Unassociated Document


6830 Spencer Street, Las Vegas, Nevada 89119
(Address of principal executive offices)

(702) 733-7195
(Issuer’s telephone number)


(Former name, former address and former fiscal year, if changed since last report)

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 29,015,099 shares of common stock, $.001 par value, as of October 31, 2006

Transitional Small Business Disclosure Format (check one): Yes o No x

	PAGE
PART I - FINANCIAL INFORMATION	1
ITEM 1. FINANCIAL STATEMENTS.	1
BALANCE SHEETS	1
STATEMENTS OF OPERATIONS	2
STATEMENTS OF CASH FLOWS	3
NOTES TO FINANCIAL STATEMENTS	4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.	11
CAUTIONARY STATEMENT	11
OVERVIEW	11
RESULTS OF OPERATIONS	12
LIQUIDITY AND CAPITAL RESOURCES	17
OFF BALANCE SHEET ARRANGEMENTS	19
CRITICAL ACCOUNTING POLICIES AND ESTIMATES	19
RISK FACTORS	20
ITEM 3. CONTROLS AND PROCEDURES	24
PART II - OTHER INFORMATION	25
ITEM 6. EXHIBITS.	25

	September 30, 2006 (Unaudited)			December 31, 2005
ASSETS Current assets:
Cash and cash equivalents	$	502,178		$	935,243
Current portion of accounts receivable, trade, net of allowance for uncollectibles of $316,469 and $276,420		2,616,636			1,550,559
Inventories		3,682,986			3,045,334
Prepaid expenses and other		184,996			117,655
		6,986,796			5,648,791

Equipment rented to customers, net of accumulated depreciation of $89,685 and $228,032		111,340			146,527
Property and equipment, net of accumulated depreciation of $2,291,943 and $2,408,234		3,496,047			585,431
Intangible assets, at cost, net of accumulated amortization of $266,257 and $836,281		5,494,962			1,862,268
Goodwill		13,094,280
Accounts receivable, trade, net of current portion, less unamortized discount		366,203			600,430
Deferred expenses		660,727			748,171
Deposits		459,337			759,653
	$	30,669,692		$	10,351,271

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of leases payable	$	550,547		$	471,269
Accounts payable		2,875,954			1,836,234
Accrued expenses		2,371,288			794,203
Deferred revenues, current portion		31,604			52,248
Short-term debt		6,180,324			4,050,000
Current portion of long term debt		1,500,000
Customer deposits		80,654			81,858
		13,590,371			7,285,812

Long -term obligations
Deferred revenues, net of current portion		79,757			161,335
Notes payable		11,500,000			11,654,500
Leases payable, net of current portion		407,790			421,975
Total Liabilities		25,577,918			19,523,622

Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $.001 par value, 50,000,000 shares authorized, 28,969,099 and 18,141,950 shares issued		28,969			18,142
Treasury stock 448,053 common shares		(846,820	)		(846,820	)
Deferred officers’ compensation		(3,797,006	)		(3,419,088	)
Additional paid in capital		90,684,880			66,763,192
Deficit		(80,978,249	)		(71,687,777	)
		5,491,774			(9,172,351	)
Total liabilities and stockholders’ equity	$	30,669,692		$	10,351,271

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Revenues:
Gaming:
Sales	$	379,433		$	131,852		$	2,780,042		$	1,751,521
Rental		75,601			159,662			266,849			416,441
Other		138,982			27,469			287,018			87,909
Non-gaming revenue		1,850,043						1,850,043
		2,444,059			318,983			5,183,952			2,255,871
Sales returns and allowances, gaming		(90,712	)		(20,002	)		(431,290	)		(310,840	)
		2,353,347			298,981			4,752,662			1,945,031
Operating costs and expenses:
Cost of sales		2,263,449			2,922,709			4,198,479			4,142,162
Selling, general and administrative		3,062,180			2,306,338			7,037,662			7,174,231
Research and development		448,105			591,807			1,260,341			1,069,496
		5,773,734			5,820,854			12,496,482			12,385,889
Loss from operations		(3,420,387	)		(5,521,873	)		(7,743,820	)		(10,440,858	)

Interest expense, unrelated parties		690,008			384,665			1,546,652			1,193,472
Interest expense, related parties											15,063
		690,008			384,665			1,546,652			1,208,535

Net loss	$	(4,110,395	)	$	(5,906,538	)	$	(9,290,472	)	$	(11,649,393	)

Basic loss per share	$	( 0.15	)	$	(0.35	)	$	(0.41	)	$	(0.68	)

Weighted average shares outstanding		27,629,090			16,864,005			22,430,475			17,105,093

	Nine Months Ended September 30,
	2006			2005

Net loss	$	(9,290,472	)	$	( 11,649,394	)

Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation		528,950			584,750
Amortization of deferred interest		44,465			158,552
Non-cash compensation expense		837,349			365,126
Increase in operating (assets) liabilities:
Trade accounts receivable		(831,850	)		710,717
Other receivables		154,486			(32,391	)
Inventory		(637,652	)		1,510,277
Prepaid expenses		(221,827	)		(116,516	)
Deferred financing and interest expense		(546,875	)
Deposits with vendors		300,316			(3,079	)
Accounts payable		1,039,720			1,189,145
Accrued expenses		1,577,084			668,671
Deferred expenses					(2,491,333	)
Deferred revenues		(102,222	)
Customer expenses					(5,175	)
Customer deposits		(1,204	)
		2,140,740			2,538,744
Net cash used in operating activities		(7,149,732	)		(9,110,650	)

Cash flows from investing activities:
Purchase of intellectual property		(716,500	)
Purchase of Dolphin (see note 5)		(1,350,000	)
Purchase of plant and equipment		(1,560,616	)		(897,707	)
Proceeds from disposition of equipment produced for rental		35,187
Proceeds from disposition of equipment		405,634			4,700
Net cash used in investing activities		(3,186,295	)		(893,007	)

Cash flows from financing activities:
Proceeds from sale of stock		3,034,179			3,566,852
Purchase of treasury stock					(846,820	)
Proceeds from capital lease financing		300,000
Repayment from leases payable		(279,373	)		(1,743,057	)
Proceeds from notes payable		13,000,000			8,750,000
Repayment of notes payable		(6,000,000	)
Repayment of short-term debt		(4,050,000	)		(188,250	)
Proceeds from short term debt		398,156
Proceeds from convertible debt		3,500,000
Net cash provided by financing activities		9,902,962			9,538,725
Increase (decrease) in cash and cash equivalents		(433,065	)		(464,932	)
Cash and cash equivalents at beginning of period		935,243			907,660
Cash and cash equivalents at end of period	$	502,178		$	442,728
Non-cash investing and financing activities:
Intangible assets acquired with stock	$	2,690,000
Note issued for acquisition of Dolphin (see note 5)	$	5,782,168
Stock issued as deposit for acquisition (see note 5)	$	7,817,833
Debt settled with stock	$	9,154,500

The accompanying unaudited financial statements of VendingData Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission applicable to interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Interim results of operations are not indicative of results to be expected for the year.

