**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-KSB/A**

** **

| **x**      | ** **                                      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                             |
|------------|-------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                      | ** **                                                                                                                                                                                                                            |
| ** ** | **For the fiscal year ended December 31, 2006** |
| ** ** | ** **                                      |
| **o**      | ** **                                      | **TRANSITION REPORT UNDER SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                               |
| ** ** | ** **                                      | ** **                                                                                                                                                                                                                            |
| ** ** | ** **                                      | **For the transition period  from                to                ** |

 

**Commission file number**

**000-25855**

** **

**ElixirGaming Technologies, Inc.**

(Name of small business issuer in its charter)

 

| **Nevada**                                                      | ** ** | **91-1696010**                                                              |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------------|
| (State or other jurisdiction of incorporation or organization)  |       | (I.R.S. Employer Identification No.)                                        |
|                                                            |       |                                                                        |
| **1120 Town Center Dr, Ste 260**                                |
| **Las Vegas, Nevada 89144**                                     |
| (Address of principal executive offices, including zip code)    |
|                                                            |
| Issuer’s telephone number: **(702) 733-7195**              |
|                                                            |
| Securities registered under Section 12(b) of the Exchange Act:  |
|                                                            |       |                                                                        |
| **Title of each class**                          | ** ** | **Name of each exchange on which registered** |
| **Common Stock, $.001 par value**                               | ** ** | **American Stock Exchange**                                                 |
| ** **                                                      |
| Securities registered under Section 12(g) of the  Exchange Act: |
|                                                            |
| **Common Stock, $.001 par value**                               |
| (Title of each class)                                           |

 

Check whether the issuer is not required to file reports pursuant toSection 13 or 15(d) of the Exchange Act. o

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x  No o

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B contained in this form, and no disclosure will becontained, to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. x

 

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

 

State issuer’s revenues for its most recent fiscal year: $7,867,657

 

State the aggregate market value of voting stock held by non-affiliatescomputed by reference to the average bid and asked price of such common equity,as of a specified date within the past 60 days. $47,586,208 ($2.89 per share asof March 22, 2007).

 

State the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date. 32,511,007shares as of March 22, 2007.

 

Transitional Small Business Disclosure Format (checkone):  Yes oNo x

 

 

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**TABLE OF CONTENTS**

 
| ** **   | ** **                                                                                                       | **Page** |
|--------------|------------------------------------------------------------------------------------------------------------------|----------|
| **PART I**   |                                                                                                             | 4        |
| ** **   |                                                                                                             |     |
| Item 1.      | Description of Business                                                                                          | 4        |
| Item 1A.     | Risk Factors                                                                                                     | 16       |
| Item 2.      | Description of Property                                                                                          | 18       |
| Item 3.      | Legal Proceedings                                                                                                | 19       |
| Item 4.      | Submission of Matters to a Vote of Security  Holders                                                             | 19       |
|         |                                                                                                             |     |
| **PART II**  |                                                                                                             | 20       |
| ** **   |                                                                                                             |     |
| Item 5.      | Market for Common Equity and Related  Stockholder Matters                                                        | 20       |
| Item 6.      | Management’s Discussion and Analysis or  Plan of Operation                                                  | 21       |
| Item 7.      | Financial Statements                                                                                             | 27       |
| Item 8.      | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                            | 44       |
| Item 8A.     | Controls and Procedures                                                                                          | 44       |
| Item 8B.     | Other Information                                                                                                | 45       |
|         |                                                                                                             |     |
| **PART III** |                                                                                                             | 46       |
| ** **   |                                                                                                             |     |
| Item 9.      | Directors, Executive Officers, Promoters  and Control Persons; Compliance with Section 16(a) of the Exchange Act | 46       |
| Item 10.     | Executive Compensation                                                                                           | 48       |
| Item 11.     | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                  | 51       |
| Item 12.     | Certain Relationships and Related  Transactions                                                                  | 53       |
| Item 13.     | Exhibits                                                                                                         | 55       |
| Item 14.     | Principal Accountant Fees and Services                                                                           | 56       |

 

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**EXPLANATORY NOTE—RESTATEMENT OF FINANCIALINFORMATION**

 

This Amendment No. 1 on Form 10-KSB/A (“Amendment No. 1”)is being filed to effect a restatement of the previously issued consolidatedfinancial statements of Elixir Gaming Technologies, Inc. (formerly known asVendingData Corporation) (either the “Company,” “we” or “our”), as of and forthe year ended December 31, 2006. The Company is restating its previouslyissued fiscal 2006 consolidated financial statements to correct an error thatresulted from the inadvertent failure to record warrants issued with debtduring the second quarter of 2006. In addition, goodwill originating with anacquisition effected in the third quarter of 2006 has been reallocated to certainidentifiable intangible assets and the associated amortization has beenrecognized for the third and fourth quarters, and a deferred tax liability wasrecorded for the differences between the assigned values and the tax basis ofrecognized assets in a business combination, and the contingent liability wascorrected. Management does not intend to amend its Quarterly Reports on Forms10-QSB for the second and third quarters of 2006 but rather intends to restatethe affected interim financial statements to be presented for comparativepurposes in an amended second quarter 2007 report and its initial filing of thethird quarter report for 2007. However, summarized 2006 quarterly financialinformation, as restated, is included in a note to our restated annual 2006financial statements contained in this Amendment No. 1.

 

The restated fiscal 2006 consolidated financial statements included inthis Amendment No. 1 also give effect to certain adjustments in fiscal 2006that result from the restatement of the Company’s consolidated financialstatements as of and for the year ended December 31, 2005 included in theCompany’s Amendment No. 1 on Form 10-KSB/A for the fiscal year ended December31, 2005 filed with the SEC on October 5, 2007. The Company also included in thisAmendment No. 1 summarized restated quarterly financial data for 2006. Forfurther discussion regarding the restatements to the fiscal 2006 consolidatedfinancial statements see note 3 to the consolidated financial statements,included in Item 7 of this Amendment No. 1. 

 

# **This Amendment No.1 amends and restates Item 6 ofPart I and Items 7and 8A of Part II of the Original Form 10-KSB toreflect the effects of the restatements. In addition, in accordance withRule 12b-15 promulgated under the Securities and Exchange Act of 1934, asamended, this Amendment also includes updated certifications from our ChiefExecutive Officer and Chief Financial Officer as Exhibits 31.1, 31.2 and 32.1and 32.2. The remaining Items contained within this Amendment No. 1 consistof all other Items originally contained in our Annual Report on Form 10-KSB forthe year ended December 31, 2006 in the form filed on April 13, 2007 (“OriginalForm 10-KSB/A”). This Amendment No. 1 does not reflect events occurring afterthe filing of the Original Form 10-KSB or modify or update thosedisclosures in any way other than as required to reflect the effects of therestatements.**

 

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# **PART I**

# ** **

## **ITEM 1. DESCRIPTIONOF BUSINESS**

## ** **

**GENERAL**

 

Wedevelop, manufacture and distribute products and services to the gamingindustry that automate the current manual processes supporting the casino tablegames business. Our gaming product line is intended to improve security,productivity and profitability of casino operations. Our principal gamingproducts include:

 

•                  The Deck Checker, a cardsecurity device that scans decks of playing cards to ensure an accurate countand verify that all of the cards are present.

 

•                  The Random Plus Shuffler,the next generation of shuffling device that is an updated version of ourpreviously offered Random Ejection Shuffler. The Random Plus Shuffler iscapable of shuffling up to eight decks of cards at once.

 

•                  The ShufflePro shuffler, ahigh-speed card-shuffler designed for use with two deck specialty variationgames such as poker and baccarat.

 

•                  Casino Chips:

 

•                  The high frequency RFIDcasino chip, a traditional casino chip imbedded with a RFID tag that allowscasinos to identify counterfeit casino chips and assists casinos in trackingtable play.

 

•                  Traditional casino chipssold to casinos for table games.

 

•                  The ChipWasher, a product that washes andsanitizes gaming chips. The ergonomically designed product is intended toprovide casinos with ease of operation inside the cage, while beingcost-effective, high-speed, environmentally friendly and hygienic.

 

Additionally,with the acquisition of Dolphin Advanced Technologies Pty Ltd (DolphinTM)in July 2006, we also have non-gaming product lines of high quality andinnovative products for a number of market sectors, including automotive andmedical.

 

# **Automotive**

# ** **

•                  Automotive componentsmanufactured by Dolphin for both internal and external applications as well assafety products. The internal/external classification is split to differentiatepurchasing departments and the required testing specifications are differentfor external parts being exposed to harsh atmospheric conditions when comparedto the internal parts. An example of internal part is the inner remote doorhandle and an external part is the wheel nut caps.

 

•                  Dolphin supplies majorautomotive companies such as General Motors’ Holden and Toyota.

 

•                  Dolphin also suppliesparts to automotive component manufacturers such as, Johnson Controls, AutolivAustralia Pty Ltd, Bridgestone Australia Ltd, and Futuris Automotive.

 

•                  Automotive components consist of inner remote door handles, fuel filler hinge assembly, modulebrackets, steering wheel spoke covers,  speaker grills, fasteners, safety products, and cosmetic components.

 

# **Medical**

# ** **

•                  Dolphin Medical is a world-class manufacturerof medical devices and is geared to meeting the exacting standards of theglobal healthcare industry.

 

•                  Medical devices are manufactured, assembledand packaged in a TGA certified US Class 10,000 clean room (Australiaclass – Grade C).

 

•                  Dolphin Medical supplies parts to a number ofgovernment and commercial research and development organizations. Dolphin’scustomers include Vivus and Acrux.

 

•                  Medicaldevices include: MDTSApplicators (Estradiol and Testosterone products), UDTS applicators, proteinseparation cartridges, allergy test kits, haemostatic dressing containers andradio frequency identification devices.

 

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Wehave an active research and development program for our current products aswell as a focus on product line expansion.

 

We are headquartered in LasVegas, Nevada with research and manufacturing facilities in Guangdong Province,China and Melbourne, Australia. We maintain our principal offices at 1120 TownCenter Dr, Suite 260, Las Vegas, Nevada, 89144. Our telephone number andfacsimile number are (702) 733-7195 and (702) 733-7197, respectively,and our website is www.elixirgaming.com. Information contained in, oraccessible through, our website does not constitute part of this report.

 

We own or have rights tocertain trademarks that we use in connection with the sale of our products,including, but not limited to, the following: *VendingData*TM,*Deck Checker*TM, *RandomEjection*TM, *Random Plus*TM, *PokerOne*TM, *ChipWasher*TM, *ShufflePro*TM, *DeckSetter*® and *Dolphin*TM. This report also makes reference to trademarks andtrade names of other companies.

 

**RECENTDEVELOPMENTS**

 

Duringfiscal 2006 through the date of this report, we engaged in the followingtransactions:

 

***Bricoleur Financing***. In May 2006, we closed on an $18 millionfinancing transaction with four investment funds managed by Bricoleur CapitalManagement. As more fully disclosed in our current report on Form 8-K datedApril 5, 2006 and elsewhere in this report, the $18 million financing consistedof $13 million of 8% senior secured promissory notes and a $5 million equityput agreement that can be exercised from time to time at our option. Concurrentwith closing of the Bricoleur financing, the holders of our previouslyoutstanding 10% Senior Notes converted approximately $5.2 million of theprincipal under those notes to our common shares. We used the proceeds of thefinancing to retire the balance of the 10% Senior notes and the $5 million 9%line of credit acquired by us in October 2005. We issued to the Bricoleur fundswarrants to purchase 2.6 million shares at $2.00 per share, some of which arerecallable based on early retirement of $6 million of the debt portion of thetransaction. During fiscal 2006, we exercised the put agreement and sold2,646,541 common shares to the Bricoleur funds for a total of $5 million, at anaverage price per share of $1.89.

 

***Dolphin Acquisition***. In July 2006, we acquired Dolphin AdvancedTechnologies Pty Ltd and its wholly-owned subsidiary (collectively, “Dolphin”)pursuant to a share sale agreement dated July 5, 2006 with William WestmorePurton, an individual, and Synwood Pty Ltd, an Australian corporation (andtogether with Mr. Purton, the “sellers”). As more fully disclosed in ourcurrent report on Form 8-K dated July 12, 2006 and elsewhere in this report, wepaid to the sellers the following consideration in exchange for all of theissued and outstanding capital shares of Dolphin: (a) a total of $1,350,000, ofwhich $750,000 was paid as a non-refundable deposit in April 2006 upon theexecution of the letter of intent between the parties; (b) 2,462,238 shares ofour common stock, of which 1,000,000 shares were issued in April 2006 as partof the non-refundable deposit; and (c) our secured convertible promissory notesin the aggregate principal amount of $5,782,168, which were subsequentlyconverted into 1,652,048 of our common shares in December 2006.

 

***Elixir Strategic Alliance***. In October 2006, we entered into anAlliance Agreement, an Amended and Restated Sales Representative Agreement, anda Securities Purchase Agreement with Elixir Group Limited (“Elixir”), a HongKong company wholly-owned by Melco International Development Limited (Melco).As more fully disclosed in our current report on Form 8-K dated October 17,2006, and elsewhere in this report, we have agreed to enter into negotiationswith Elixir to establish a manufacturing alliance pursuant to which(i) Elixir will integrate its research and development operations in Macauwith our engineering operations in Zhuhai, China, (ii) after asatisfactory testing period, we will manufacture all products required byElixir at our China manufacturing facilities, and (iii) Elixir will makean equity investment in a special purpose entity we will form to hold our Chinamanufacturing facilities. Pursuant to the Sales Agreement, we haveappointed Elixir as our exclusive distributor throughout Asia, and to thosecasinos controlled by certain designated customers, regardless of where theyare located, for our chips, plaques, chip washers, shufflers, DeckCheckers, andall new products developed or sold by us that do not directly compete with anyproduct distributed by Elixir. Pursuant to the securities purchase agreement,in January 2007 Elixir purchased, for the aggregate price of$2.65 million, 1,000,000 shares of our common stock and warrants topurchase 16,000,000 shares of our common stock at exercise prices rangingfrom $2.65 to $5.50 per share for a period of 36 months beginning onDecember 31, 2007.

 

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***Corporate Restructuring***. In February 2007, we announced a companywide restructuring, which when fully implemented, is expected to reduce costsand expenses by a combined $3.5 million annually. The reorganization changesinclude:

 

•                          transferring of all research and developmentefforts to our newly created R&D Center located in Zhuhai, China. Therelocation of the engineering division to the Zhuahi office is a strategic stepin continuing the forward movement and integration of our engineering divisionin Zhuhai with Elixir’s newly established gaming research and developmentcenter in Macau, as contemplated by our October 2006 Alliance Agreement withElixir.

