss carry forwards for Federal income tax purposes of approximately $4,843,000, which are available to offset future Federal taxable income, if any, through 2021. The Company also has alternative minimum tax credit carry forwards of approximately $74,000, which are available to reduce future Federal regular income taxes, if any, over an indefinite period. In addition, the Company has general business credit carry forwards of approximately $129,000, which are available to reduce future Federal regular income taxes, if any. These general business credits are scheduled to expire in 2012.  No unrecognized tax benefits are set to expire in the next twelve months that may have an impact upon the Company’s effective tax rate.

The Company files tax returns in the U.S. federal jurisdiction and various state jurisdictions.  The tax years 2006, 2007, 2008 and 2009 remain open to examinations.  Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense.  During the twelve months ended December 31, 2009, the Company did not recognize expense for interest or penalties related to income tax, and does not have any amounts accrued at December 31, 2009, as the Company does not believe it has taken any uncertain tax positions.

Note 9. EARNINGS PER SHARE

During 2008 and 2007, the Company issued a five percent (5%) stock dividend payable to all common stock shareholders. The stock dividend resulted in the issuance of 493,183 and 467,363 additional common shares in 2008 and 2007, respectively. All reported earnings per share disclosures have been retroactively restated to reflect this dividend. The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per common share for the years ended December 31:

-18-

(in $000's except for per share data)	2009		2008		2007
Basic earnings (loss) per common share:
Net earnings (loss)	$	1,097	$	204	$	195
Weighted-average common shares outstanding		10,417		10,350		10,309
Basic net earnings (loss) per common share	$	0.11	$	0.02	$	0.02
Diluted earnings (loss) per common share:
Net earnings (loss)	$	1,097	$	204	$	195
Weighted-average common shares outstanding		10,417		10,350		10,309
Add:  Effect of dilutive stock options		0		0		33
Adjusted weighted-average common shares outstanding		10,417		10,350		10,342
Diluted net earnings (loss) per common share	$	0.11	$	0.02	$	0.02

As of December 31, 2009, 2008 and 2007, there were 591,554 warrants outstanding to purchase common stock at $5.13.  These warrants were anti-dilutive and excluded from the diluted earnings per share. For the year ended December 31, 2009, 2008 and 2007, there were 48,454, 66,862 and 6,869 options, respectively, which were anti-dilutive and excluded from the diluted earnings per share calculation.

Note 10. JOINT VENTURE / AFFILIATES

The Company closed and liquidated its Malaysian joint venture partner (Wells East Asia Displays – WEA) in 2007.  The entire investment in WEA has been repatriated as of December 31, 2009.  The joint venture was accounted for under the equity method of accounting.  The Company recorded equity in earnings of the joint venture of $1,000, $2,000 and $24,000 in 2009, 2008 and 2007, respectively.  In 2007, the Company recorded a liquidation reserve of $194,000 which was offset by $153,000 of foreign currency gains and $65,000 of current year operating income.  In 2009, 2008 and 2007, respectively, the Company also received dividends of $9,000, $123,000 and $1,277,000 from WEA.  Purchases by the Company from the joint venture were $0, $0 and $5,510,000 in 2009, 2008 and 2007, respectively, and sales by the Company to the joint venture were $0, $0 and $219,000, respectively.

Note 11. LEASE COMMITMENTS

The Company leases certain buildings, data processing and other equipment under operating lease agreements expiring through the year 2013. The future minimum lease payments required under operating leases are as follows:

Years ending
December 31	(in $000's)
2010	$	766
2011	$	572
2012	$	561
2013	$	186
Thereafter	$	0
	$	2,085

-19-

Rent expense related to operating leases was approximately $808,000, $814,000 and $851,000 during the years ended December 31, 2009, 2008 and 2007, respectively.

Note 12. OTHER  EXPENSE / INCOME

Other expense in 2009 of $170,000 was primarily due to sales tax audits relating to prior years.  The primary components of other income in 2007 were $275,000 of foreign currency gains on accounts receivable and a $32,000 collection of a bad debt which had been previously expensed.