The results of operations for the current period presented here are not necessarily indicative of the results to be expected for the full year. The accompanying financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2005, included in the Company's Annual Report on Form 10-KSB filed with the Securities and Exchange Commission from which the accompanying balance sheet information as of that date was derived. Certain reclassifications have been made to amounts presented in prior periods for comparability to the current period presentation.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Secure Drop®				$	8,641					$	81,235
Shuffler	$	192,293			124,957		$	602,476			1,289,706
Deck Checker^TM		207,393			157,916			1,191,797			797,021
Casino chips		55,348						1,252,618
Non-gaming		1,850,043						1,850,043
Other		138,982			27,469			287,018			87,909
		2,444,059			318,983			5,183,952			2,255,871
Sales returns and allowances		(90,712	)		(20,002	)		(431,290	)		(310,840	)
	$	2,353,347		$	298,981		$	4,752,662		$	1,945,031
Depreciation and amortization
Shuffler	$	7,899		$	54,469		$	28,564		$	159,908
Deck Checker		3,998			9,229			13,869			27,687
Non-gaming		66,616						66,616
Unallocated		183,116			106,705			419,901			397,155
	$	261,629		$	171,403		$	528,951		$	584,750
Operating income (loss)
Secure Drop® gross margin				$	8,412					$	73,262
Shuffler gross margin	$	94,523			(164,266	)	$	132,638			704,558
Deck Checker gross margin		142,790			149,952			855,683			711,216
Casino chip gross margin		5,845						552,329
Non-gaming gross margin		53,954						53,954
Other costs of good sold		(207,214	)		(2,617,826	)		(1,040,421	)		(3,688,067	)
Selling, general, and administrative		(3,062,180	)		(2,306,338	)		(7,037,662	)		(7,172,331	)
Research and development		(448,105	)		(591,807	)		(1,260,341	)		(1,069,496	)
	$	(3,420,387	)	$	(5,521,873	)	$	(7,743,820	)	$	(10,440,858	)

Effective with the first quarter of 2006, the Company was required to adopt Financial Accounting Standards Board (FASB) Statement No. 123R, Share-Based Payment, to account for its stock-based compensation beginning January 1, 2006, and elected the modified prospective method of transition. Previously the Company accounted for all stock-based compensation under FASB Statement No. 123. The adoption of SFAS No. 123R did not have any effect on the Company’s results of operations for the current periods.

In July 2006 the Company acquired Dolphin Advanced Technologies Pty Ltd and its wholly-owned subsidiary (collectively, “Dolphin”) pursuant to a Share Sale Agreement ("Agreement") dated July 5, 2006 with William Westmore Purton, an individual, and Synwood Pty Ltd, an Australian corporation (and together with Mr. Purton, the "Sellers"). Pursuant to the Agreement, the Company paid to the Sellers the following consideration in exchange for all of the issued and outstanding capital shares of Dolphin: (a) a total of $1,350,000, of which $750,000 was paid as a non-refundable deposit in April 2006 upon the execution of the letter of intent between the parties; (b) 2,462,238 shares of the Company’s common stock, of which 1,000,000 shares were issued in April 2006 as part of the non-refundable deposit; and (c) the Company’s secured convertible promissory notes in the aggregate principal amount of $5,782,168. The notes are non-interest bearing and all principal under the notes are due and payable on January 7, 2007. The notes provide that immediately upon the Company’s receipt of any shareholder approval of its issuance of the common shares underlying the notes ("Conversion Shares") required by the rules of the American Stock Exchange, or a determination that shareholder approval of the Company’s issuance of the Conversion Shares is not required under the AMEX rules, all outstanding principal will automatically be converted into the Company’s common shares at the rate of $3.50 per share.

For a period of two years from the close of the transaction, if the Sellers sell any of the 1,462,238 common shares delivered at closing or the Conversion Shares (together, the "Consideration Shares") for a price of less than $3.50 per share, the Company is required to deliver to the Sellers cash equal to difference between the sale price and $3.50 per share; provided that with regard to any sales of the Consideration Shares otherwise than in a public sale through an ordinary brokers' transaction, the Company’s payment obligation will be limited to the difference between $3.50 per share and the greater of the sale price or 90% of the average closing price for the Company’s common shares during the ten trading days preceding the sale. The Sellers are obligated to use their reasonable best efforts to obtain the most favorable available sale price. Except for the first 900,000 Consideration Shares sold by the Sellers during the first 90 days following the close, the Company will have no obligation to make up the difference between the sale price of their shares and $3.50 per share in the event of any sale otherwise than in a public sale through an ordinary brokers' transaction at a sale price of less than 80% of the average closing price for our common shares during the ten trading days preceding the sale.

The Company is a party to certain claims, legal actions, and complaints, including a patent infringement action between the Company and one of its main competitors, Shuffle Master, and the sales tax dispute discussed in the following paragraph. The Company cannot predict or estimate the likely outcome of any such litigation or other disputes or whether any such matters would have a material adverse effect on its business as presently conducted or as anticipated, and accordingly, no provision has been made for any minimum estimated losses with regard to such matters. The Company is a defendant in a patent infringement action against it. The outcome of this matter cannot be estimated at this time and, accordingly, no provision has been made in the accompanying financial statements for any losses the Company might incur in its connection.