 

•                          contracting out US sales and service to athird party that has in place extensive sales and technical service teamsthroughout the US in order to support the anticipated growth of the company’sdomestic business from new product line introductions. Discussions are ongoingand are expected to be concluded by the end of the second quarter.

 

•                          effective February 4, 2007, we relocated ourUS Corporate offices to 1120 Town Center Drive, Suite 260, Las Vegas, Nevada,89144, pursuant to lease arrangements that will reduce our overall leaseexpense in the US by approximately $30,000 per month.

 

•                          the recently completed sale of intellectualproperty related to the discontinued SecureDrop product line for $500,000. Thissale was another step of the plan to redeploy our resources to new product lineintroductions as well as capitalize on the opportunities in Macau and othergrowing markets.

 

***Further Expansion of Elixir Alliance***. On February 9, 2007, we expanded thedistribution element of our alliance with Elixir to allow for Elixir’s exclusivedistribution in Asia of our entire product offering and to include Australiaand New Zealand in the exclusive territory.

 

***GLG Financing***  OnMarch 28, 2007, we completed the sale of 1.625 million shares of common stockat $2.65 per share to GLG NorthAmerican Opportunity Fund (GLG) for approximately $4.3 million. The stockpurchase included warrants to purchase an additional 1.625 million shares at$2.65 per share.

 

**BUSINESS STRATEGY**

** **

Our strategy is to increase revenue and margins basedon three key factors:

 

•                  ***Development of product lines with limited competition.***We intend to focus on the development oracquisition of new products, such as the high frequency RFID casino chip andthe ChipWasher, which have the potential to provide us with product lines withlimited or no competition.

 

•                  ***Expansion intoadditional domestic and international gaming markets for our products.***The worldwide expansion of gaming shouldprovide new markets for our products, and we intend to target salesopportunities in these new markets in addition to our traditional establishedgaming markets. To help address these markets we continue to look at variousdistribution channels both in the US and internationally.

 

•                  ***Implementation ofcost reduction initiatives to increase gross margins.***We intend to pursue the implementation of cost reduction initiatives with the goalincreasing the gross margins on our products over time. We continuously striveto reduce the cost of production andour component parts through the use of production facilities in China.

 

**TABLE GAME SUPPORT PRODUCTS**

** **

**Shuffler ProductLine**

** **

We believe that the motivating factors for casinooperators to adopt automatic shufflers on gaming tables include the desire toincrease dealer productivity, reduce exposure to fraud and cheating by dealers,players or both and reduce reliance on experienced dealers. The ability to turnmore hands, or decisions, per hour and reduce the advantage knowledgeableplayers have with respect to poor manual shuffles will more likely generate higher“holds,” the percentage of wagers that the casino earns, from automatedshufflers than from manual shuffles.

 

In 2005, we introduced our next generation shuffler,the RandomPlus Shuffler. This shuffler effectively replaced our previousgeneration shufflers, the Random Ejection Shuffler, and the Continuous RandomEjection Shuffler. In November 2006, we introduced our next generationspecialty shuffler, the ShufflePro, which will be available for sale in early2007.

 

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***RandomPlusShuffler.***The RandomPlusutilizes state of the art electronics for improved reliability and longevity.It has been designed with reliability in mind. The RandomPlus has fewer movingparts than its predecessor and is designed with additional user accessibleadjustments to accommodate a wider variety of card types and conditions. Itincludes additional features, such as the ability to switch from alternatingcurrent (AC), to direct current (DC), conversion to an external power supply,redesign of the cabinet, and the addition of an external lever to adjust theshuffler for card thickness.

*** ***

***PokerOneShuffler***. The PokerOneshuffler is a specialty game shuffler providing shuffles of pre-dealt hands ofcards for specialty poker games. Specialty game shufflers are only used insingle deck poker variation games such as Caribbean StudTM, Let It RideTM, PaiGow Poker and Three Card Poker. The PokerOne shuffler is designed to re-stackthe deck and deliver the required number of cards (3, 5 or 7 cards) intopackets using a batch system method. We have designed the PokerOne shuffler to:

*** ***

•            shuffle and prepare thecards into the individual packets required for the specialty poker game;

 

•            provide sufficient speed tomaintain the pace of the game even if just a single player is playing;

 

•            verify the overall quantityof the cards shuffled and the number of cards in each packet; and

 

•            verify the actual cardsdealt to each player.

 

***ShufflePro***   Tocomplement our current shufflers, in February 2007, we received approval fromGaming Laboratory International, a worldwide leader in independent game machinetesting and certification, for ShufflePro, the Company’s newest specialtyshuffler. This single or double deck specialty shuffler will be launchedinitially in the United States and Europe and marketed through our network ofgaming products distributors. ShufflePro is being manufactured in VendingData’slow cost, state-of-the-art facilities in China. ShufflePro is a high-speed cardshuffler designed to handle up to two decks of cards, capable of shuffling thesmaller “bridge” cards as well as the larger cards typically used forBlackjack. The shuffler can be configured in an embedded table-top version oras a free standing unit. Among its many features, the new ShufflePro shufflesusing a patented random selection process:

 

•          Verifies card count on each shuffle

 

•          Has indicator lights signaling extra or missing cards

 

•          Produces shuffles that are unpredictable, and non-trackable

 

The ShufflePro increasesspeed and accuracy, and improves dealer productivity. It utilizes enhancedsecurity and integrity technology, and is user-friendly, with easy-to-readmessage displays. We intend to offer customers both purchase and rental plansthrough our distributor network, as well as service contracts and customertraining programs.

 

***ShufflerMarket.***We estimatethat there are over 45,000 gaming tables worldwide with many more coming online in Macau over the next three years and that the market penetration ofinstallations of automatic shufflers is low. We estimate that of the automaticshufflers installed, most of these installations are on specialty gamingtables. Several companies have introduced automatic shufflers for the generalmarket, but for the most part, these efforts have been unsuccessful.

*** ***

There are several factors that have resulted in lowacceptance of automatic shufflers for the general market, including securityissues, reliability/productivity and player confidence. We believe that ourtechnology and ergonomic design will allow our products to overcome theseindustry concerns:

 

•                  **Security.**We believe that our combination of patented computer and mechanicaltechnology safeguards against cheating schemes. The random ejection technologyused in all of our shuffler products produces a

 

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computer-generated,random and untrackable shuffle, and the continuous random ejection shufflertechnology eliminates advantages achieved by knowledgeable players, as eachcard is available for the next round of play by producing “full” decks ofcontinuously shuffled random cards. This has the added benefit of giving thecasino a higher hold from the gaming table since the shuffler preserves theoriginal odds of each game, which favor the casino.

 

•                  **Reliability/Productivity.**Given the paper handling demands placed on card shufflers, shufflersare prone to jamming and breakdown. We have designed our shufflers to be easilyaccessed by dealers so they can hand-deal cards until the unit can be put backin****service and prevent a table fromshutting down. In addition, the dealer, with little interruption, can easilyput the unit back into play in most cases.

 

•                  **PlayerConfidence.**To reduce cheating schemes, many existing shufflerscompletely cover or shield from players the deck(s) being shuffled, therebyreducing player confidence in a fair game. The design of our shufflers allowsplayers to see the cards being ejected and re-stacked through a frosted coverwithout compromising security, which we believe will gain better playeracceptance.

 

***ShufflerInstallations***. As ofDecember 31, 2006, we had installed a net total of 548 units, representing thenumber of revenue generating shufflers installed at casinos through sale orrental agreements. Of the units installed as of December 31, 2006, 66 unitswere installed pursuant to rental agreements, and 482 units were sales. Interms of location, as of December 31, 2006, we have installed our shufflers in58 different gaming properties.

*** ***

***Competition– Shufflers.***Competition inthe shuffler market is intense. The shuffler market is divided into twoseparate segments, traditional table game and specialty table games. ShuffleMaster, Inc. is the current market leader in both the traditional table game andspecialty table game markets. We believe our other competitors have a smallcollective market share of the table game market. With respect to thetraditional table game market segment, we compete with Shuffle Master whichmarkets multi-deck continuous shufflers, single deck shufflers and multi-deckbatch shufflers.

*** ***

**The DeckChecker**

** **

The patented DeckChecker is a card security devicethat specifically scans playing cards to ensure an accurate count and verifythat all of the cards in a deck are present. This innovative product confirmsthe integrity of each card and will reject any non-conforming cards. TheDeckChecker has multiple uses and can be used in the back of the house (casinosupport departments) to reduce labor costs by expediting the verificationprocess of used cards, or it can be used in the front of the house (the casinofloor) to ensure that all table games open with complete and accurate decks,reducing the amount of time it takes to open a table game, thereby increasingproductivity. The DeckChecker allows the re-use of playing cards by providing asecure and reliable method of putting used cards back into play, reducing cardusage and the associated costs. In addition, the DeckChecker can scan up toeight decks at a time, with each deck scanned in less than 15 seconds. Thedevice is programmed for all standard playing cards, accommodates plastic,paper and plastic coated playing cards and is programmed with many standardcard games.

 

The DeckChecker has an integrated management systemand an on-board storage/vault system. The integrated management system gives areport for every transaction - providing an audit trail. Further, theDeckChecker requires limited operator training time, as the machine prompts theuser throughout the entire checking process. Since the DeckChecker does notrequire additional staff, the DeckChecker is designed to increase efficiencyand shorten the start-of-the-day and the end-of-the-day procedures.

 

***Market andDistribution of the DeckChecker.***Weestimate that the potential market for the DeckChecker to be one machine forevery ten table games, or approximately 5,000 machines installed worldwide. Asof December 31, 2006, we had 214 units of the DeckChecker installed at 57casinos, 206 of which were purchased and eight of which were rented. We placedmore than 100 DeckCheckers in Macau in 2006.

 

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***Competition– DeckChecker.***We believeShuffle Master’s MD2 product provides limited competition for the DeckChecker.

*** ***

**High FrequencyRFID Casino Chip**

** **

Highfrequency 13.56 MHz RFID casino chip is designed to provide real-time datacapability, enhanced chip security, player tracking and accounting managementbenefits for casinos. The high frequency RFID chips enable casinos to read1,000 chips in a second and have a memory capacity of over 10,000 bits. Incomparison to the existing RFID casino chip technology (the 125KHz RFID chip),the 13.56 MHz chip is faster, has much greater memory capacity, is moreeconomic to produce and, being more robust, it is more cost effective andeasier to install. As an example, if there are 100 chips in a particular playerposition - in the same time that it takes the125 KHz technology to determinethat there are 100 chips in the field - the 13.56 MHz has not only determinedthe number of chips, it has also interrogated 3 or 4 levels of securityfeatures within each chip, authenticated the unique identity of each individualchip, determined the value of the bet and calculated the win or loss. The 13.56MHZtechnology enables real time monitoring of table games. We believe the highfrequency RFID chips provide significant cost advantages over predecessortechnology.

 

***Highfrequency RFID Market.***We estimate that the addressable chip market is at least 100 millioncasino chips worldwide. Initially the market will emerge from the build-out ofnew casinos in Macau. From 2006 through 2008, at least 15 new casinos will bebuilt in Macau and it is expected that the new casinos will be migrating to thenew chip technology to thwart counterfeiters and to track casino chip movementwithin the properties.As of December 31, 2006, we had approximately 1,100,000 RFID casino chips installed - including 800,000 at the Galaxy StarWorld Casino in Macau.

*** ***

***Competition- High frequency RFID Market***. There is limited competition in this market and a high barrier ofentry. There is currently one other provider of high frequency RFID casinochips, Gaming Partners International Corporation (GPIC).

*** ***

**ChipWasher**

** **

ChipWasher is a product thatwashes and sanitizes gaming chips. The build-up of oils and residue makes themsticky and difficult for dealers and players to handle, which makes for slowerplay. Casino surveillance and identification becomes increasingly difficult andplayers’ gaming experience is considerably lessened. Regular chip washingprevents this, but the traditional method of hand-washing is time-consuming andcostly. The ChipWasher is a practical and efficient means toward cleaner andmore hygienic casino chips.

 

Benefits of this product include:

 

•                  Easeof operation inside the cage

 

•                  Cost-effectiveness

 

•                  Labor-savings

 

•                  Greaterspeed

 

•                  Environmentallyfriendly

 

•                  Enablesgreater surveillance identification

 

•                  Hygienic

 

•                  Ergonomicallydesigned

 

***ChipWasherMarket.***We estimatethat the addressable chip market is at least 100 million casino chipsworldwide. Currently, chips are either washed by hand or placed in commercialclothes washing machines. We estimate that there is a market for an easy touse, high speed chip washer and the development of that market will befurthered with the introduction of high frequency RFID chips that will requirebetter care and handling than traditional chips.

*** ***

***Competition– ChipWasher.***There is noother equipment specifically manufactured for the washing of casino chips inthe market today.

*** ***

# **Dolphin Automotive**

# ** **

Automotivecomponents (*e.g.,*inner remote door handles, fuelfiller hinge assembly, module brackets, steering wheel spoke covers, speakergrills,fasteners,safety products, and cosmetic components) are manufactured by Dolphin for bothinternal and external automotive applications as well as safety products.Dolphin supplies major automotive companies such as General Motors Holden andToyota.

 

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***AutomotiveComponents Market.***Weestimate that the addressable market for our automotive components is $70million in Australia, although the total Australian plastic component market isapproximately $650 million. In addition to Australia, Dolphin is supplying components to several countriesaround the world such as Argentina, Mexico, Germany, Malaysia, and Thailand.Expansion to the US markets and China is expected in 2007.

*** ***

***Competition– Automotive Components ***Global sourcing of the major automotive customersremains very competitive, and Dolphin’s main competitors are Illinois Toolworks, Hook Plastics and MTM Systems. Nonetheless, Dolphin has been able totarget costs for both tooling and component and provide an overall packageoffering high technical expertise for high precision and complex parts and wasrecently awarded with four new projects with General Motors’ Holden and fournew projects with Autoliv at the start of 2007.

*** ***

***Dolphin Medical***

*** ***

DolphinMedical is a world-class manufacturer of medical devices and is geared tomeeting the exacting standards of the global healthcare industry. Medicaldevices include: MDTS Applicators (Estradiol and Testosteroneproducts), UDTS applicators, protein separation cartridges, allergy test kits,haemostatic dressing containers and radio frequency identification devices.Medical devices are manufactured, assembled and packaged in a TGA certified USClass 10,000 clean room. Dolphin Medical supplies parts to a number ofgovernment and commercial research and development organizations. Dolphin’scustomers include Vivus and Acrux.

 

***MedicalDevices Market.***The market inmedical devices is somewhat limited in Australia as it is based around researchand development of potential components and results in small volume batchproduction. Once the component has been supplied in the small batch volumes andall the product validation is completed and approved, the product volumeincreases and is then transferred to larger market bases such as the Europeanand United States markets for mass production to satisfy the necessary demand.