Note 13. UNAUDITED QUARTERLY FINANCIAL DATA

Selected quarterly data for 2009 and 2008 are as follows:

		2009
(in $000's except per share data)		First		Second		Third		Fourth
Net sales	$	11,604	$	14,376	$	13,446	$	13,100
Gross margin	$	2,083	$	2,601	$	2,391	$	2,072
Net earnings (loss)	$	103	$	484	$	266	$	244
Basic net earnings (loss) per share	$	0.01	$	0.05	$	0.03	$	0.02
Diluted net earnings (loss) per share	$	0.01	$	0.05	$	0.03	$	0.02
		2008
(in $000's except per share data)		First		Second		Third		Fourth
Net sales	$	14,916	$	14,525	$	11,283	$	13,115
Gross margin	$	2,441	$	2,332	$	1,686	$	1,896
Net (loss) earnings	$	199	$	170	$	(184)	$	19
Basic net (loss) earnings per share	$	0.02	$	0.02	$	(0.02)	$	0.00
Diluted net (loss) earnings per share	$	0.02	$	0.02	$	(0.02)	$	0.00

-20-

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Wells-Gardner Electronics Corporation

We have audited the accompanying consolidated balance sheets of Wells-Gardner Electronics Corporation and Subsidiary as of December 31, 2009 and 2008 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We did not audit the 2007 financial statements of Wells Eastern Asia Displays (M) SDN.BHD., a joint venture, the investment in which, as discussed in Note 10 to the consolidated financial statements, was accounted for by the equity method of accounting until it was closed and liquidated in 2007. The company’s equity in the net income of Wells Eastern Asia Displays (M) SDN.BHD was $24,000 for the year ended December 31, 2007.  The 2007 financial statements of Wells Eastern Asia Displays (M) SDN.BHD. were audited by other auditors whose report has been furnished to us, and in our opinion, insofar as it relates to the amounts included for Wells Eastern Asia Displays (M) SDN.BHD., is based solely on the report of other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wells-Gardner Electronics Corporation and Subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/ Blackman Kallick, LLP

Chicago, Illinois

March 10, 2010

-21-

BOARD OF DIRECTORS	EXECUTIVE OFFICERS
Anthony Spier	Anthony Spier
Chairman, President	Chairman, President
& Chief Executive Officer	& Chief Executive Officer
Marshall L. Burman	James F. Brace
Counsel to Wildman, Harrold, Allen & Dixon	Executive Vice President, Secretary,
	Treasurer & Chief Financial Officer
Merle H. Banta
Chairman & Chief Executive Officer
BHH Management, Inc.
Frank R. Martin
Attorney
Righeimer, Martin & Cinquino, P.C.

CORPORATE INFORMATION
ANNUAL MEETING	BANKER
The Annual Meeting of Shareholders will take place at 10:00 a.m. on Tuesday, May 11, 2010 at the corporate offices of the Company.	Wells Fargo Bank N.A.
	Milwaukee, Wisconsin
FORM 10-K	AUDITOR
A copy of the Company’s annual report on Form 10-K, as filed with the Securities and Exchange Commission, is available without charge upon written request to James F. Brace at the corporate offices of the Company.	Blackman Kallick, LLP
	Chicago, Illinois
TRANSFER AGENT	COUNSEL
BNY Mellon Shareowner Services	Gould & Ratner, LLP
P.O. Box 358015	Chicago, Illinois
Pittsburgh, PA  15252-8015
or
480 Washington Boulevard
Jersey City, NJ  07310-1900
Telephone: 1-800-853-4967
Web: www.bnymellon.com/shareowner/isd

-22-

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Anthony Spier, certify that:

(1)	I have reviewed this Annual Report on Form 10-K of Wells-Gardner Electronics Corporation;
(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Omitted;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 10, 2010	By:	/s/ ANTHONY SPIER
		Anthony Spier
		Chairman, President &
		Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James F. Brace, certify that:

(1)	I have reviewed this Annual Report on Form 10-K of Wells-Gardner Electronics Corporation;
(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Omitted;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 10, 2010	By:	/s/ JAMES F. BRACE
		James F. Brace
		Executive Vice President
		& Chief Financial Officer, Secretary &Treasurer

EX-32.1

Exhibit 32.1

STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Anthony Spier, and I, James F Brace certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Wells-Gardner Electronics Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2009:

(1)	Fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
(2)	That the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This written statement is being furnished to the Securities and Exchange Commission as an exhibit to such Form 10-K. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: March 10, 2010	By:	/s/ ANTHONY SPIER
		Anthony Spier
		Chairman, President &
		Chief Executive Officer
Date: March 10, 2010	By:	/s/ JAMES F. BRACE
		James F. Brace
		Executive Vice President
		& Chief Financial Officer, Secretary &Treasurer