In February 2004, the State of Nevada initiated a sales/use tax audit of the Company’s, equipment lessors. As of this filing the State of Nevada has not made a determination if there has been a shortfall in the payment of the sales/use tax. The Company has sold and leased back shufflers and Deck Checkers over the last five years. The auditor for the State of Nevada is trying to determine at what level a sales/use tax needs to be collected. The Company now collects from our customers in Nevada and remits payments to the State of Nevada. If the State of Nevada determines that the sales of the products to the leasing companies is the level at which sales/use tax should have been collected, liability of the leasing companies would be passed to the Company. The amount of this potential liability could range from a refund of $144,000 to the payment of sales/use tax with interest and penalties of up to $500,000. Accordingly, no provision has been made for any possible losses in connection with this matter. A hearing with the State of Nevada Department of Taxation originally scheduled for the forth quarter 2006 has been postponed due to a change in the Department’s leadership. The Company intends to vigorously defend its position in this matter.

On May 2, 2006, the Company closed on an $18 million financing transaction with four investment funds. The $18 million financing consists of $13 million of 8% senior secured promissory notes and a $5 million equity put agreement that can be exercised from time to time at the Company’s option. The senior debt placement included detachable warrants to purchase 3.2 million shares at $2.50 per share, some of which are recallable based on early retirement of $6 million of the debt portion of the transaction. In September 2006, the amount of detachable warrants were reduced to 2.6 million shares at $2.00 per share, some of which are recallable based on early retirement of $6 million of the debt portion of the transaction. Interest at 8% is due semi-annually on July 1, and December 1, each year until repayment. The loan is secured by all the assets of the company. In addition, if the Company reduces the debt to under $7 million within one year of the transaction 800,000 of the 2.6 million warrants will be cancelled, within two years 600,000 of the 2.6 million warrants will be cancelled and within three years 200,000 of the 2.6 million warrants will be cancelled.

As referenced above, the transaction includes a $5 million equity put option for the Company’s common stock, at a discount of 20% to the market at the date of execution of the put. The purchase price for shares sold pursuant to the securities put agreement will be equal to 80% of the volume-weighted average price of the Company’s common stock on the day the Company delivers the requisite purchase notice to the investment funds (“Put Conversion Price”), but not in excess of $3.50 per share. In connection with the Company’s election to exercise its equity put rights in the aggregate amount of $3.5 million through the quarter ended September 30, 2006 the Company issued to the Bricoleur funds 1,852,781 common shares.

Pursuant to the Alliance Agreement, Elixir and the Company have agreed to enter into negotiations to establish a manufacturing alliance pursuant to which (i) Elixir will integrate its research and development operations in Macau with the Company's engineering operations in Zuhai, China, (ii) after a satisfactory testing period, the Company will manufacture all products required by Elixir at its China manufacturing facilities, and (iii) Elixir will make an equity investment in a special purpose entity to be formed by the Company to hold the Company's China manufacturing facilities. The manufacturing alliance is subject to the parties' negotiation and agreement on the definitive terms of the manufacturing alliance, and to any required third party approvals.

In connection with the transactions and the relationships contemplated by the Alliance Agreement, Elixir will, subject to the approval of its board of directors, license to the Company the right to use the trade name "Elixir." The Company's rights under the license from Elixir will include the right to change its corporate name to "Elixir Gaming Technologies Incorporated", subject to the approval of the Company's shareholders. The license will be royalty-free, nontransferable and non-exclusive. In addition, the Company and Elixir will negotiate terms under which the Company will acquire an equity interest in Elixir, subject to regulatory approval and shareholder approvals of all parties if required.

The Alliance Agreement imposes certain limitations on the business operations of the Company and Elixir through September 30, 2007, as follows: (i) if Elixir decides to sell a material portion of its business or assets, Elixir must give the Company a 30 day right of first refusal to purchase such business or assets; (ii) if Elixir decides to sell any capital stock, Elixir must give the Company a 30 day right of first refusal to purchase 20% of the stock being offered; (iii) the Company may not compete with Elixir in Asia, take any other action that could cause Elixir to breach certain preexisting agreements with another party, or enter into an alliance with any competitor of Elixir in Asia; (iv) the Company must give Elixir a 30 day right of first refusal if the Company is selling a material portion of its assets; (v) other than the transactions contemplated by the Alliance Agreement, the Company may not solicit any proposal for a change of control of the Company; and (vi) neither Elixir nor the Company will enter into an arrangement with a third party to acquire gaming technology without first giving the other an opportunity to participate. With respect to Elixir, the limitations against third party arrangements to acquire gaming technology apply only to transactions pursued directly by Elixir, and do not extend to arrangements that are pursued by Elixir's parent or sister companies or to acquisitions that relate to Elixir's preexisting relationship with another party. The Alliance Agreement may be terminated immediately upon notice by one party if the other undergoes a change of control or breaches any provision of the agreement.

The Amended and Restated Sales Representative Agreement (the "Sales Agreement") replaces in its entirety that certain Sales Representative Agreement, dated January 5, 2006, by and between the Company and Elixir. Pursuant to the Sales Agreement, the Company has appointed Elixir as its exclusive distributor throughout Asia, and to those casinos controlled by certain designated customers, regardless of where they are located, for the Company's chips, plaques, chip washers, and all new products developed or sold by the Company that do not directly compete with any product distributed by Elixir. The initial period of exclusivity is five (5) years, and may be extended for an additional fifteen (15) year period provided that Elixir achieves an aggregate sales target of US$20,000,000 during the initial five year period. If at any time Elixir fails to achieve a pro rata portion of the sale target during two consecutive 12-month periods, the Company may terminate Elixir's exclusivity under the Sales Agreement with respect to the Asian market upon sixty (60) days written notice. The Sales Agreement is subject to termination (i) by Elixir, without cause, upon thirty (30) days written notice to the Company; (ii) by either party upon written notice if the other party is in breach of any material term of the Sales Agreement and has not remedied the breach within thirty (30) days of receiving notice thereof; (iii) by either party upon written notice if the other party liquidates or becomes insolvent; (iv) by either party immediately if any gaming authority recommends termination of the Sales Agreement, or determines that one of the parties is not suitable to engage in gaming activities; or (v) by either party immediately if such party reasonably believes that the Sales Agreement may have a detrimental impact upon the ability of such party or any of its affiliates to be qualified for, or maintain, any licenses issued by a gaming authority.