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***Competition– Medical Devices  ***The medical market in Australia is limited to notmore than three companies, and the business is distributed based on the levelof trials and what level of clean room is required by potential customers.

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**RESEARCH AND DEVELOPMENT**

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In February 2007, we transferred all research anddevelopment efforts to our newly created R&D Center located in Zhuhai,China. The relocation of the engineering division to the Zhuahi office is astrategic step in continuing the integration of our engineering division inZhuhai with Elixir’s newly established gaming research and development centerin Macau, as per the Alliance Agreement completed subsequent to our year-end onJanuary 18, 2007. Ourcurrent research and development emphasis is to improve our existing productlines, as demonstrated by our development of our new ShufflePro shuffler to bedeployed in early 2007. We spent $1,555,882 in 2006 and $1,394,006 in 2005 onresearch and development activities. We expect our research and developmentexpenses to increase as we develop enhancements to the current shuffler lineand develop new products in conjunction with the Elixir product lines.

 

**GAMING REGULATION AND LICENSING**

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**Overview**

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Weare subject to regulation by governmental authorities in most jurisdictions inwhich our products are sold or used by persons or entities licensed to conductgaming activities. Gaming regulatory requirements vary from jurisdiction tojurisdiction, and obtaining licenses, findings of suitability, registrationsand/or other required approvals with respect to us, our personnel and ourproducts are time-consuming and expensive. Generally, gaming regulatoryauthorities have broad discretionary powers and may deny applications for orrevoke approvals on any basis they deem reasonable.

 

Wehave approvals that enable us to conduct our business in numerousjurisdictions, subject in each case to the conditions of the particularapprovals. These conditions may include limitations as to the type of productwe may sell or lease, as well as limitations on the type of facility (such asriverboats) and the territory within which we may operate (such as tribalnations). Jurisdictions in which we, and specific personnel where required,have authorizations with respect to some or all of our products and activitiesincluding Arizona, California, Indiana, Iowa, Kansas, Michigan, Mississippi,Missouri, Nevada, New York, Washington, various Native American tribes, as wellas Argentina, Bahamas, Peru, Puerto Rico, Macau, Russia, Sweden and Vietnam.

 

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CertainIndian tribes throughout the United States that have compacts with the statesin which their tribal dominions are located operate or propose to operatecasinos, and these tribes may require suppliers of gaming and gaming-relatedequipment to obtain authorizations. We have worked and will continue to workwith these tribes to obtain the necessary authorizations.

 

During2006, we cooperated with certain state gaming authorities with respect to therequired re-licensing of our company in certain jurisdictions, as well as thelicensing of our new management team. We do not anticipate that this processwill have a material adverse effect on us. We continue to cooperate with allgaming regulatory agencies as necessary and applicable to maintain goodstanding in all jurisdictions in which we hold a license.

 

**AssociatedEquipment**

** **

Inmost jurisdictions, our products fall within the general classification of “associatedequipment.” “Associated Equipment” is equipment that is not classified as a “gamingdevice,” but which has an integral relationship to the conduct of licensedgaming. Regulatory authorities in some jurisdictions have discretion to requiremanufacturers and distributors to meet licensing or suitability requirementsprior to or concurrently with the use of associated equipment. In otherjurisdictions, the regulatory authorities must approve associated equipment inadvance of its use at licensed locations. Except as described below in “OtherJurisdictions,” we have obtained approval for our associated equipment in eachjurisdiction that requires such approval and in which our products that areclassified as associated equipment are sold or used.

 

**Gaming Devices andEquipment**

** **

Certainjurisdictions classify our products as “gaming devices” and/or “gamingequipment”. Although regulations vary among jurisdictions, each jurisdictionrequires various licenses, findings of suitability, registrations, approvals orpermits to be held by companies and their key personnel in connection with themanufacture and distribution of gaming devices and equipment.

 

**Regulation ofStockholders**

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Inmost jurisdictions, in which we are subject to regulatory oversight, certainbeneficial owners of our voting securities or other securities may, at thediscretion of the gaming regulatory authorities, be required to file anapplication for a license, finding of suitability or other approval and in theprocess subject himself or herself to an investigation by those authorities. Webelieve gaming regulatory authorities typically do not require such actionunless a beneficial owner owns more than 5% of our outstanding votingsecurities, at which time many jurisdictions require certain reports to befiled.

 

**Regulation andlicensing - Nevada**

** **

InSeptember 2006, upon request we submitted an application for licensing to theNevada Gaming Control Board. As part of the licensing process, The NevadaGaming Control Board may investigate us or any individual who has a materialrelationship to, or material involvement with, us in order to determine whethersuch individual is suitable or should be licensed. Besides the company, ourofficers, directors and certain key employees will be required to fileapplications and be licensed or found suitable by the Nevada GamingAuthorities. The Nevada Gaming Authorities may deny an application forlicensing for any cause that they deem reasonable. A finding of suitability iscomparable to licensing. Both require submission of detailed personal andfinancial information, which is followed by a thorough investigation. Theapplicant for licensing or a finding of suitability must pay all costs of theinvestigation.

 

Inthe event that the Nevada Gaming Authorities were to find an officer, directoror key employee unsuitable for licensing or unsuitable to continue having arelationship with us, we would have to sever all relationships with thatindividual. In addition, the Nevada Gaming Commission may require us toterminate the employment of any person who refuses to file appropriateapplications. Determinations of suitability or of questions pertaining tolicensing are not subject to judicial review in Nevada.

 

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Inthe event that we are found to have violated the Nevada Gaming Control Act, thelicenses and/or approvals we hold could be limited, conditioned, suspended orrevoked. In addition, we and the persons involved could be required to paysubstantial fines, at the discretion of the Nevada Gaming Control Board, foreach separate violation of the Nevada Gaming Control Act. The limitation,conditioning or suspension of any license or approval held by us could andrevocation of any license or approval would materially adversely affect ouroperations.

 

Anybeneficial holder of our voting securities, regardless of the number of sharesowned, may be required to file an application, be investigated, and have theholder’s suitability as a beneficial holder of our voting securities determinedif the Nevada Gaming Control Board finds reason to believe that such ownershipwould otherwise be inconsistent with the declared policies of the State ofNevada. The applicant must pay all costs of investigation incurred by theNevada Gaming Authorities in conducting any such investigation. Any person whofails or refuses to apply for a finding of suitability or a license withinthirty days after being ordered to do so by the Nevada Gaming Commission or theChairman of the Nevada Gaming Control Board may be found unsuitable. The samerestrictions apply to a record owner if the record owner, after request, failsto identify the beneficial owner. In the event that an individual is found tobe unsuitable, that individual would be required to transfer or otherwisedispose of all of our stock on such terms as may be required by the applicableNevada Gaming Authority.

 

**OtherJurisdictions**

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Allother jurisdictions that have legalized gaming require various licenses, registrations,findings of suitability, permits and approvals for manufacturers anddistributors of gaming devices and equipment as well as licensure provisionsrelated to changes in control. In general, such requirements involverestrictions similar to those of Nevada. During the past year, certain eventsin connection with our regulatory approvals have taken place as follows:

 

*Mississippi*. InJune 2006, we were approved by the Mississippi Gaming Commission for licensureas a manufacturer and distributor. Until this application was approved we werenot able to sell or service our shuffler products inMississippi. The Commission had previously determined that ourDeckChecker product is a type of gaming associated equipment that may besold in Mississippi without our first receiving a license.

 

*New Jersey*. Upona satisfactory initial background investigation, in December 2005 we obtained atransactional waiver approval from the New Jersey Commission to engage inspecific transactions with certain New Jersey casinos pending the outcome ofthe complete investigation of our license application. The transactionalapproval process permitted us to continue our business with New Jersey casinospending the completion of the investigation. Our transactional waiver expired inNew Jersey in December 2006. We are currently working with regulators there tore-aquire a transactional waiver.

 

*Louisiana*. In2005, the Louisiana State Police, Gaming Division, in connection with ourannual renewal of our supplier/manufacturers licenses investigated us withrespect to certain omissions in our gaming application relating to a formerofficer and two directors. We received a Notice of Hearing Date before theLouisiana Gaming Control Board Administrative Hearing Office for January 24,2006. A settlement agreement and related motions executed by VendingData andthe Louisiana State Police, Gaming Division, and passed affirmatively upon bythe Administrative Law Judge retained by the Louisiana Gaming Control Board wasapproved, by the Louisiana Gaming Control Board at its February 21, 2006,meeting. The settlement allows VendingData to re-apply for a gaming license in30 months.

 

*Indiana.*During2006, we underwent a thorough investigation by the Indiana Gaming Control Boardas part of the process of renewing our license in Indiana. On November 9,2006, our license renewal was granted.

 

*Rincon Tribal GamingCommission, California*. TheRincon Tribal Gaming Commission denied our application in February 2005,primarily due to certain omissions contained in applications filed by a formersenior executive officer. Our new management team is evaluating whether to filenew applications with this jurisdiction.

 

**United States -Federal**

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TheFederal Gambling Devices Act of 1962 makes it unlawful for a person tomanufacture, transport, deliver or receive gaming machines, gaming machine typedevices and components thereof across interstate lines unless that person hasfirst registered with the Attorney General of the Department of Justice of theUnited States. We register annually with the Department of Justice inaccordance with the Federal Gambling Devices Act of 1962.

 

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**Application ofFuture or Additional Regulatory Requirements**

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In the future, we intend toseek the necessary licenses, approvals and findings of suitability for us, ourproducts and our personnel in other jurisdictions throughout the United Statesand the world where significant sales are anticipated. However, there can be noassurance that such licenses, approvals or findings of suitability will beobtained, and if obtained that they will not be revoked, suspended orconditioned or that we will be able to obtain the necessary approvals in atimely manner, or at all, for our future products as they are developed. If alicense, approval or finding of suitability is required by a regulatoryauthority and we fail to seek or do not receive the necessary license, approvalor finding of suitability, we may be prohibited from selling our products foruse in the respective jurisdiction or may be required to sell our productsthrough other licensed entities at a reduced profit.

 

**CUSTOMER SERVICE**

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To date, we have centralized most of our servicefunctions in Las Vegas, Nevada for the purposes of ensuring uniform repair ofour products. As such, all major technical maintenance on our products has beenconducted by our local technicians. We have also provided our customers withadditional back-up products for use until we can return the serviced productsto them.

 

With respect to routine maintenance, we have in thepast employed multiple****remote service technicians****in variouslocations in the United States.

 

In February 2007, we decided to transfer theresponsibility for US sales and service to a third party that has existingextensive sales and technical service teams throughout the US in order tosupport the anticipated growth of the company’s domestic business from new productline introductions. Discussions are ongoing and are expected to be concluded inthe second quarter of 2007.

 

Our standard warranty period is 90 days for ourproducts. If a problem arises during the warranty period, we will arrange forthe product to be fixed at no cost to the customer. Certain components that weuse to manufacture our products are acquired from third parties, and maycontain a longer warranty period. For example, the warranty period on allmemory chips is ten years.

 

****MARKETING AND DISTRIBUTION****

 

Asthe gaming industry becomes increasingly more competitive, our strategy is todevelop and deliver cost-effective, customer-focused, niche products andservices that increase the security, productivity and profitability for theglobal gaming industry. As part of our strategy, we offer to lease or sell ourproducts to casinos and other lawful gaming establishments.

 

Currentsales strategies include the performance of live demonstrations of our productsto potential customers. These demonstrations occur at both the customer sitesand at our Las Vegas showroom. Our marketing department supports the saleseffort through direct mail advertising and presentations at domestic andinternational trade shows. Future marketing plans include more effective salesdemonstration tools that take advantage of current computer, web, and videotechnologies.

 

Wesell and lease our products directly to gaming operators and indirectly throughdistributors. In general, except as described below, we depend on distributorsto sell our products internationally and on our sales team to sell our productsdomestically. Our distributors receive compensation through our volume discountpricing structure, which allows them to sell the products to their customers atmarket driven prices. In fiscal year 2006, our direct sales accounted for 87%of our revenue and distributor-based sales accounted for 13%.

 

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Weuse distributors to gain exposure of our products in certain foreign geographicareas where we believe distributors with a local presence would be moreeffective than our own sales force. Management believes that utilizingdistributors to sell our products internationally has two main advantages:

 

•                  Distributors have the authority to operate inthe respective market and are able to address and resolve regulatory complianceissues that may arise in a timely manner; and

 

•                  Distributors have the internal infrastructureand superior contacts necessary to effectively sell and service our products incertain markets.

 

On February 28, 2006, weentered into a distribution agreement with Elixir. The distribution agreementhad an initial three year term, with rollover provisions, and providedexclusive distribution rights for our high frequency RFID casino chip forcertain Southeast Asia casino properties and non-exclusive distribution rightselsewhere in Asia. In October 2006 and February 2007, the distributionagreement was expanded to encompass our entire product line including shufflerlines and the DeckChecker product. We also extended Elixir’s exclusivedistribution rights to include all of Asia, Australia and New Zealand.

 

****CUSTOMERS****

 

Our customers for gamingproducts are domestic and international casino and gaming operators. Any adversechanges in the financial condition of our major customers, any loss of ourmajor customers, or any meaningful reduction in the level of sales to any ofthese customers could have a materially adverse impact on the business.Additionally, 47% of our revenue is related to Dolphin’s non-gaming productlines. Major customers include Holden Motors, Autoliv Australia and JohnsonControls.

 

****COMPETITION****

 

**The gamingindustry is extremely competitive. Although we have assembled an experiencedmanagement team, which uses its knowledge of the gaming industry to tailor ourproducts and services to the needs of the gaming industry, we compete with manyestablished companies that are substantially larger, have more substantialhistories, backgrounds, experience and records of successful operations;greater financial, technical, marketing and other resources; more employees andmore extensive facilities than we now have, or will have in the foreseeablefuture. The competitive pressures of the gaming industry will require us toinvest in additional research and development. The need to update and innovatemay result in increased costs for, and reduced margins on, our products andservices**.

** **

**Our non-gamingproduct lines are sold to long standing customers however; this does not ensurethat we will be able to retain our customers. We will need to continue toprovide cost effective, quality products in order to maintain our customers andattract new customers in the future.**

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**PRODUCT DEVELOPMENT, MANUFACTURING AND ASSEMBLY**

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Wemaintain a state-of-the-art facility for our product development and finalassembly divisions in Xiaolan, China. In Zhuhai, China, we have 13 full-timeengineers working in research and development of our shufflers, enhancements toour DeckChecker product line, and final development of our ChipWasher line.

 

Wealso maintain a state-of-the-art manufacturing facility in Melbourne,Australia, for the production of our casino chips - the high frequency DolphinRFID chip and traditional casino chips – as well as the non-gaming productsincluding automotive and pharmaceutical product lines.

 

Inaddition, we occasionally engage consultants in research and development tocomplement our skill set in specific areas of engineering activities. We hirecontract personnel on a varied basis depending upon production and installationvolume.

 

**SUPPLIERS**

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Most components for theshufflers and our DeckChecker are sourced in China. Shuffler and DeckCheckerassembly is being done in China and final units are shipped to Las Vegas fordistribution to the North America and European markets. The manufacturing ofRFID casino chips is performed at our Dolphin subsidiary inAustralia, which specializes in plastic injection molding. Dolphin has licensedcertain RFID technology from Magellan Technology Pty Ltd in Sydney, Australia,the owner of the intellectual property for RFID technology. Dolphin is sourcingtheir RFID tags from Progressive Gaming International Corp (“PGIC”).

 

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**INTELLECTUAL PROPERTY**

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Wehave secured, and endeavor to secure, to the extentpossible, exclusive rights in our products, primarily through federal andforeign intellectual property rights, such as patents, copyrights andtrademarks. We have applied for various other patents with respect to otherconcepts and products, including potential non-gaming application of ourtechnology. We believe that our intellectual property is critical to our futureprofitability and growth.

 

Withrespect to our shufflers, the United States Patent and Trademark Office hasissued ten patents, Patent Nos. 5,584,483, 5,676,372, 6,019,368, 6,293,546,6,299,167, 6,698,756 and 6,719,288, 6,886,829, 6,959,925 and 7,066,464 inaddition to two design patents, Patent Nos. D488,193 and D490,481. Thesepatents expire on dates between April 2014 and April 2024. In addition,there are seven patent applications on file with the United States Patent andTrademark Office and nine applications pending in foreign countries. Ourshufflers have also been issued two patents in Australia and one patent inCanada. For additional information with respect to the ongoing litigationinvolving Shuffle Master, Inc., see “Item 3. Legal Proceedings.”

 

Withrespect to the ChipWasher and DeckSetter (, we acquired the rights to thesepursuant to a patent and trade secret purchase agreement dated October 6, 2005in which we purchased all of the tangible and intangible assets related to theChipWasher and DeckSetter from Dolphin. The purchase price was $566,000, where$200,000 was payable upon execution of the contract and $366,000 was payableover twelve months after completion of due diligence. The first payment in the amount of $200,000 was completed on November 9,2005 and the first installment payment was initiated on February 9, 2006.Two additional installment payments were made prior to VendingData acquiringall of Dolphin.

 

Withrespect to the RFID chip technology we acquired the rights to the technologypursuant to a patent purchase agreement dated October 1, 2005 in which wepurchased the patent rights and all other intellectual property rights relatingto the RFID chip from Dolphin. The purchase price was $750,000 plus one millionshares of our common stock, where $125,000 was payable upon execution of thecontract and second installment of $125,000 was to be paid on the execution ofa Licensing and Manufacturing Agreement. The final $500,000 was payable oversix months after completion of the agreement. The first payment in the amount of $125,000 was completed on October 12,2005. We issued one million shares on the execution of the Licensing andManufacturing Agreement on February 27, 2006. We made a final payment of$625,000 on April 4, 2006.

 

Includedin the patent purchase agreement, we acquired the rights to U.S. Patent No.6,659,875, which covers a unique process for manufacturing RFID chips andplaques. Patents covering similar processes have also been issued in Australiaand the United Kingdom. In addition, on February 13, 2007, an new provisionalspecification was filed in Australia to protect additional enhancements in themanufacture of RFID chips and plaques. We plan to file applications based onthese enhancements for patent protection throughout the world.

 

Therecan be no assurance that any of the claims contained in our pending UnitedStates or foreign patent or trademark applications will be issued, that any ofthese rights will not be infringed by others or that already issued patents ortrademark registrations will not be invalidated or canceled. Third partiescould infringe on our rights or successfully duplicate our products withoutinfringing on our legal rights. Many elements incorporated in our proprietaryproducts are in the public domain or otherwise not amenable to legal protectionand the steps taken by us will not, in and of themselves, preclude competitionwith our proprietary products.

 

InJanuary 2007, we concluded the sale of a patent portfolio related to thediscontinued Secure Drop product line for $500,000.

 

**EMPLOYEES**

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As of December 31, 2006, we had approximately 40 full-timeemployees in the United States, 66 full-time employees in China, and 90 fulltime employees in Australia. None of our US or China employees are representedby a labor union, and we consider our relationships with our employees to besatisfactory. In Australia, a few employees are members of the NUW (NationalUnion of Workers) and we consider our relationships with our employees to besatisfactory. All U.S employees have signed confidentiality agreements, which prohibitthem from disclosing any of our confidential information at any time during orafter their employment with us. We have also executed confidentiality andnon-competition agreements with all key China personnel.

 

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| **ITEM  1A.** | **RISK FACTORS** |
|---------------|------------------|

 

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

 

Ourfuture results, including results related to forward-looking statements,involve a number of risks and uncertainties. No assurance can be given that theresults reflected in any forward-looking statements will be achieved. Anyforward-looking statement speaks only as of the date on which such statement ismade. Our forward-looking statements are based upon assumptions that aresometimes based upon estimates, data, communications and other information fromsuppliers, 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 keepcurrent either (i) any forward-looking statement to reflect events orcircumstances arising after the date of such statement, or (ii) the importantfactors that could cause our future results to differ materially fromhistorical results or trends, results anticipated or planned by us, or whichare reflected from time to time in any forward-looking statement.

 

Inaddition to other matters identified or described by us from time to time infilings with the SEC, there are several important factors that could cause ourfuture results to differ materially from historical results or trends, resultsanticipated or planned by us, or results that are reflected from time to time inany forward-looking statement. Some of these important factors, but notnecessarily all important factors, include the following:

 

***We may require additional funding in the future tocontinue to operate our business***.  As of December 31, 2006, we had a working capital deficitof ($4,703,802). In January 2007, we received gross proceeds of $2.65 millionas a result of the sale of our equity securities Elixir. In March 2007, wereceived an additional $4.3 million of working capital through our sale ofequity securities to GLG North American Opportunity Fund. After giving effectto the sale of equity securities to Elixir and to GLG North AmericanOpportunity Fund, we had pro forma working capital of approximately $2.78million as of December 31, 2006.We believe that our cash on hand togetherwith cash to be generated by operationswill meet our working capital needs, capital expenditures, and commitments forat the next 12 months. In the event it is not sufficient, we will endeavor toraise additional required funds through various financing sources, includingthe sale of our equity. If such financing is not available on satisfactoryterms, we may be unable to expand or continue our business as desired andoperating results may be adversely affected. Any debt financing will increaseexpenses and must be repaid regardless of operating results and may involverestrictions limiting our operating flexibility. If we issue equity securitiesto raise additional funds, the following results may occur:

 

•                  the percentage ownership of our existingstockholders may be reduced;

 

•                  our stockholders may experience additionaldilution in net book value per share; or

 

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

 

***We have a history of significant operating losses andanticipate continued operating losses, and we may be unable to achieveprofitability.*** We have ahistory of significant operating losses and anticipate continued operatinglosses for the foreseeable future. For the years ended December 31, 2006and 2005 we have incurred net losses of $14,605,762 and $23,401,529,respectively, and our operations have used $7,709,812 and $10,085,798 of cash,respectively. As of December 31, 2006 and 2005, we had accumulateddeficits of $92,957,833 and $78,352,071, respectively. Over the past severalyears, we have derived only limited revenues, which have been insufficient tosustain

 

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***our operations. We may not generate sufficient revenue tosustain future operations. No independent organization has conducted marketresearch providing management with independent assurance from which to estimatepotential demand for our products. The overall market may not be receptive toour products, and we may not successfully compete in the target market for ourproducts.***

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***Our leased shufflers are moresusceptible to replacement by customers.***All of our leased shufflersare placed with customers under short-term lease arrangements, which, unlikelong-term leases or permanent sales of our products, can easily be terminatedby a customer. The manner in which such short-term leases are structured putsour leased shufflers at greater risk of replacement due to pressure fromcompetitors, changes in economic conditions, obsolescence and decliningpopularity. Casino operators may terminate the use of our products, and we maynot be able to maintain and expand the number of installed shufflers throughenhancement of existing shufflers, introduction of new shufflers, customerservice or other reasons.

 

***We may be unableto adequately protect our intellectual property rights***. Our successdepends upon maintaining the confidentiality and proprietary nature of ourintellectual property rights. Our ability to compete may be damaged, and ourrevenues may be reduced if we are unable to protect our intellectual propertyrights adequately. To protect these rights, we rely principally on acombination of:

 

•                  contractualarrangements providing for non-disclosure and prohibitions on use;

 

•                  patents andpending patent applications;

 

•                  trade secret,copyright and trademark laws; and

 

•                  certainbuilt-in technical product features.

 

Patent, trade secret, copyright and trademark lawsprovide limited protection. The protections provided by laws governingintellectual 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, andother proprietary rights may be unavailable or limited in certain foreigncountries. We may be unaware of certain non-publicly available patentapplications, which, if issued as patents, could relate to our services and productsas currently designed or as we may modify them in the future. Legal orregulatory proceedings to enforce our patents, trademarks or copyrights couldbe costly, time consuming, and could divert the attention of management andtechnical personnel.

 

***Adverse results in current litigation could resultin substantial monetary damages and adversely impact on the manufacture andsale of certain of our shuffler products***. Shuffle Master, our principal competitor inthe shuffler market, has, in prior years, filed two lawsuits against us forpatent infringement. The first suit was settled in 2005. Concerning the secondlawsuit, we believe our position to be meritorious. On February 28, 2007, theUnited States District Court for the District of Nevada entered an order thatadopted and affirmed the ruling by the Magistrate Judge in favor of VendingData’sclaim construction in the case. The order adopting VendingData’s claimconstruction leaves Shuffle Master exposed to liability on a $3 million bond itposted to secure the preliminary injunction. VendingData intends to vigorouslypursue collection of the $3 million bond and other damages from Shuffle Master(see also Part II - Item 1. Legal Proceedings). However, we cannot determinewhether we will ultimately prevail in the lawsuit or, if we are successful,whether we will be able to collect any portion of the bond or a meaningfulamount of damages.

 

***It is possiblethat our future products will be the subject of future patent litigation if theproducts are sold and installed in the United States and, if commenced, couldsubject us to continuing litigation costs and risks.***To the extentthat we introduce new products that incorporate the same or similar technology,it is likely that Shuffle Master will bring one or more claims against usseeking damages, injunctive or other equitable relief, or both. We cannotpredict the outcome of any present or future litigation that may occur.

 

If our future products incorporate technology thatinfringes the proprietary rights of third parties and we do not secure licensesfrom them, we could be liable for substantial damages that would cause amaterial reduction in revenues and impair our prospects for achieving growthand profitability.

 

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

 

•                  consumingsubstantial time and financial resources required to defend against them;

 

•                  diverting theattention of management from growing our business and managing operations;

 

•                  resulting incostly litigation; and

 

•                  disruptingproduct sales and shipments.

 

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

 

***We rely on distributors in international markets, andour limited sales experience in foreign countries could cause us to lose sales.***Substantiallyall sales of our products outside the U.S. are achieved through distributorrelationships and by the first quarter of 2007, our U.S. sales will also beachieved through a distributor relationship. We believe the distributors thatwe have engaged and will engage are experienced and reputable; however, if weare unable to manage these relationships, our ability to generate revenue andprofits may be adversely affected. To the extent that we engage in direct salesoutside the U.S., we have limited sales experience and history in foreignmarkets.

*** ***

***Our management holds acontrolling interest in our common stock, giving our management the power tosignificantly influence all matters submitted to our stockholders.***As of March 9,2006, our executive officers and members of our board beneficially ownapproximately 10,850,866 shares of common stock, or approximately 33% of theoutstanding shares of our common stock. Accordingly, these stockholders havethe power to significantly influence all matters requiring approval by ourstockholders, including the election of directors and approval of mergers andother significant corporate transactions. This concentration of ownership maymake it more difficult for non-management stockholders to effect substantialchanges in our company, and also has the effect of delaying, preventing orexpediting, as the case may be, a change in control of our company.

 

***Our board of directors may issue blank check preferred stock, which mayaffect the voting rights of our holders and could deter or delay an attempt toobtain control of us.***Our board of directors is authorized, withoutstockholder approval, to issue preferred stock in series and to fix and statethe voting rights and powers, designation, preferences and relative,participating, optional or other special rights of the shares of each suchseries and the qualifications, limitations and restrictions thereof. Preferredstock may rank prior to our common stock with respect to dividends rights,liquidation preferences, or both, and may have full or limited voting rights.Accordingly, issuance of shares of preferred stock could adversely affect thevoting power of holders of our common stock and could have the effect ofdeterring or delaying an attempt to obtain control of us.

 
| **ITEM  2.** | **DESCRIPTION  OF PROPERTY** |
|--------------|------------------------------|

 

In2006, we leased approximately 58,725 square feet for our headquarters at 6830Spencer Street, Las Vegas, Nevada 89119, which housed our corporate offices,including sales and engineering departments, and warehouse space. The leaserequired payments of approximately $58,000 per month and expired inJanuary 2007. As ofFebruary 2007, the company moved its headquarters to new offices at 1120 TownCenter Drive, Suite 260, Las Vegas, Nevada, 89144, and leases approximately7,000 square feet. The five year lease requires payments of approximately$17,500 per month and expires inFebruary 2012. Additionally, our warehouse facilities moved to 6151 S. McLeod,Suite A, Las Vegas, Nevada, 89120, and we lease approximately 3,000 squarefeet. The three year lease requires payments of approximately $2,500 per monthand expires in February 2010.

 

In August 2005, we leased office, manufacturing andwarehouse space within Xiaolan Town in Zhongshan City, Guangdong Province,China to accommodate our manufacturing requirements. The facilities consist ofover 47,000 square feet. The lease payments are approximately $4,300 per month,and the lease ends in August 2008. In June 2006, we leased office space inZhuhai, China, to accommodate our research and development team. The facilitiesconsist of approximately 2,100 square feet. The lease payments areapproximately $1,500 per month, and the lease expires in August 2008.

 

InJanuary 2004 and September 2004, Dolphin, our Melbourne based subsidiary,leased office, manufacturing and warehouse space at 590 WaterdaleRoad, West Heidelberg, 3081, Australia, and renewed its existing leasefor 600 Waterdale Road, respectively. The facilities consistof approximately 32,000 square feet each. The lease payments areapproximately $21,500 per month each and the leases expire on January 30,2014, and December 16, 2013, respectively.