Pursuant to the Securities Purchase Agreement, Elixir has agreed to purchase, subject to satisfaction of the closing conditions, for the aggregate price of $2.65 million, 1,000,000 shares of the Company's common stock and warrants to purchase 16,000,000 shares of the Company's common stock at exercise prices ranging from $2.65 to $5.50 per share for a period of thirty-three months beginning on March 31, 2007. The warrants are non-transferable, except to certain affiliates of Elixir. Following the closing of the transaction, Elixir will be entitled to appoint one person to the Company's Board of Directors, and will be able to appoint a replacement director if the Elixir seat on the Board becomes vacant at any time. Upon the exercise of any of the warrants, Elixir will be entitled to appoint to the Board a number of directors proportionate to its equity ownership in the Company, determined on a fully diluted basis.

Following the closing, if at any time Elixir believes in its sole discretion that it is or may be subject to a material regulatory examination, review, process or other requirement relating to its ownership of the Company's securities, and the examination, review, process or requirement may subject Elixir or its affiliates to licensing or gaming regulations in the United States, and Elixir believes in its sole discretion that it is or will be unable to cooperate or comply with such examination or requirements without an unreasonable amount of time, expense or effort, Elixir may transfer ownership of the affected securities to a voting trust. For this purpose, a probity or suitability review or process by federal or state gaming regulators in the United States will be considered a material regulatory requirement. If Elixir believes in its sole discretion, after taking into account the time, expense and effort, that transferring its securities to a voting trust would not be commercially advisable or would not resolve the issue, and the material regulatory requirement is continuing, the Company will use its best efforts to assist Elixir to sell its securities to a third party as expeditiously as possible for an aggregate amount of not less than the sum of $2,650,000 plus the exercise price of any warrants acquired by Elixir at closing and subsequently exercised. If such sale cannot be completed within ninety (90) days, the Company will use its best efforts to repurchase all of the securities issued to Elixir pursuant to the Securities Purchase Agreement for an aggregate amount equal to that described in the preceding sentence. Any repurchase by the Company will be subject to the good faith determination by the Company's Board of Directors that the repurchase is not inconsistent with the Board's fiduciary duties to the Company's shareholders.

The Securities Purchase Agreement includes customary representations, warranties, and covenants by Elixir and the Company, and an indemnity from the Company. The transactions contemplated by the Securities Purchase Agreement are conditioned upon completion by Elixir of a satisfactory due diligence investigation of the Company, approval of the Company's stockholders, and the Company filing an amendment to its articles of incorporation to increase its authorized capital. The amendment to the Company's articles of incorporation is also subject to shareholder approval.

Until January 25, 2007, the exercise period of the warrants may be extended at Elixir's request; however, the expiration date may not be extended beyond December 31, 2010, and except as described below the initial exercise date may not be accelerated. If, prior to the date that the warrants first become exercisable, the Company enters into a transaction with a party other than Elixir or its affiliates that will result in a change of control of the Company, then (i) upon consummation of the transaction, warrants to purchase 4,000,000 shares of the Company's common stock at $2.65 per share shall become immediately exercisable, and (ii) all remaining warrants will be cancelled. In addition, if Elixir, an affiliate of Elixir or the holder of any warrant breaches any material obligation under the Securities Purchase Agreement or the relevant warrant, and the breach is not remedied within ninety (90) days of receiving written notice of the breach from the Company, the Company may cancel all or any portion of the warrants that are unexercised at the end of the 90 day cure period.

The exercise price of the warrants and the number of shares issuable pursuant to the warrants are subject to adjustment for stock splits, dividends, rights offerings and other dilutive events. In addition, the number of shares of common stock for which the warrants may be exercised is subject to adjustment if the Company issues shares of its common stock, or securities convertible into or exchangeable for shares of its common stock at a price less than the volume-weighted average price ("VWAP") on the date of issuance. Such an adjustment will be made every time the Company issues common stock as a price below the VWAP; however, no adjustment will be made for shares issued in connection with the exercise of outstanding stock options and warrants, or the exercise of the Company's put rights pursuant to the Securities Put Agreement described in Note 6 above.

In connection with the closing of the transactions contemplated by the Securities Purchase Agreement described above, the Company will enter into a Registration Rights Agreement with Elixir. The Registration Rights Agreement requires the Company to file a selling shareholder registration statement with the SEC within thirty (30) days following the closing of the transactions described in the Securities Purchase Agreement, for purposes of registering the resale of the shares of the Company's common stock issued to Elixir pursuant to the transaction, including all shares that are issued, or may be issued, upon exercise of the warrants. Pursuant to the Registration Rights Agreement, the holders of the securities are also entitled to certain demand and piggyback registration rights.

You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained elsewhere in this report. The information contained in this quarterly report on Form 10-QSB is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our annual report on Form 10-KSB for the year ended December 31, 2005 and subsequent reports on Forms 10 QSB and Form 8-K, which discuss our business in greater detail.

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

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

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

Our strategy is to develop cost-effective niche products for the global gaming industry. We focus on products that increase the security, productivity and profitability of casino operations. Our strategy involves marketing certain of our products for sale (or rent), depending on the product, the geographic location of the customer and other factors. We rely on our internal sales staff and distributor relationships for the sale and rental of our products. Although we anticipate significant sales development and revenue growth, there is no assurance that we will generate sufficient revenue, cash flow or profit to sustain our operations.

On July 11, 2006, we acquired all of the capital shares of Dolphin. The acquisition was accounted for using the purchase method of accounting and our financial condition as of September 30, 2006 and results of operations from July 11, 2006 forward include the assets and operations of Dolphin. Dolphin is engaged in the business of producing high-precision plastic injection molded components and associated tooling, including casino chips and plaques, for the gaming, medical and automotive industries. As a result of the Dolphin acquisition, we have two segments for financial reporting purposes, our gaming operations and our non-gaming operation, which consists of the Dolphin operations in the medical and automotive sectors.

For the three months ended September 30, 2006, we generated gross revenues of $2,444,059 or 666% more than the three months ended September 30, 2005. The increase in revenue was due primarily to our acquisition of Dolphin on July 11, 2006. During the three months ended September 30, 2006 we generated $1,850,982 of non-gaming revenue and $55,348 of gaming revenue from our Dolphin operations. Without giving effect to our acquisition of Dolphin, gross revenues during the third quarter increased by $219,685 or 41%. Gross revenue was offset by sales returns and allowances of $90,712 or 354% more than the three months ended September 30, 2005. Net revenues were $2,353,347 or 687% more than the three months ended September 30, 2005. Specific product line results for the three months ended September 30, 2006 compared to the three months ended September 30, 2005 are provided below.