 

18

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| **ITEM  3.** | **LEGAL  PROCEEDINGS** |
|--------------|------------------------|

 

On October 5, 2004, ShuffleMaster filed a patent infringement action in the United States District Court,District of Nevada (Case No. CV-S-04-1373-JCM-LRL) claiming that the use,importation and offering for sale of our PokerOne shuffler infringed Shuffle Master’sUnited States Patent No. 6,655,684. We responded by denying Shuffle Master’sclaim of patent infringement and requesting that the court enter a declaratoryjudgment of non-infringement. On November 30, 2004, the District Court grantedShuffle Master’s motion for preliminary injunction, prohibiting us from sellingour PokerOne shuffler in the United States pending resolution of the lawsuit.On March 4, 2005, the Federal Circuit Court of Appeals issued an order stayingthe injunction pending our appeal of the matter. On December 27, 2005, theFederal Circuit held that the District Court erred in failing to properlyconstrue Shuffle Master’s patent claims before preliminarily enjoining us andon this basis vacated the order. As a result, we may seek to recover fromShuffle Master any damages we suffered as a result of the wrongful injunction.With respect to the merits of Shuffle Master’s action, a Magistrate Judgeappointed by the District Court to conduct a Markman hearing to determine theproper construction of Shuffle Master’s patent claims recommended on September26, 2005 that the Court adopt the claim construction urged by us. On February28, 2007, the United States District Court for the District of Nevada enteredan order that adopted and affirmed the ruling by the Magistrate Judge in favorof VendingData and against Shuffle Master. We believe the order adopting ourclaim construction leaves Shuffle Master exposed to liability on a $3 millionbond it posted to secure the preliminary injunction. We intend to vigorouslypursue collection of the $3 million bond and other damages from Shuffle Master,however there can be no assurance we will be successful in doing so.

 
| **ITEM  4.** | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
|--------------|----------------------------------------------------------|

 

Ourannual meeting of stockholders was held on December 28, 2006. All of thepersons nominated to serve on our board of directors, namely James Crabbe, MarkNewburg, Maj. Gen. Paul Harvey, Vincent DiVito and Robert Miodunski, wereelected to our board of directors. In addition, our share holders approved eachof the other proposals set forth at the meeting as follows:

 

Ourshareholders approved the issuance of up to 1,652,048 shares of our commonstock upon conversion of promissory notes issued in the Dolphinacquisition, with shares voted as follows: 

 
| Shares voted for  |   | 20,132,714 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 727,725    |   |
| Shares abstaining |   | 14,100     |   |

 

Ourshareholders approved the issuance of up to 793,760 shares of our commonstock issuable upon the conversion of promissory notes issued in theBricoleur financing transaction, with shares voted as follows: 

 
| Shares voted for  |   | 20,830,934 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 328,505    |   |
| Shares abstaining |   | 14,100     |   |

 

Ourshareholders approved the issuance of 150,000 shares of common stock to certaindirectors, with shares voted as follows: 

 
| Shares voted for  |   | 19,334,499 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 1,526,940  |   |
| Shares abstaining |   | 13,100     |   |

 

Ourshareholders approved the issuance of all shares of our common stockissuable in the Elixir transaction, with shares voted as follows: 

 
| Shares voted for  |   | 20,830,714 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 30,225     |   |
| Shares abstaining |   | 13,600     |   |

 

19

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Ourshareholders approved an amendment to our articles of incorporation toincrease our authorized common stock, with shares voted as follows:  

 
| Shares voted for  |   | 25,801,596 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 182,083    |   |
| Shares abstaining |   | 15,282     |   |

 

Ourshareholders approved an amendment to our articles of incorporation tochange our corporate name, with shares voted as follows:  

 
| Shares voted for  |   | 25,924,825 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 68,536     |   |
| Shares abstaining |   | 5,600      |   |

 

Ourshareholders approved an amendment to our 1999 stock option plan to increasethe number of shares that may be issued, with shares voted as follows: 

 
| Shares voted for  |   | 19,625,369 |   |
|-------------------|--------|------------|--------|
| Shares against    |   | 1,152,370  |   |
| Shares abstaining |   | 96,800     |   |

 

# **PART II**

# ** **

| **ITEM  5.** | **MARKET  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS** |
|--------------|---------------------------------------------------------------|

## ** **

**Market Information**

** **

Our common stock currentlytrades on the American Stock Exchange, or AMEX, under the symbol “VNX.”

 

The following table setsforth the high and low closing sale price of our common stock, as reported bythe AMEX for each quarter during the past two fiscal years:

 
| **2006**        | ** ** | **Low** | ** ** | **High** | ** ** |
|-----------------|------------|---------|------------|----------|------------|
| Fourth  Quarter |       | $       | 1.97       |     | $          | 2.70 |   |
| Third  Quarter  |       | $       | 1.98       |     | $          | 2.62 |   |
| Second  Quarter |       | $       | 2.00       |     | $          | 2.96 |   |
| First  Quarter  |       | $       | 2.20       |     | $          | 3.80 |   |

 
| **2005**       | ** ** | **Low** | ** ** | **High** | ** ** |
|----------------|------------|---------|------------|----------|------------|
| Fourth Quarter |       | $       | 2.29       |     | $          | 3.70 |   |
| Third Quarter  |       | $       | 1.34       |     | $          | 2.25 |   |
| Second Quarter |       | $       | 1.80       |     | $          | 2.15 |   |
| First Quarter  |       | $       | 1.49       |     | $          | 2.22 |   |

 

**Shareholders**

 

As of March 22, 2007, we had outstanding 32,511,007shares of common stock, heldby approximately 260 stockholders of record.

 

**Dividend Policy**

** **

We have never declared or paid cash dividends on ourcommon stock. We presently intend to retain earnings to finance the operationand expansion of our business and do not anticipate declaring cash dividends inthe foreseeable future. Also, under the terms of the $18 million financingentered in May 2006, we will not, without first obtaining the written approvalof the lenders, repurchase, redeem, or declare or pay any cash dividend ordistribution on, any shares of our capital stock.

 

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**Recent Sales of Unregistered Securities**

 

We have previously reported in our filings with theSEC on Forms 8-K and 10-QSB information about unregistered sales of oursecurities made during the period covered by this report pursuant to applicableexemptions from the registration requirements of the Securities Act of 1933, asamended.

 
| **ITEM 6.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

**OVERVIEW**

** **

Our business strategy is to develop and delivercost-effective, customer-focused, niche products and services that increase thesecurity, productivity and profitability for the global gaming industry. These products include card shufflers,card verification devices, traditional, high frequency RFID imbedded casinochips, and chip washer as part of our gaming business. Our Australiansubsidiary is a plastic injection molding company that manufactures our casinochips and also has non-gaming manufacturing consisting of automotive componentsas well as some medical related plastic component manufacturing. Our strategyinvolves marketing certain of our gaming products for sale or lease, dependingon the product, the geographic location of the customer and other factors. Werely on our internal sales staff and distributor relationships for the sale andrental of our gaming products.

 

**RESULTS OF OPERATIONS - YEARS ENDED DECEMBER31, 2006 AND 2005**

** **

For2006, we generated gross revenues of 166% more than the year ended December 31, 2005. Gross revenues wereoffset by sales returns and allowances of $383,122. Specific product line results for the yearended December 31, 2006 compared to the year ended December 31, 2005 areprovided below. Sales increased as a result our acquisition of Dolphin AdvancedTechnologies Pty Ltd in July 2006, the introduction and sale of the highfrequency RFID casino chip to a casino in Macau and the acceptance of theDeckChecker product at new casino openings in Macau. We acquired Dolphin as ofJuly 11, 2006 and our results of operations from that date forward include theoperating results of Dolphin. Our newly acquired Dolphin subsidiary accountedfor $3,780,430 of revenue during fiscal 2006 from the sale of non-gamingproducts.

 

For2006, our cost of sales was 15% more than 2005. The cost of sales increase can be attributed to thecosts associated with deploying the new high frequency RFID casino chips andthe negative gross margins associated with the non-gaming products manufacturedat our Dolphin subsidiary. These increases are offset by material cost savingsrealized from the improved relations with vendors in China.

 

Theoverall negative gross margin on revenue for 2006, improved over 2005,excluding the impact of an inventory write down of $3,068,846 in 2005, by morethan $1.2 million or 55%.

 

**SecureDrop Sales.**As a result of ourdecision to discontinue new installations for this product line****there were no system sales generated in 2006. Our SecureDrop sales in2005 consisted of supply items for systems already in place.

 

**ShufflerSales.**The 65%decrease, from $1,311,000 in 2005 to $462,000 in 2006, in sales was due, inpart, to the replacement of discontinued products with new products but atlower introductory or replacement pricing. Also affecting sales for PokerOnewere the lingering effects of the Shuffle Master suit causing customeruncertainty on the product.****The58% decrease in the cost of shuffler****sales in 2006was due primarily to costs related to the roll out of two new shuffler productsin 2005. Our average cost per unit decreased 20% due to production costs in ourChina facility.

 

**ShufflerRentals.**The 17%decrease in shuffler rental revenue, from $279,000 to $230,000 reflects thereduced number of shufflers placed on a rental basis as a result of theconversion of rental units to purchased units in 2005 and the failure to placeadditional shuffler units on a rental basis. The number of rental units dropped27% from the year ending 2005 to 2006. Cost of sales, which dropped 92% in2006, include shuffler rental depreciation of $36,758 during 2006 compared to$467,983 (includes depreciation as well as significant service costs attributedto the deployment of new product) during the prior year period. The cost ofsales decrease can be attributed to the incremental costs in deploying upgradedversions of PokerOne and RandomPlus in 2005.

 

**DeckCheckerSales.**The 60%increase in DeckChecker sales, from $861,000 in 2005 to $1,377,000 in 2006,resulted primarily from sales to casinos in Macau. Our average sales pricedropped 38% due to the increased sales to distributors versus direct sales byus. Further, we decreased our DeckChecker costs by approximately 30%.

 

21

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**DeckCheckerRentals**. The 55%decrease in DeckChecker rental revenue, from $241,000 in 2005 to $108,000 in2006, resulted primarily from increased sales of DeckCheckers as a result ofmore competitive pricing of the product domestically and internationally. Thenumber of rental units dropped 72% from 2005 to 2006. Cost of sales includedrental depreciation of $16,961 during the year ended December 31, 2006 compared to $77,476 during theprior year.

 

**CasinoChips.**RFIDcasino chips are a new product line introduced during the second quarter of2006. Revenue continued to grow due to international sales. Total casino chiprevenue was $1,800,000 in 2006. As we further automate our production methods,we expect to see improved margins over the next year.

 

**Non-gamingproduct.**With theacquisition of Dolphin there is additional revenue of $3,780,000 not related tothe gaming business. Over 59% of this revenue relates to the automotive line ofbusiness. In the fourth quarter of 2006, we experienced higher costs of salesdue to our expenditure of approximately $1.8 million for the conversion of ourproduction line for a new long term automotive contract. We expect to seemargins improve over the next year.

 

**OtherIncome.**The 124%increase in other revenues was due to the increase sale of supplies and serviceagreements and also the reduction of sales returns and allowances. In 2005, thechange in smoking laws in the state of Washington impacted that segment of ourbusiness as several customers had filed for bankruptcy or closed down, thus wesaw increased returns in 2005 resulting in negative revenue for fiscal 2005.The year ended December 31, 2005 included shuffler service costs of $3,014,806compared to $2,111,902 in shuffler service costs during 2006. Cost of sales declined in 2006 due toreduced material costs of supplies and improved costs controls in our servicedepartment. In 2005, there was a one time inventory adjustment of $2,584,290for discontinued products and an additional inventory adjustment of $484,556.When normalized, cost of sales in 2006 was $826,669 or 27% less than costs ofsales in 2005.

 

***Selling, General and Administrative Expense***

 

For the year ended 2006, ourselling, general and administrative expense was $9,488,852 or 3% more than 2005.Approximately $663,000 of the increase in general and administrative expensesis attributable to our acquisition of Dolphin which is included in our resultsof operations from July 11, 2006 forward. Giving effect to the Dolphin impact,US and China expenses decreased by approximately $395,000 from fiscal 2006 tofiscal 2005. The decrease is composed of approximately $1,979,000 decrease inlegal and regulatory costs due to defense of the patent lawsuits andlegal/regulatory issues pertaining to former senior management. Thesereductions are offset by an increase of $703,000 in payroll primarily relatedto the conversion of management from consulting to employees in October 2005, a$621,000 increase in finance fees relating to the Elixir transaction, a$250,000 increase in acquisition costs associated with the Dolphin acquisition,and $88,000 increase for Sarbanes Oxley consulting fees. A $21,500 increase in 2006 rent expenseis attributable to the Dolphin acquisition and the related addition of leasedoffice and manufacturing facilities in Australia. Rent reductions in 2007 willinclude lower cost in Las Vegas under new leases and elimination of theWashington office.

 

***Research andDevelopment Expenses***

 

For 2006, research and development expenses, associated with the development of theChipWasher and ShufflePro, were $1,555,882, or 12% more than 2005.

 

***Interest Expenseand finance fees***

 

For 2006, we incurred interest expense and financefees of $2,527,160 or 66% less than 2005. In May 2006, we placed $13 million of8% senior secured promissory notes to the Bricoleur funds. Concurrent withclosing of the 8% senior secured note financing, the holders of our previouslyoutstanding 10% senior notes converted approximately $5.2 million of theprincipal under those notes to our common shares. We used the proceeds of theMay 2006 financing to retire the balance of the 10% senior notes and the $5million 9% line of credit acquired by us in October 2005. The decrease in interest expense infiscal 2006 was primarily attributable to the non-cash expensing of warrants in2005, offset by the increased debt service related to our 8% seniorsecured note arrangement,Dolphin’s short term overdraft facilities and, for the first five months of2006, the 9% senior secured notes, the 10% senior secured convertible notes andthe $5 million 9% line of credit. This also includes $81,174 in related partyinterest for Dolphin.

 

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**FINANCIALCONDITION**

 

Asof December 31, 2006, we had a working capital deficit of $(4,703,802). InJanuary 2007 we received gross proceeds of $2.65 million as a result of thesale of our equity securities Elixir. In March 2007, we received an additional$4.3 million of working capital through our sale of equity securities to GLGNorth American Opportunity Fund. After giving retroactive effect to the noteconversions and sale of equity securities to Elixir and GLG North AmericanOpportunity Fund as if it had occurred on December 31, 2006, we would have hadpro forma working capital of approximately $2.78 million as of December 31,2006.