For the three months ended September 30, 2006, our cost of sales was $2,263,449, or 23% less than the three months ended September 30, 2005. In September 2005, we discontinued the Secure Drop and RES product lines resulting in an inventory write down of $2,584,290. A normalized analysis of the cost of sales results in an increase of $1,925,030. The introduction of the Dolphin non-gaming product line accounts for approximately $1,796,000 of this increase. The gross margin on revenue for the three months ended September 30, 2006 was $89,898. The gross margin as a percentage of revenue for the three months ended September 30, 2006 was 4%.

	Three months ended September 20, 2006			Three months ended September 20, 2005			Year to year change			Percentage change

Secure Drop
Revenue		-			8,641			(8,641	)		-100	%
Cost of Sales		-			230			(230	)		-100	%
Gross Margin		-			8,411			(8,411	)		-100	%
Gross Margin %		0	%		97	%

Shuffler Sales
Revenue		140,878			38,791			102,087			263	%
Cost of Sales		89,871			19,357			70,514			364	%
Gross Margin		51,006			19,434			31,572			162	%
Gross Margin%		36	%		50	%

Shuffler Rentals
Revenue		51,416			86,167			(34,751	)		-40	%
Cost of Sales		7,899			43,001			(35,102	)		-82	%
Gross Margin		43,517			43,166			351			1	%
Gross Margin%		85	%		50	%

Deck Checker
Revenue		183,208			84,420			98,788			117	%
Cost of Sales		60,604			(1,226	)		61,830			-5043	%
Gross Margin		122,603			85,646			36,957			43	%
Gross Margin%		67	%		101	%

Deck Checker Rentals
Revenue		24,185			73,495			(49,310	)		-67	%
Cost of Sales		3,998			9,229			(5,231	)		-57	%
Gross Margin		20,187			64,266			(44,079	)		-69	%
Gross Margin%		83	%		87	%

Casino Chips
Revenue		55,348			-			55,348			100	%
Cost of Sales		49,503			-			49,503			100	%
Gross Margin		5,845			-			5,845			100	%
Gross Margin%		11	%		0	%

Non-gaming Product Line
Revenue		1,850,043			-			1,850,043			100	%
Cost of Sales		1,796,089			-			1,796,089			100	%
Gross Margin		53,954			-			53,954			100	%
Gross Margin%		3	%		0	%

Other
Revenue		48,270			7,467			40,803			546	%
Cost of Sales		255,485			2,852,118			(2,596,633	)		-91	%
Gross Margin		(207,215	)		(2,844,651	)		2,637,437			128	%
Gross Margin%		-429	%		-38096	%

Total
Revenue		2,353,347			298,981			2,054,366			687	%
Cost of Sales		2,263,449			2,922,709			(659,260	)		-23	%
Gross Margin		89,898			(2,623,728	)		2,713,626			-103	%
Gross Margin%		4	%		-878	%

Shuffler Sales. The $102,087 increase in revenue was due to the sale of PokerOne™ shufflers to international customers and the sale of Random Plus™ shufflers through a sales promotion for converting existing Random Ejection Shuffler (RES) customers to the new product. As a result of the Random Plus marketing program the average selling price for shuffler units decreased 38% during the three months ended September 30, 2006 compared to the prior year period. The average material cost of sales for shufflers decreased 3% but was offset with increased installation and conversion expenses.

Deck Checker Sales. This price reduction the number of units sold increased by 113% in the quarter ended September 30, 2006 driven by the list price reduction we initiated in September 2005, the increased use of pre-shuffled cards by casinos in the US, and the opening of new casinos in Macau. The period over period decrease in gross margin percentage from 101% to 67% resulted from the increased unit sales at a lower average sales price and also the reduced material cost of 41%.

Other Revenue. Other income is comprised of miscellaneous consumable products and sales returns and allowances. The increase in other revenues was due to the increased sale of supplies and service agreements. We also increased sales returns and allowances by 354%. The change in smoking laws in the state of Washington is the largest contributor to the increase in sales returns due to the increased bankruptcy filings and card house closures. Cost of sales declined in the current period due to reduced costs of supplies and improved cost controls in the Service department. In September, 2005, there was a one time inventory adjustment of $2,584,290 for discontinued products. When normalized, the reduction to other cost of sales is $12,343 or 5%.

For the three months ended September 30, 2006, our general and administrative expenses were $3,062,180, or 33% more than the three months ended September 30, 2005. The increase in general and administrative expenses related primarily to the addition of Dolphin. These costs totaled $794,798. There was a 23% increase in travel and entertainment and an increase of $225,000 in stock option expensing. This is offset by decreases in legal costs and legal/regulatory issues pertaining to former senior management.

For the nine months ended September 30, 2006, we generated gross revenues of $5,183,952, or 130% more than the nine month period ended September 30, 2005. The increase in revenue was due primarily to our acquisition of Dolphin on July 11, 2006. During the nine months ended September 30, 2006 we generated $1,850,982 of non-gaming revenue and $1,252,618 of gaming revenue from Dolphin operations. Without giving effect to our acquisition of Dolphin, gross revenues during the nine months decreased by $174,580 or 8%. Gross revenues were offset by sales returns and allowances of $431,290. Net revenues were $4,752,663, or 144% more than the nine month period ended September 30, 2005 as a result of our RFID casino chip sales and other product lines at Dolphin. Specific product line results for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 are provided below.

The gross margin on revenue for the nine months ended September 30, 2006 was $554,184, or 4%, and 98% more compared to the gross margin on revenue for the period ended September 30, 2005. The increase in gross margin of $2,751,315 for the nine months ended September 30, 2006 compared to the prior year period relates primarily to the one-time inventory adjustment recorded in 2005. When gross margin is normalized, the nine months ended September 30, 2006 is $2,640,607 or 170% higher than the same period in 2005. The gross margin on product as a percentage of revenue for the nine months ended September 30, 2006 was 33% compared to 69% for the prior year period as a result of the changing product mix.