 

Basedprimarily on recent financing and other developments discussed below under *Liquidity and Capital Resources*, we believe that our cash on hand as of thedate of this report, our reduced infrastructure costs in the US, and ourdistribution agreement with Elixir will be sufficient to meet our workingcapital needs, capital expenditures, and commitments for at the next 12 months.In the event we need additional working capital we will endeavor to raiseadditional required funds through various financing sources, including the saleof our equity and debt securities and the procurement of commercial debtfinancing. However, as result of our present level of debt and certainrestrictions on our ability to incur additional indebtedness under ourfinancing agreement with the Bricoleur funds, it is unlikely we will be able toobtain additional debt-based capital, unless a significant portion of theproceeds are used to retire existing debt. There can be no guarantees that suchfunds will be available on commercially reasonable terms, if at all. If suchfinancing is not available on satisfactory terms, we may be unable to expand orcontinue our business as desired and operating results may be adverselyaffected.

 

***Liquidityand Capital Resources***

** **

***Sources of Capital***

*** ***

During 2006, our sources of capital included aplacement of our common stock; equipment financing from a third party,short-term notes from stockholders, convertible debentures and other privatesources of capital.

 

We received proceeds of $300,000 and paid $528,253 oflease payments related to 2006 and prior year leases. As of December 31,2006, we had outstanding equipment financing of $709,991. These equipmentleases have terms of 36 to 39 months and were not recorded as sales becauseeach of the leases included a mandatory buy-back provision.

 

We repaid $4,050,000 in short-term debt, during 2006.As of December 31, 2006, we had outstanding short-term loans in theaggregate amount of $676,600 comprised of equipment related loans and apartially utilized overdraft facility by our Australian subsidiary.

 

In2005, to fund our continuing operating cash flow deficits, in addition to usingthe remaining cash we had on hand at the beginning of the year, we raisedadditional capital through private placements of $10 million of our 10% seniorsecured convertible notes in February 2005 (the “February Senior Notes”) and $2million our 10% senior secured convertible notes in March 2005 (the “MarchSenior Notes” and together with the February Senior Notes, the “Senior Notes”).On October 6, 2005, we obtained a one year revolving credit facility in theamount of $5 million. As described below, in May 2006, we sold to the Bricoleurfunds $13 million of our 8% senior secured promissory notes. We used a portionof the proceeds from that placement to pay off the full $5 million under thecredit line in May 2006 and pay off approximately $6 million of our SeniorNotes. The $5.6 million balance of our Senior Notes were converted to ourcommon shares according to the terms of conversion in the notes.

 

On May 2, 2006, we closed onan $18 million financing transaction with four investment funds managed byBricoleur Capital Management. The $18 million financing consisted of $13million of 8% senior secured promissory notes and a $5 million equity putagreement exercisable by us from time to time at our option. The senior debtplacement included detachable warrants to purchase 3.2 million shares at $2.50per share. In September 2006, the amount of detachable warrants was reduced to2.6 million shares at $2.00 per share, some of which are recallable based onearly retirement of $6 million of the debt portion of the transaction. Interestat 8% is due semi-annually on June 1, and December 1, each year untilrepayment. The loan is secured by all the assets of the company. In addition,if we reduce the debt to under $7 million within one year of the transaction,650,000 of the 2.6 million warrants will be cancelled, within two years 325,000of the 2.6 million warrants will be cancelled and within three years 162,500 ofthe 2.6 million warrants will be cancelled.

 

Theforegoing transaction included a $5 million equity put option for our commonstock, 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 wasset at 80% of the volume-weighted average price of our common stock on the daywe deliver the requisite purchase notice to the funds, but not in excess of$3.50 per share. In connection with our election to exercise our equity putrights in the aggregate amount of $5 million through the year ended December 31,2006, we sold to the Bricoleur funds 2,646,541 common shares at an averageprice per share of $1.89.

 

23

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Inaddition, on February 6, 2007, we announced a Company-wide restructuring, whichwhen fully implemented, we expect to reduce costs and expenses by a combined$3.5 million annually. The reorganization changes included:

 

•                          Transferring of all research and developmentefforts to our newly created R&D Center located in Zhuhai, China. Therelocation of the engineering division to the Zhuahi office is a strategic stepin continuing the forward movement and integration of our engineering divisionin Zhuhai with Elixir’s newly established gaming research and developmentcenter in Macau, as per the Alliance Agreement completed on January 18, 2007.

 

•                          Transferring the responsibility for US salesand service to another party that has in place extensive sales and technicalservice teams throughout the US in order to support the anticipated growth ofthe company’s domestic business from new product line introductions.Discussions were ongoing and are expected to be concluded by the end of thefirst quarter.

 

•                          Relocating the Company’s US Corporate officesto 1120 Town Center Drive, Suite 260, Las Vegas, Nevada, 89144.

 

•                          The recently completed sale of intellectualproperty related to the discontinued SecureDrop product line. The proceeds ofthe transaction totaled $500,000. This sale was another step of the plan toredeploy our resources to new product line introductions as well as capitalizeon the opportunities in Macau and other growing markets.

 

OnFebruary 9, 2007, we expanded the distribution element of our alliance withElixir for exclusive distribution in Asia to include our entire productoffering. The prior agreement between the two companies included only ourcasino chips and casino chip-related product lines and did not includeAustralia and New Zealand in the territory. The expanded agreement provides fordistribution of chips and chip related products as well as the exclusivedistribution and service by Elixir of our DeckChecker and shuffler lines,including all future product additions, for the entire Asia-Pacific region.

 

OnMarch 28, 2007, we completed a sale of 1.625 million shares of common stock at$2.65 per share. The stock purchase included warrants to purchase an additional1.625 million shares at $2.65 per share for total cash proceeds ofapproximately $4.3 million.

 

TheCompany’s ability to maintain adequate liquidity in the medium-to-long term maybe dependent upon the success of management’s plans to address and overcomeprior operating losses. Management has developed and refined its 2007 operatingplan to increase its sales by the rollout of new shuffler products, sale of itshigh frequency RFID casino chip product to new casino openings in Macau, andimproving its sales efforts domestically and internationally through newlyannounced distributorship arrangement with Elixir in Asia and TCSJohnHuxley inEurope. Management continues in its efforts to reduce operating costs throughthe transfer of manufacturing operations to China. Management has focused onfinancial condition and liquidity improvements through its capital raisingefforts in 2006 and earlier, resulting in improved cash and working capitalposition. As a result of expected sales improvements and operating costinitiatives, management believes that the Company will begin to generatepositive operating cash flows during 2007.

 

**Contractual Cash Obligations and OffBalance Sheet Arrangements.**

 

Our contractual cashobligations under our debt agreements, capital leases and operating leases forthe next five years are as follows as of December 31, 2006:

 
| **CONTRACTUAL**  | ** ** | **PAYMENTS DUE BY PERIOD** | ** **     |
|------------------|------------|-------------------------------------------|----------------|
| **OBLIGATIONS**  | ** ** | **TOTAL**                                 | ** **     | **1 YEAR** | ** ** | **2-3 YEARS** | ** ** | **4-5 YEARS** | ** ** | **AFTER 5 YEARS** | ** ** |
| Debt Agreements  |       | $                                         | 22,619,618     |   | $ | 2,476,093 |   | $ | 3,392,225 |   | $ | 3,444,215 |   | $ | 12,957,085 |   |
| Capital Leases   |       | 709,991                                   |           | 440,719 |   | 269,272 |   | 0 |   | 0 |   |
| Operating Leases |       | —                                    |           | — |   | — |   | — |   | — |   |
|             |       |                                      |           |   |   |   |   |   |   |   |   |
| **Total**        | ** ** | **$**                                     | **22,979,609** | ** ** | **$** | **2,916,812** | ** ** | **$** | **3,661,497** | ** ** | **$** | **3,444,215** | ** ** | **$** | **12,957,085** | ** ** |

 

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** **

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

** **

Following is a summary of what our management believesare the critical accounting policies related to our operations. The applicationof these policies, in some cases, requires management to make subjective judgmentsand 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 this annual report for a more detaileddiscussion of our accounting policies. Except as described below, we do notemploy any critical accounting policies selected from among availablealternatives or that require the exercise of significant management judgment toapply, and we believe none of our estimates are so highly uncertain orsusceptible to change as to present a significant risk of a material impact onour financial condition or operating performance.

 

***Allowance for Doubtful Accounts.***

 

In connection with the preparation of our financialstatements, management reviews and evaluates the collectability of our tradereceivables and adjusts our allowance for estimated uncollectible accounts asdeemed necessary in the circumstances. These estimates have the potential forcritically affecting the determination of results of operations for any givenperiod. Factors considered by management in making such estimates andadjustments include any concentrations among customers, changes in ourrelationships therewith, payment history and the apparent financial condition ofour customers.

 

***Revenue Recognition.***

 

Werecognize revenue from the sale of our shuffler and Deck Checker products uponshipment against customer contracts or purchase orders. Sales are recognizedimmediately when shufflers that are rented are converted to purchases dependingon the creditworthiness and payment history of the casino company since paymentterms are from 20 to 48 months.

 

Werecognize revenue from the sale of our casino chip and RFID casino chipproducts upon shipment against customer contracts or purchase orders.

 

Werecognize revenue from our sales to independent distributors upon shipmentagainst distributor contracts or purchase orders of our product.

 

Revenuefrom shuffler rentals is recorded at the first of each month in accordance withrental contract terms. All rental contracts are cancelable upon 30-day writtennotice by the customer. Maintenance expense for rental units is recorded in theperiod it is incurred.

 

Theextended warranty and maintenance components that are part of long term salescontracts are unbundled and recognized as deferred revenue amortized over theremaining life of the sales agreement after the initial 90-day warranty asrequired by the Emerging Issues Task Force Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*. We providecurrently for estimated warranty repair costs associated with sales contracts.Although there are no extended warranties offered for our products, and ourrecorded warranty liability is, therefore, not material, we do provide for maintenancecontracts that are billed and recognized on a monthly basis.

 

If thecustomer does not possess the required creditworthiness or an establishedpayment history with us, we would then book the revenue as an installment saleand recognize it over time as payments are received.

 

Althoughsales are not generally made with a right to return, upon occasion, usuallyassociated with the performance warranty, sales returns and allowances arerecorded after returned goods are received and inspected.

 

We also recognize revenue on bill and hold transactions whenthe product is completed and is ready to be shipped and the risk of loss istransferred to the customer. In a certain case, at the customers’ request, westore the product for a brief period of time. Management evaluates the criteriaset forth in SAB 104 related to “bill-and-hold” transactions, precedent torevenue recognition whenever delivery has not occurred.

 

***Intangible Assets.***

 

Wecurrently amortize our intangible assets (patent and technology rights) on astraight-line basis over currently estimated useful lives of 10 years.Management believes that the useful life of patents and technology rightsequals the full term of the patent.

 

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***Legal defense costs***

 

We do not accrue for futurelitigation defense costs, if any, to be incurred by us in connection withoutstanding litigation and other disputed matters but, instead, record suchcosts as the related legal and other services are rendered.

 

**RecentAccounting Pronouncements**

 

In February 2006, the Financial Accounting StandardsBoard (FASB)  issued Statement ofFinancial Accounting Standards (SFAS) No. 155, *Accountingfor Certain Hybrid Financial Instruments*, which amends SFAS 133, *Accounting for Derivative Instruments and HedgingActivities*, and SFAS 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities*is**a replacement of*FASB Statement No. 125*. SFAS 155will be effective for all financial instruments issued or acquired after thebeginning of our fiscal year 2007. We have not yet evaluated and determined thelikely effect of SFAS 155 on our future financial statements.

 

InJune 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “*Accounting for Uncertainty in Income Taxes,**an Interpretation of FASB Statement No. 109*,” which dealswith the accounting for uncertainty in income taxes. FIN 48 will be effectivefor the quarter ending March 31, 2007. Since as a result of our history ofoperating losses, we have not recognized any tax provisions or benefits in ourfinancial statements, its effects, if any, will be solely on our incometax-related disclosures and, therefore, we do not expect that it will have amaterial impact on our financial position, results of operations or cash flowsfor the foreseeable future.

 

InSeptember 2006, the FASB issued SFAS No. 157, Fair Value Measurements, whichdefines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. In February 2007, the FASBissued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of SFAS No.115,*which will permit the option of choosing to measure certaineligible items at fair value at specified election dates and report unrealizedgains and losses in earnings. SFAS Nos. 157 and 159 will becomeeffective for us for financial statements issued for fiscal year.2008. We arecurrently evaluating the effects, if any, that SFAS Nos. 157 and 159 willhave on our future financial position, results of operations and operating cashflows.

 

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**Item 7.    FinancialStatements**

 

**INDEX TO FINANCIAL STATEMENT**

 
| Report of Independent Registered Public  Accounting Firm                                           | 28     |
|----------------------------------------------------------------------------------------------------|--------|
|                                                                                               |   |
| Balance Sheets at December 31, 2006 and  2005                                                      | 30     |
|                                                                                               |   |
| Statements of Operations for the Years  Ended December 31, 2006 and 2005                           | 31     |
|                                                                                               |   |
| Statements of Changes in Stockholders’  Equity for the Years Ended December 31, 2006 and 2005 | 32     |
|                                                                                               |   |
| Statements of Cash Flows for the Years  Ended December 31, 2006 and 2005                           | 33     |
|                                                                                               |   |
| Notes to Financial Statements                                                                      | 34     |

 

27

----

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

Elixir Gaming Technologies, Inc. (formerly VendingDataCorporation)

 

We have audited theconsolidated balance sheets of Elixir Gaming Technologies, Inc. (formerly VendingDataCorporation) and subsidiaries (the Company) as of December 31, 2006 and 2005,and the related consolidated statements of operations, stockholders’ equity,and cash flows for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. We did not audit thefinancial statements of Dolphin Advanced Technologies PTY LTD (Dolphin), awholly-owned subsidiary, which financial statements reflect total assets of$5,002,148, and total revenues of $5,645,527 or****18%and 72% of the respective consolidated totals. Those statements were audited byother auditors whose report has been furnished to us, and our opinion, insofaras it relates to the amounts included for Dolphin, is based solely on thereport of the other auditors.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, audits of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits and the report of otherauditors provide a reasonable basis for our opinion.

 

In our opinion, based on ouraudits and the report of other auditors, the consolidated financial statementsreferred to above, present fairly, in all material respects, the consolidatedfinancial position of the Company as of December 31, 2006 and 2005, and theconsolidated results of its operations and cash flows for the years then ended,in conformity with accounting principles generally accepted in the UnitedStates.

 

As discussed in Note 3 tothe financial statements, the Company’s 2006 financial statements have beenrestated.

 

 
|   | /s/  Piercy  Bowler Taylor & Kern    |   |
|--------|----------------------------------------------------|--------|
|   | Piercy Bowler Taylor & Kern                    |
|   | Certified Public Accountants and Business Advisors |

 

March23, 2007, except for Note 3, as to which the date is October 12, 2007

LasVegas, Nevada

 

28

----

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

Board of Directors and Stockholders

VendingData Corporation

 

Wehave audited the consolidated balance sheet of Dolphin Advanced TechnologiesPty Ltd as of December 31, 2006, and the related consolidated statement ofoperations, consolidated statement of changes in stockholders equity andconsolidated cash flow statement for the period ended December 31, 2006. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrols over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statement, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides reasonable basis forour opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material aspects, the financial position of Dolphin AdvancedTechnologies Pty Ltd at December 31, 2006, and the results of its operationsand its cash flow for the period ended December 31, 2006, in conformity withaccounting principles generally accepted in the United States of America,

 

HorwathMelbourne

CharteredAccountants

 

22March 2007

 

Melbourne,Australia

 

29

----

 

## **ELIXIR GAMING TECHNOLOGIES, INC**. AND ITSSUBSIDIARIES

## ** **

## **(FORMERLY**VENDINGDATACORPORATION)

## **CONSOLIDATED BALANCE SHEETS**

## ** **

**December 31, 2006 and 2005 **
| ** **                                                                                                        | ** ** | **2006**               | ** ** | **2005**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------|------------|
| ** **                                                                                                        | ** ** | **(As restated)** | ** ** | ** **  | ** ** |
| **ASSETS**                                                                                                        | ** ** | ** **             | ** ** | ** **  | ** ** |
| **Current assets:**                                                                                               |       |                   |       |        |       |
| Cash and cash equivalents                                                                                         |       | $                      | 333,888    |        | $          | 935,243 |   |
| Current portion of accounts receivable,  trade net of allowance for uncollectibles of $267,154 and $276,420       |       | 1,856,898              |       | 1,550,559   |       |
| Due from employee                                                                                                 |       | 138,181                |       | 4,098       |       |
| Prepaid expenses and other receivables                                                                            |       | 46,494                 |       | 113,557     |       |
| Inventories                                                                                                       |       | 3,407,361              |       | 3,045,334   |       |
|                                                                                                              |       | 5,782,822              |       | 5,648,791   |       |
| Accounts receivable, trade, net of current  portion, less unamortized discount                                    |       | 358,841                |       | 600,430     |       |
| Equipment rented to customers, net of accumulated  depreciation of $67,673 and $228,032                           |       | 94,777                 |       | 146,527     |       |
| Property and equipment, at cost, net of accumulated  depreciation of $2,472,897, and $2,408,234                   |       | 3,493,817              |       | 585,431     |       |
| Intangible assets, at cost, net of accumulated  amortization of $819,753 and $836,281                             |       | 8,936,561              |       | 1,862,268   |       |
| Goodwill                                                                                                          |       | 11,195,737             |       | —      |       |
| Deferred costs                                                                                                    |       | 450,404                |       | 748,171     |       |
| Deposits and other assets                                                                                         |       | 305,282                |       | 759,653     |       |
|                                                                                                              |       | $                      | 30,618,241 |        | $          | 10,351,271 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIENCY)**                                                       |       |                   |       |        |       |
| **Current liabilities:**                                                                                          |       |                   |       |        |       |
| Capital leases payable, current portion                                                                           |       | $                      | 440,719    |        | $          | 471,269 |   |
| Accounts payable                                                                                                  |       | 2,354,163              |       | 1,836,234   |       |
| Accrued expenses                                                                                                  |       | 3,657,792              |       | 794,203     |       |
| Deferred revenues, current portion                                                                                |       | 43,599                 |       | 52,248      |       |
| Short-term debt                                                                                                   |       | 3,676,600              |       | 4,050,000   |       |
| Current portion of long-term debt                                                                                 |       | 299,494                |       | —      |       |
| Customer deposits                                                                                                 |       | 14,257                 |       | 81,858      |       |
|                                                                                                              |       | 10,486,624             |       | 7,285,812   |       |
| Deferred revenues, net of current portion                                                                         |       | 43,199                 |       | 161,335     |       |
| Notes payable, net of current portion, net  of debt discount of $2,837,911                                        |       | 13,955,613             |       | 11,654,500  |       |
| Capital leases payable, net of current  portion                                                                   |       | 269,272                |       | 421,975     |       |
| Deferred tax liability                                                                                            |       | 1,765,383              |       | —      |       |
|                                                                                                              |       | 26,520,091             |       | 19,523,622  |       |
| **Stockholders’ equity (deficiency):**                                                                       |       |                   |       |        |       |
| Common stock, $.001 par value, 70,000,000  shares authorized 30,015,099 and 18,141,950 share issued (or issuable) |       | 30,016                 |       | 18,142      |       |
| Additional paid-in capital                                                                                        |       | 106,221,270            |       | 73,427,486  |       |
| Treasury stock, 448,053 shares at cost                                                                            |       | (846,820               | )          | (846,820    | )          |
| Deferred compensation expense                                                                                     |       | (8,348,483             | )          | (3,419,088  | )          |
| Deficit                                                                                                           |       | (92,957,833            | )          | (78,352,071 | )          |
|                                                                                                              |       | 4,098,150              |       | (9,172,351  | )          |
|                                                                                                              |       | $                      | 30,618,241 |        | $          | 10,351,271 |   |

 

**See accompanying notes to consolidated financialstatements.**

 

30

----

 

## **ELIXIR GAMING TECHNOLOGIES, INC**. AND ITSSUBSIDIARIES

## ** **

## **(FORMERLY**VENDINGDATACORPORATION) CONSOLIDATEDSTATEMENTS OF OPERATIONS

## ** **

## **YEARS ENDED DECEMBER 31, 2006 AND 2005**

| ** **                                                             | ** ** | **2006**               | ** **  | **2005**    | ** ** |
|------------------------------------------------------------------------|------------|------------------------|-------------|-------------|------------|
| ** **                                                             | ** ** | **(As restated)** | ** **  | ** **  | ** ** |
|                                                                   |       |                   |        |        |       |
| **Revenues**                                                           |       |                   |        |        |       |
| Sales                                                                  |       | $                      | 3,637,753   |        | $          | 2,302,484 |   |
| Rental                                                                 |       | 338,058                |        | 519,635     |       |
| Non-gaming revenue                                                     |       | 3,780,430              |        | —      |       |
| Service                                                                |       | 230,178                |        | —      |       |
| Other                                                                  |       | 264,359                |        | 278,619     |       |
|                                                                   |       | 8,250,778              |        | 3,100,738   |       |
| Less sales returns and allowances                                      |       | (383,122               | )           | (739,263    | )          |
|                                                                   |       | 7,867,656              |        | 2,361,475   |       |
|                                                                   |       |                   |        |        |       |
| **Operating costs and expenses:**                                      |       |                   |        |        |       |
| Cost of sales, including an inventory  writedown of $3,068,846 in 2005 |       | 8,901,524              |        | 7,736,066   |       |
| Selling, general and administrative                                    |       | 9,488,852              |        | 9,220,636   |       |
| Research and development                                               |       | 1,555,882              |        | 1,394,006   |       |
|                                                                   |       | 19,946,258             |        | 18,350,708  |       |
| Loss from operations                                                   |       | (12,078,602            | )           | (15,989,233 | )          |
|                                                                   |       |                   |        |        |       |
| Interest expense and finance fees                                      |       | 2,527,160              |        | 7,412,296   |       |
|                                                                   |       |                   |        |        |       |
| **Net loss**                                                           |       | $                      | (14,605,762 | )           | $          | (23,401,529 | ) |
|                                                                   |       |                   |        |        |       |
| Basic loss per share                                                   |       | $                      | (0.60       | )           | $          | (1.37 | ) |
|                                                                   |       |                   |        |        |       |
| Weighted average number of shares  outstanding                         |       | 24,270,827             |        | 17,050,398  |       |

 

**See accompanying notes to consolidated financial statements.**

 

31

----

 

## **ELIXIR GAMING TECHNOLOGIES, INC**. AND ITSSUBSIDIARIES

## ** **

## **(FORMERLY**VENDINGDATACORPORATION) CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

## ** **

**Years Ended December 31,**2006 and 2005
| ** **                                                  | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Treasury** | ** ** | **Deferred** | ** ** | ** **  | ** ** | ** **  | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|-------------|------------|-------------|------------|
| ** **                                                  | ** ** | **Shares**            | ** ** | **Dollars**             | ** ** | **Capital**  | ** ** | **stock**    | ** ** | **expense** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| **Balances,  January 1, 2005**                              |       | 17,199,558            |       | $                       | 17,200     |         | $          | 60,673,265   |       |        |       |        |       | $ | (54,950,542 | ) | $ | 5,739,923 |   |
| Options issued for employee compensation                    |       |                  |       |                    |       | 4,447,169    | (1)        |         |       | $           | (3,419,088 | )           |       |   | 1,028,081 |   |
| Exercise of employee options                                |       | 70,000                |       | 70                      |       | 130,080      |       |         |       |        |       |        |       | 130,150 |   |
| Stock issued for conversion of debt                         |       | 209,393               |       | 209                     |       | 345,291      |       |         |       |        |       |        |       | 345,500 |   |
| Exchange of warrants for stock                              |       |                  |       |                    |       | 846,820      |       | (846,820     | )          |        |       |        |       | — |   |
| Exercise of warrants                                        |       | 162,500               |       | 163                     |       | 401,662      |       |         |       |        |       |        |       | 401,825 |   |
| Warrants Issued                                             |       |                  |       |                    |       | 5,834,299    |       |         |       |        |       |        |       | 5,834,299 |   |
| Stock issued for services                                   |       | 100,000               |       | 100                     |       | 152,900      |       |         |       |        |       |        |       | 153,000 |   |
| Sale of shares                                              |       | 400,000               |       | 400(2                   | )          | 596,000      |       |         |       |        |       |        |       | 596,400 |   |
| Net loss                                                    |       |                  |       |                    |       |         |       |         |       |        |       | (23,401,529 | )          | (23,401,529 | ) |
| **Balances,  December 31, 2005**                            |       | 18,141,451            |       | 18,142                  |       | 73,427,486   |       | (846,820     | )          | (3,419,088  | )          | (78,352,071 | )          | (9,172,351 | ) |
| Options issued for employee compensation                    |       |                  |       |                    |       | 3,454,055    |       |         |       | (3,454,055  | )          |        |       | — |   |
| Exercise of employee options                                |       | 1,083,164             |       | 1,083                   |       | 1,260,297    |       |         |       |        |       |        |       | 1,261,380 |   |
| Amortization of deferred compensation expense               |       |                  |       |                    |       |         |       |         |       | 1,268,895   |       |        |       | 1,268,895 |   |
| Warrants issued for financing                               |       |                  |       |                    |       | 3,285,765    |       |         |       | (94,235     | )          |        |       | 3,380,000 |   |
| Stock issued for conversion of debt                         |       | 4,828,246             |       | 4,829                   |       | 10,899,671   |       |         |       |        |       |        |       | 10,904,500 |   |
| Stock issued for acquisition of Dolphin                     |       | 2,462,238             |       | 2,462                   |       | 7,581,526    |       |         |       |        |       |        |       | 7,583,988 |   |
| Stock issued to distributor through subscription receivable |       | 1,000,000             |       | 1,000                   |       | 2,649,000    |       |         |       | (2,650,000  | )          |        |       | — |   |
| Exercise of warrants                                        |       | 1,500,000             |       | 1,500                   |       | 1,648,500    |       |         |       |        |       |        |       | 1,650,000 |   |
| Stock issued for acquisition of technology                  |       | 1,000,000             |       | 1,000                   |       | 1,826,500    |       |         |       |        |       |        |       | 1,827,500 |   |
| Net loss                                                    |       |                  |       |                    |       |         |       |         |       |        |       | (14,605,762 | )          | (14,605,762 | ) |
| **Balances,  December 31, 2006 (as restated)**              |       | 30,015,099            |       | $                       | 30,016     |         | $          | 106,221,270  |       | $           | (846,820   | )           | $          | (8,348,483 | ) | $ | (92,957,833 | ) | $ | 4,098,150 |   |
|                                                             |            |                       |            |                         |            |              |            |              |            |             |            |             |            |  |  |  |  |  |  |  |  |

 

----

(1) Includes 75,000 stock options at $126,000that were issued and subsequently cancelled within the year 2005. A total of1,419,590 stock options were cancelled during 2005.

(2)Proceeds from the sale of 400,000 shares sold werereceived in 2005, but shares were issued in the first quarter of 2006.

 

**See accompanying notes to consolidated financialstatements.**

 

32

----

 

## **ELIXIR GAMING TECHNOLOGIES, INC**.

## ** **

## **(FORMERLY**VENDINGDATACORPORATION) CONSOLIDATEDSTATEMENTS OF CASH FLOWS

## ** **

**Years Ended December 31, 2006 and 2005**

** **
| ** **                                                                           | ** ** | **2006**               | ** **  | **2005**    | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------|-------------|-------------|------------|
| ** **                                                                           | ** ** | **(As restated)** | ** **  | ** **  | ** ** |
| **Cash flows from operating activities:**                                            |       |                   |        |        |       |
| Net loss                                                                             |       | $                      | (14,605,762 | )           | $          | (23,401,529 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:         |       |                   |        |        |       |
| Depreciation and amortization of property  and equipment                             |       | 788,073                |        | 796,101     |       |
| Amortization of intangible assets                                                    |       | 514,207                |        | 392,375     |       |
| Amortization of debt discount                                                        |       | 927,884                |        | 188,213     |       |
| Non cash finance fees                                                                |       | —                 |        | 5,834,299   |       |
| Stock-based compensation expense                                                     |       | 1,268,896              |        | 1,206,097   |       |
| Write down of inventory                                                              |       | 241,931                |        | 3,068,846   |       |
| Loss on disposal of assets                                                           |       | 22,082                 |        | 48,739      |       |
| Increase in operating (assets) liabilities:                                          |       |                   |        |        |       |
| Trade accounts receivable                                                            |       | 945,405                |        | 885,038     |       |
| Inventory                                                                            |       | 656,524                |        | (76,679     | )          |
| Prepaid expenses and other assets                                                    |       | 479,353                |        | 193,581     |       |
| Accounts payable                                                                     |       | (730,349               | )           | 748,558     |       |
| Accrued expenses                                                                     |       | 1,908,729              |        | 255,245     |       |
| Deferred revenues                                                                    |       | (126,785               | )           | (224,682    | )          |
| Net cash used in operating activities                                                |       | (7,709,812             | )           | (10,085,798 | )          |
| **Cash flows from investing activities:**                                            |       |                   |        |        |       |
| Cash for business combination, net of cash  obtained of $174, 139                    |       | (1,350,000             | )           | —      |       |
| Acquisition of technology                                                            |       | (716,500               | )           | (1,125,000  | )          |
| Acquisition of plant and equipment                                                   |       | (385,083               | )           | (187,269    | )          |
| Proceeds from the disposition of property  and equipment                             |       | 51,600                 |        | 21,200      |       |
| Payments received on notes receivable                                                |       | 484,833                |        | —      |       |
| Net cash used in investing activities                                                |       | (1,915,150             | )           | (1,291,069  | )          |
| **Cash flows from financing activities:**                                            |       |                   |        |        |       |
| Proceeds from sale of stock, warrants and  options                                   |       | 2,911,380              |        | 1,128,374   |       |
| Repayment of notes payable and leases                                                |       | (14,173,045            | )           | (2,179,695  | )          |
| Cash paid for deferred financing fees                                                |       | (45,947                | )           | (361,371    | )          |
| Proceeds from notes payable, leases and  short term debt                             |       | 20,331,219             |        | 12,800,000  |       |
| Net cash provided by financing activities                                            |       | 9,023,607              |        | 11,387,308  |       |
| Increase (decrease) in cash and cash  equivalents                                    |       | (601,355               | )           | 10,441      |       |
| Cash and cash equivalents, beginning of  year                                        |       | 935,243                |        | 924,802     |       |
| Cash and cash equivalents, end of year                                               |       | $                      | 333,888     |        | $          | 935,243 |   |
|                                                                                 |       |                   |        |        |       |
| **Supplemental cash flow information:**                                              |       |                   |        |        |       |
| Cash paid for interest                                                               |       | $                      | 1,681,097   |        | $          | 664,342 |   |
| Non-cash investing and financing  activities:                                        |       |                   |        |        |       |
| Loans converted into common stock (February  2005 and March 2005 convertible notes)_ |       | 9,154,500              |        | 345,500     |       |
| Acquisition of technology with stock prior  to business combination                  |       | 1,827,500              |        |        |       |
| Stock issued for business combination                                                |       | 7,817,833              |        |        |       |
| Short term note issued in connection with  business combination                      |       | 5,782,168              |        |        |       |
| Stock subscribed                                                                     |       | 2,650,000              |        |        |       |
| Loan refinanced                                                                      |       |                   |        | 2,904,500   |       |
| Stock  converted to warrants                                                         |       |                   |        | 846,820     |       |