	Nine months ended September 20, 2006			Nine months ended September 20, 2005			Year to year change			Percentage change
Secure Drop
Revenue		-			81,235			(81,235	)		-100	%
Cost of Sales		-			7,973			(7,973	)		-100	%
Gross Margin		-			73,262			(73,262	)		-100	%
Gross Margin%		0	%		90	%

Shuffler Sales
Revenue		424,015			1,077,230			(653,215	)		-61	%
Cost of Sales		441,274			198,368			242,906			122	%
Gross Margin		(17,260	)		878,862			(896,122	)		-102	%
Gross Margin%		-4	%		82	%

Shuffler Rentals
Revenue		178,462			212,476			(34,014	)		-16	%
Cost of Sales		28,564			386,780			(358,216	)		-93	%
Gross Margin		149,897			(174,304	)		324,201			-186	%
Gross Margin%		84	%		-82	%

Deck Checker
Revenue		1,103,410			593,056			510,354			86	%
Cost of Sales		322,244			58,118			264,126			454	%
Gross Margin		781,165			534,938			246,227			46	%
Gross Margin%		71	%		90	%

Deck Checker Rentals
Revenue		88,388			203,965			(115,578	)		-57	%
Cost of Sales		13,869			27,687			(13,818	)		-50	%
Gross Margin		74,518			176,278			(101,760	)		-58	%
Gross Margin%		84	%		86	%

Casino Chips
Revenue		1,252,618			-			1,252,618			100	%
Cost of Sales		700,289			-			700,289			100	%
Gross Margin		552,329			-			552,329			100	%
Gross Margin%		44	%		0	%

Non-gaming Product Line
Revenue		1,850,043			-			1,850,043			100	%
Cost of Sales		1,796,089			-			1,796,089			100	%
Gross Margin		53,954			-			53,954			100	%
Gross Margin%		3	%		0	%

Other
Revenue		(144,272	)		(222,931	)		78,659			-35	%
Cost of Sales		896,149			3,463,236			(2,567,087	)		-74	%
Gross Margin		(1,040,420	)		(3,686,167	)		2,645,747			-72	%
Gross Margin%		721	%		1654	%

Total
Revenue		4,752,663			1,945,031			2,807,632			144	%
Cost of Sales		4,198,479			4,142,162			56,317			1	%
Gross Margin		554,184			(2,197,131	)		2,751,315			-125	%
Gross Margin%		12	%		-113	%

Other Revenue. Other income is comprised of miscellaneous consumable products and sales returns and allowances. The increase in other revenues is due to increased service revenue of 165% offset by higher service costs of 67%. The service costs relate directly to the roll out of RandomPlus and Poker One products. Sales returns and allowances increased $120,450 or 39%. The change in smoking laws in the state of Washington is the largest contributor to the increase in sales returns due to the increased bankruptcy filings and card house closures.

For the nine months ended September 30, 2006, we incurred interest expenses of $1,546,652 or 28% more than the nine months ended September 30, 2005. This increase relates to the addition of Dolphin’s line of credit and the payoff of the $5 million line of credit at 9% interest. A non-cash portion of the interest expense is attributable to the expensing of a discounted warrant conversion. The debt service on our 8% secured note will continue until May 2011, at which time the principal amount is due.

Our working capital has decreased from a working capital deficit of $(1,637,021) at December 31, 2005 to a working capital deficit of $(6,603,575) at September 30, 2006. Of that decrease, $5.8 million is attributable to the short term convertible note related to the Dolphin acquisition that will convert into shares of our common stock at a price of $3.50 subject to and concurrent with shareholder approval, which is expected to occur in the fourth quarter of 2006. Assuming the conversion of the Dolphin note, we had a working capital deficit of ($821,407) as of September 30, 2006.

To fund our continuing operating cash flow deficits, on May 2, 2006, we closed on an $18 million financing transaction with four investment funds managed by Bricoleur Capital Management, of San Diego, California (the “Bricoleur Funds”). The $18 million financing includes $13 million of 8% senior secured promissory notes. The senior debt placement includes detachable warrants to purchase 2.6 million shares at $2.00 per share, some of which are recallable based on early retirement of $6 million of the debt portion of the transaction.

In connection with this debt financing, we also entered into a definitive agreement with the purchasers of our notes whereby we may, at our sole option, require them to purchase up to $5 million of our common stock. This agreement has a term of five years and grants us a binding “put” right to sell our shares at a 20% discount to the volume weighted average price of our shares on the day of a drawdown, subject to a ceiling price of $3.50 per share. In connection with our election to exercise our equity put rights in the aggregate amount of $3.5 million during the quarters ended June 30, 2006 and September 30, 2006, we issued 1,852,781common shares to Bricoleur.

In connection with the Bricoleur financing, in May 2006 we conducted the concurrent pay off or conversion into common stock of all of our outstanding 10% senior secured convertible promissory notes. Prior to the Bricoleur financing, we had approximately $11.2 million principal amount of senior secured convertible promissory notes outstanding. Of this amount, the holders of these notes converted approximately $5.2 million in principal and interest into 3,166,661 shares of our common stock and we paid off the remaining $6.0 million outstanding balance with a portion of the proceeds from the Bricoleur financing described above.

As described in Note 9 of our interim financial statements, in October 2006 we entered into a Securities Purchase Agreement with Elixir Group Limited, a Hong Kong company ("Elixir”) pursuant to which Elixir has agreed to purchase, subject to satisfaction of the closing conditions, for the aggregate price of $2.65 million, 1,000,000 shares of our common stock and warrants to purchase 16,000,000 common shares at exercise prices ranging from $2.65 to $5.50 per share for a period of thirty-three months beginning on March 31, 2007. The Elixir securities purchase is subject to the approval of our shareholders, and the matter is expected to be put to the vote of our shareholders in the fourth quarter of 2006.

Assuming the conversion of the $5.8 million Dolphin note to shares of our common stock, as of September 30, 2006, we had working capital of ($821,407), with the ability to draw an additional $1.5 million of funds under the Bricoleur securities put option agreement and, subject to shareholder approval, obtain an additional $2.65 million from the placement of securities with Elixir. We believe that the Bricoleur financing, and the Elixir transaction, in addition to our existing cash and cash equivalents together with expected cash generated by operations, will meet our working capital needs, capital expenditures, and commitments through the end of this year. However, in the event that we are unable to sell the non-gaming assets of Dolphin we believe that we will require up to $5 million of additional capital in order to fund our current commitments and plan of operations over the next 12 months. We will endeavor to raise additional required funds through various financing sources, including the sale of our equity and debt securities and the procurement of commercial debt financing. However, we have no agreements or understandings with any third parties at this time for our receipt of additional working capital. Further, as result of our present level of debt and certain restrictions on our ability to incur additional indebtedness under our existing loan agreements, it is unlikely we will be able to obtain additional debt-based capital, unless a significant portion of the proceeds are used to retire existing debt. Consequently, there can be no assurance we will be able to obtain continued access to capital as and when needed or, if so, that the terms of any available financing will be subject to commercially reasonable terms. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected.

The following is a summary of what management believes are the critical accounting policies related to operations. The application of these policies, in some cases, requires management to make subjective judgments and estimates regarding the effect of matters that are inherently uncertain. See Note 1, "Description of Business and Significant Accounting Policies," to financial statements included in our annual report on Form 10KSB for a more detailed discussion of our accounting policies. Except as described below, we do not employ any critical accounting policies selected from among available alternatives or that require the exercise of significant management judgment.

The extended warranty and maintenance components that are part of long term sales contracts are unbundled and recognized as deferred revenue amortized over the remaining life of the sales agreement after the initial 90-day warranty as required by the Emerging Issues Task Force Issue No. 00−21, Revenue Arrangements with Multiple Deliverables. We provide currently for estimated warranty repair costs associated with sales contracts. Although there are no extended warranties offered for our products, we do provide for maintenance contracts that are billed and recognized on a monthly basis.

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Financial Standards (“SFAS”) 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125. SFAS 155 will be effective for all financial instruments issued or acquired after the beginning of an entity's first fiscal year that begins after September 15, 2006. Management has not yet evaluated or determined the likely effect of SFAS 155 on its future financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that the adoption of FIN 48 will have a significant impact on the Company's financial position and results of operations.

We may require additional funding in the future to continue to operate our business. We had working capital deficit of $(6,603,575) as of September 30, 2006. Assuming the conversion of the $5.8 million Dolphin note to shares of our common stock, as of September 30, 2006 we had working capital deficit of ($821,407), with the ability to draw an additional $1.5 million of funds under the Bricoleur securities put option agreement and, subject to shareholder approval, raise an additional $2.65 million from the placement of securities with Elixir. We believe that the Bricoleur financing and the Elixir transaction, in addition to our existing cash and cash equivalents together with expected cash generated by operations, will meet our working capital needs, capital expenditures, and commitments through the end of this year. However, we believe that in the event that we are unable to sell the non-gaming assets of Dolphin we will require up to $5 million of additional capital in order to fund our current commitments and plan of operations over the next 12 months. We will endeavor to raise additional required funds through various financing sources, including the sale of our equity and debt securities and the procurement of commercial debt financing. However, we have no agreements or understandings with any third parties at this time for our receipt of additional working capital. Further,, as result of our present level of debt and certain restrictions on our ability to incur additional indebtedness under our existing loan agreements, it is unlikely we will be able to obtain additional debt-based capital, unless a significant portion of the proceeds are used to retire existing debt. There can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Any debt financing will increase expenses and must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the following results may occur:

We have a history of significant operating losses and anticipate continued operating losses for at least the near term. For the nine months ended September 30, 2006 and the years ended December 31, 2005 and 2004, we have incurred net losses of $9,290,472, $17,567,230 and $9,538,200, respectively, and our operations have used $7,149,732, $14,816,322 and $10,660,133 of cash, respectively. As of September 30, 2006, December 31, 2005 and December 31, 2004, we had accumulated deficits of $80,978,249, $71,687,777 and $54,120,547, respectively. Based on our presently known commitments and plans, we believe that we have sufficient funding through the end of 2006. If we are unable to generate additional funds from operational cash flow, we will be required to locate additional sources of capital from private or public placements of debt or equity, or from institutional or other lending sources. If our revenues do not increase very substantially, or if our spending levels exceed our expectations, we will not become profitable. Revenues may not grow in the future, and we may not generate sufficient revenues for profitability. If we become profitable, we may not be able to sustain profitable operations.

We recently conducted a strategic business acquisition, and the failure to successfully integrate the recent acquisition into our operations could adversely affect our business. In July 2006, we completed the acquisition of Dolphin Advanced Technologies Pty Ltd., an Australian based developer and manufacturer of products for the gaming, automotive, medical and mining industries. We also may make additional acquisitions or enter into joint ventures in the future. While we believe we will effectively integrate such businesses, joint ventures, or strategic alliances with our own, we may be unable to successfully do so and may be unable to realize expected cost savings and/or sales growth. Regarding the Dolphin acquisition, the acquired business includes operations other than development, manufacture and sale of gaming devices, which has been our historical focus. There can be no assurance we will be able to properly supervise and manage the non-gaming businesses or effectively integrate the acquired businesses’ marketing, technology, production, development, distribution and management systems with ours. Acquisitions generally involve significant other risks and uncertainties, including distraction of management’s attention away from normal business operations, expenses associated with the transaction, and unidentified issues not discovered in our due diligence process, such as product quality and technology issues and legal contingencies. Our operating results could be adversely affected by any problems arising during or from the Dolphin acquisition or from modifications or termination of joint ventures and strategic alliances or the inability to effectively integrate any future acquisitions.

We are continuing to develop customer acceptance of our products and until such time as our products are widely accepted in the marketplace we do not expect to achieve a profitable level of operations. We may be unable to generate sufficient demand for our products. If we fail to generate sufficient demand for our products, we may be unable to sustain operations or generate a return to investors. Until January 2000, we were in the development stage and derived minimal revenues from our products. Currently we are an operating company that continues to develop new products. Since January 2000, our activities have been limited to analyzing and consulting with persons in the gaming industry, developing and manufacturing new products, establishing distribution networks for our products, marketing our products to the gaming industry, and commencing product sales. During such time, we have derived only limited revenues, which have been insufficient to sustain our operations. We may not generate sufficient revenue to sustain our operations. No independent organization has conducted market research providing management with independent assurance from which to estimate potential demand for our products. The overall market may not be receptive to our products, and we may not successfully compete in the target market for our products.

Our Rental shufflers are more susceptible to replacement by customers. All of our leased shufflers are placed with customers under short-term lease arrangements, which, unlike long-term leases or permanent sales of our products, can easily be terminated by a customer. The manner in which such short-term leases are structured puts our shufflers at greater risk of replacement due to pressure from competitors, changes in economic conditions, obsolescence and declining popularity. Casino operators may terminate the use of our products, and we may not be able to maintain and expand the number of installed shufflers through enhancement of existing shufflers, introduction of new shufflers, customer service or otherwise.

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

Adverse results in current litigation could result in substantial monetary damages and impacts on the manufacture and sale of certain of our shuffler products. Shuffle Master, our principal competitor in the shuffler market, has one lawsuit against us for patent infringement. We believe our position to be meritorious based on the Markman hearing ruling as well as a subsequent ruling by the Federal Circuit Court in December 2005, and we have reasonable defenses to Shuffle Master’s claims. However, we cannot determine whether we will ultimately prevail in the lawsuit, nor whether damages, if awarded, would significantly impact our ability to continue to manufacture and sell particular products within the United States and its territories. If we do not prevail, we will be unable to sell the PokerOne shuffler products in the United States unless we change certain components used in the shuffler or obtain appropriate licenses from Shuffle Master to use the playing card shuffler apparatus.

It is possible that our future products will be the subject of future patent litigation if the products are sold and installed in the United States and, if commenced, could subject us to continuing litigation costs and risks. Other than the allegations made by Shuffle Master discussed above, we are not aware of any claims or basis for our current products infringing on the proprietary rights of third parties. To the extent that we introduce new products that incorporate the same or similar technology, it is likely that Shuffle Master will bring one or more claims against us seeking damages, injunctive or other equitable relief, or both. We cannot predict the outcome of any present or future litigation that may occur.

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

We rely on distributors in international markets, and our limited sales experience in foreign countries could cause us to lose sales. Substantially all sales of our products outside the U.S. are achieved through distributor relationships. This accounts for 79% of revenue for the nine months ending September 30, 2006 compared to 20% in 2005. We believe the distributors that we have engaged are experienced and reputable; however, if we are unable to manage these relationships, our ability to generate revenue and profits in the non-U.S. market may be adversely affected. To the extent that we engage in direct sales outside the U.S., we have limited sales experience and history in foreign markets.

Our management holds a controlling interest in our common stock, giving our management significant power to control matters submitted to our stockholders. As of September 30, 2006, our executive officers and members of our board beneficially own approximately 13,101,151 shares of common stock, or approximately 45% of the outstanding shares of our common stock. Accordingly, these stockholders have significant power to control matters requiring approval by our stockholders, including the election of directors and approval of mergers and other significant corporate transactions. This concentration of ownership may make it more difficult for non management stockholders to effect substantial changes in our company, and also has the effect of delaying, preventing or expediting, as the case may be, a change in control of our company.

(a) Evaluation of Disclosure Controls. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2006. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2006.

(b) Changes in Internal Controls. Since joining VendingData in the fourth quarter of 2005, our current financial management team has and is continuing to implement improvements to our internal controls and procedures to address weaknesses and deficiencies identified by current senior management. Specifically, we have modified, or are in the process improving, our procedures for reconciling intercompany accounts, posting accounts receivable in our accounting system, communicating between sales and accounting personnel, reviewing journal entries, authorizing purchase orders and integrating our financial reporting databases. On March 27, 2006, our independent registered public accounting firm notified our Audit Committee that, during the course of performing its audit of our 2005 financial statements, it had identified one material weakness concerning the proper dating of payments received, which affects the aging of accounts receivable, and a significant deficiency regarding our internal controls over our financial reporting concerning the reconciliation of the separate databases used by us in our financial reporting and inventory tracking. The material weakness and significant deficiency related to processes in place when our current financial management joined our company in the fourth quarter of 2005. We have already addressed and resolved the material weakness concerning the proper dating of payments received .We are in the process of addressing and resolving the significant deficiency concerning the reconciliation of the separate databases and expect that it will be corrected with the implementation of a new corporate-wide accounting system. The Company has decided to change its accounting software and will start implementing Oracle’s E-Business Suite in the third quarter. The accounting system is web-hosted by Oracle and we believe it will improve our ability to consolidate financial results for our China and Australia subsidiaries - it will also provide enhanced auditing capabilities for the Company and its auditors.

While we are in the process of taking the foregoing steps and developing and implementing a formal set of internal controls and procedures for financial reporting as required by the Sarbanes-Oxley Act of 2002, the efficacy of the steps we have taken to date and steps we are in the process of completing is subject to continued management review supported by confirmation and testing by management and by our external auditors. We estimate the completion of this project may be in excess of $1 million over the next 15 months. As a result, we anticipate that additional changes will be made to our internal controls and procedures. Other than the foregoing initiatives, no change in our internal control over financial reporting occurred during the three months ended September 30, 2006 that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

10.1		Alliance Agreement dated October 11, 2006 between the Compnay and Elixir Group Limited

10.2		Amended and Restated Sales Representative Agreement dated October 11, 2006 between the Compnay and Elixir Group Limited

10.3		Securities Purchase Agreement dated October 11, 2006 between the Compnay and Elixir Group Limited

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

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

32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

Nevada			91-1696010
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

	Stock Options		Weighted Average Exercise Price
Balance, December 31, 2005		3,953,472	$	1.99
Options granted		1,605,000		2.19
Options exercised		360,000		2.19
Options cancelled		348,940		4.00

Balance, September 30, 2006		4,849,532		2.00

Options exercisable (vested) at September 30, 2006		974,938	$	2.24


	VENDINGDATA CORPORATION (Registrant)

Date: November 14, 2006	By:	/s/ Mark R. Newburg
		Mark R. Newburg
	Its:	President, Chief Executive Officer and Treasurer (Principal Executive Officer)


Date: November 14, 2006	By:	/s/ Arnaldo F. Galassi
		Arnaldo F. Galassi
	Its:	Chief Financial Officer and Secretary (Principal Financial Officer)

VendingData Corporation
(Exact name of small business issuer as specified in its charter)