 

**See accompanying notes to consolidated financial statements**.

 

33

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**ELIXIR GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES**

**(FORMERLY VENDINGDATA CORPORATION)**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**Note 1.**          Description of business andsignificant accounting policies

** **

Theprincipal business activity of Elixir Gaming Technologies, Inc. (formerlyVendingData Corporation) and its subsidiaries, VendingData Electric (Zhongshan)Co., Ltd. and Dolphin Products Pty Ltd, (collectively, the Company) is thedeveloping and distributing of products relating to the gaming and automotiveindustries. These products include electronic card shuffling devices and RFIDcasino chips. The Company operates in the United States of America and, throughits subsidiaries, in Australia and China; however, a portion of its revenuesare derived from sales to customers in other foreign countries.

 

The Companymanages its credit risk by evaluating the creditworthiness of customers beforecredit is extended and monitoring it thereafter. The maximum losses that theCompany would incur if a customer failed to pay amounts owed would be limitedto the recorded receivables after any allowances provided.

 

***Principles ofconsolidation***

*** ***

These consolidated financial statements include the accountsand transactions of the Company and, from the date of a business combination(Note 2), its wholly-owned subsidiaries, after elimination of all inter-companybalances and transactions.

 

***Cash equivalents***

*** ***

All highly liquid debt instruments with an originalmaturity of three months or less are considered cash equivalents.

 

***Estimates***

*** ***

Preparation of financial statements requiresmanagement to make estimates that affect the amounts reported in the financialstatements and accompanying notes, which estimates may require revision infuture financial statements.

 

***Inventory***

*** ***

Inventory is stated at the lower of cost, determinedusing the first-in, first-out method, or market.

 

***Property andequipment***

*** ***

Propertyand equipment (Note 7), and equipment rented to customersare carried at cost.Depreciation and amortization are computed using the straight-line method overthe useful lives of the assets currently estimated to be 3-5 years, which, inthe case of leasehold improvements is limited to the life of the lease andrenewal period, so long as renewal is intended.

 

***Intangible assets***

*** ***

Patentand trademark costs (Note 8) are amortized using the straight-line methodover an appropriate useful life currently estimated to be 10 years**.**

 

***Revenuerecognition***

*** ***

TheCompany recognizes revenue from the sale of its products upon shipment againstcustomer contracts or purchase orders. Sales are recognized immediately whenshufflers that are rented are converted to purchases depending on thecreditworthiness and payment history of the casino company since payment termsare from 20 to 48 months.

 

TheCompany recognizes revenue from its sales to independent distributors uponshipment against distributor contracts or purchase orders of our product.

 

34

----

 

Revenuefrom shuffler rentals is recorded at the first of each month in accordance withrental contract terms. All rental contracts are cancelable upon 30-day writtennotice by the customer. Maintenance expense for rental units is recorded in theperiod it is incurred.

 

Theextended warranty and maintenance components that are part of long term salescontracts are unbundled and recognized as deferred revenue amortized over theremaining life of the sales agreement after the initial 90-day warranty asrequired by the Emerging Issues Task Force Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*. The Companyprovides currently for estimated warranty repair costs associated with salescontracts. Although there are no extended warranties offered for its products,the Company provides for maintenance contracts that are billed and recognizedon a monthly basis.

 

If thecustomer does not possess the required creditworthiness or an establishedpayment history with the Company, the revenue is booked as an installment saleand is recognized over time as payments are received.

 

Althoughsales are not generally made with a right to return, upon occasion, usuallyassociated with the performance warranty, sales returns and allowances arerecorded after returned goods are received and inspected.

 

TheCompany also recognizes revenue on bill and hold transactions when the productis completed and is ready to be shipped and the risk of loss is transferred tothe customer. In a certain case, at the customers’ request, the Company willstore the product for a brief period of time. The Company’s managementevaluates the criteria set forth in SAB 104 related to “bill-and-hold”transactions, precedent to revenue recognition whenever delivery has notoccurred.

 

***Advertising***

*** ***

Advertising costs are charged to selling, general andadministrative expenses when incurred and were $113,000 and $61,460 for 2006and 2005, respectively.

 

***Stock-basedcompensation***

*** ***

Effectivewith the first quarter of 2006, the Company was required to adopt FinancialAccounting Standards Board (FASB) Statement No. 123R, *Share-BasedPayment*, to account for all its stock-based compensation beginningJanuary 1, 2006, and elected the modified prospective method of transition;accordingly, prior periods have notbeen restated to reflect the impact adopting Statement No. 123R.

 

Previouslythe Company accounted for all stock-based compensation under FASB Statement No.123. The impact of the adoption ofStatement No. 123R for stock-based compensation was an increase to stock-basedcompensation expense included in selling, general and administrative expense ofapproximately $1,204,100 for the twelve-month period ended December 31, 2006.

 

The fair value of options at the date of grant isestimated using the Black-Scholes option pricing model; assumptions used for2006 and 2005 were as follows:  
| ** **             | ** ** | **2006**           | ** ** | **2005**    |
|------------------------|------------|--------------------|------------|-------------|
| Market value           |       | $1.34 – $3.03 |       | $1.34-$3.01 |
| Expected life in years |       | 3 to 6             |       | 3 to 6      |
| Interest rate          |       | 4.76%              |       | 1.95%       |
| Volatility             |       | 10% - 70%          |       | 10%-70%     |
| Dividend yield         |       | 0.00%              |       | 0.00%       |

 

***Legal defense costs***

 

The Company doesnot accrue for estimated future litigation defense costs to be incurred by theCompany in connection with outstanding litigation and other disputed matters.

 

35

----

 

***Loss per share***

*** ***

Basic loss per share is computed by dividing net lossby the weighted average number of shares of common stock outstanding during theyear. No diluted loss per share is presented since the assumed exercise ofcommon stock equivalents would have an anti-dilutive effect due to losses.

 

***Warranties***

 

Aspart of the normal sale of its products, the Company has provided its customerswith product warranties. Management determines the warranty accrual on eachsale based on known product failure rates of key components, historicalexperience, service staff costs and other variables that affect the liability.

 

Thefollowing table summarizes changes in accrued product warrant costs included asaccrued expenses in the accompanying balance sheets at December 31, 2006and 2005.

 
| ** **           | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
| Opening balance      |       | $        | 5,867      |     | $          | 8,792 |   |
| Accruals             |       | 17,650   |       | 2,600    |       |
| Charges              |       | (23,517  | )          | (5,525   | )          |
| Balance, end of year |       | $        | 0          |     | $          | 5,867 |   |

 

***Rental payment commitments***

 

Future minimum rental payment commitments, includingscheduled escalation provisions are expensed on a straight line basis.

 

***Translation of foreign currencies***

 

Assets and liabilities are translated at the exchangerate as of the balance sheet date. All revenue and expense accounts aretranslated at average exchange rates in effect during the year.

 

**Note 2.**                      Dolphin acquisition

** **

TheCompany acquired Dolphin Advanced Technologies Pty Ltd (Dolphin), amanufacturer of plastic injection molded products, on July 12, 2006. Dolphinmanufactures traditional and high frequency RFID casino chips as well as non-gamingproducts including automotive components and medical components.

 

TheCompany acquired Dolphin to enhance the Company’s product line of table gameproducts and to diversify its product lines. Management believes the goodwillassociated with the acquisition was justified based on expected future growthof the casino chip market in Macau and in southeast Asia and the interest inRFID casino chips.

 

TheCompany’s consolidated financial statements include the transactions of Dolphinduring the period since acquisition, July 12, through December 31, 2006.

 

TheCompany acquired Dolphin pursuant to a share sale agreement the sellers. TheCompany paid to the sellers the following consideration in exchange for all ofthe issued and outstanding capital shares of Dolphin: 

 
| Cash (a)                                                                |   | $          | 1,350,000  |   |
|-------------------------------------------------------------------------|--------|------------|------------|--------|
| 1,462,238 shares of the Company’s common  stock at $3.50 per share |   | 5,117,833  |       |
| 1,000,000 shares of the Company's common  stock at $2.70 per share (b)  |   | 2,700,000  |       |
| Secured convertible promissory notes (c)                                |   | 5,782,168  |       |
| Purchase price                                                          |   | 14,950,001 |       |
| Acquisition costs                                                       |   | 250,000    |       |
| Adjusted purchase                                                       |   | $          | 15,200,001 |   |

 

36

----

 

----

(a) Includes $750,000 paidas a non-refundable deposit in April 2006,

(b) Includes 1,000,000shares issued as part of the non-refundable deposit; and

(c) Subsequently convertedin December 2006 into 1,652,048 shares of common stock.

 

The aggregate adjustedpurchase price was allocated based on the estimated fair value of the netassets acquired as follows:

 
| Cash                                             |   | $          | 174,139    |   |
|--------------------------------------------------|--------|------------|------------|--------|
| Receivables                                      |   | 1,010,155  |       |
| Shareholder receivable                           |   | 618,916    |       |
| Inventories                                      |   | 1,262,451  |       |
| Property, plant, equipment                       |   | 2,567,090  |       |
| Identifiable intangible assets and other         |   | 5,884,610  |       |
| Accounts payable                                 |   | (1,248,278 | )          |
| Accrued expenses                                 |   | (302,260   | )          |
| Provision for dividends payable                  |   | (1,995,088 | )          |
| Contingent purchase price liability              |   | (535,000   | )          |
| Deferred tax liability                           |   | (1,765,383 | )          |
| Debt and capital lease obligation – current |   | (749,245   | )          |
| Capital lease obligation – noncurrent       |   | (917,843   | )          |
|                                             |   | 4,004,264  |       |
| Less adjusted purchase price                     |   | 15,200,001 |       |
| **Goodwill**                                     |   | $          | 11,195,737 |   |

 

As of December 31, 2006, theCompany had a convertible note of $5,782,168 outstanding for the balance of theDolphin acquisition. The note was converted to shares in January 2007 at $2.13per share; however; the Company remains contingently liable, until July 12,2008, if the holder sells such shares at market for less than the guaranteedprice of $3.50 per share. As of March 31, 2007, there were 2,614,286 sharesremaining still subject to this guarantee.

 

Following are unaudited,condensed pro forma, consolidated statements of operations for 2006 and 2005 asif the Dolphin acquisition had take place as of January 1, 2005:

 
| ** **                         | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------------------------------|------------|-------------|------------|-------------|------------|
| Net revenue                        |       | $           | 10,068,815 |        | $          | 7,924,534 |   |
| Operating  expenses                |       | 22,742,197  |       | 23,781,902  |       |
| Loss from  operations              |       | (12,673,382 | )          | (15,857,368 | )          |
| Interest expense                   |       | 2,607,237   |       | 7,195,376   |       |
| Income taxes                       |       | (58,992     | )          | (25,516     | )          |
| Net loss                           |       | (15,221,627 | )          | (23,027,228 | )          |
| Basic and diluted  loss per share  |       | $           | (0.57      | )           | $          | (0.90 | ) |
| Weighted average  number of shares |       | 26,733,065  |       | 19,512,636  |       |

 

**Note 3.****                     ****Restatementto the Consolidated Financial Statements**

 

The Company has  restated itspreviously issued consolidated financial statements as of and for the fiscalyear ended December 31, 2006 to correct errors that resulted from its failureto record debt issuance costs related to warrants issued in connection with debtfinancings completed during the year ended December 31, 2006.  The errors relate to the accounting treatmentthat the Company failed to apply with respect to warrants issued by it inconnection with certain debt financings the majority of which were issuedduring the second quarter of 2006.   Inthis Amendment No. 1, the issuance of warrants issued with debt have been recordedas a debt discount in the total amount of $3,380,000 and are being

 

37

----

 

amortized as interest expense over the life of the debt.  Also by way of this Amendment No. 1, theCompany reclassified $4,300,000 from goodwill to other identifiable intangibleassets and reversed certain warrant related expenses, and recorded a taxliability in the amount of $1.8 million for the differences between theassigned values and the tax basis of recognized assets in a businesscombination and corrected the contingent liability by $301,000. Also, theCompany had originally recorded in its 2006 fiscal year consolidated financialstatements certain expenses related to warrants issued during 2005 and2004.  The Company has restated itsfiscal 2005 consolidated financial statements by way of Amendment No. 1 to theCompany’s Form 10-KSB/A for the fiscal year ended December 31, 2005 filed withthe SEC on October 5, 2007 for purposes of, among other things, properlyrecording those warrant expenses in fiscal 2005 and for warrants issued in 2004as an equity beginning balance adjustment. In this Amendment No. 1, those warrant related expenses have beenreversed from the 2006 consolidated financial statements.

 

Following is areconciliation of income (loss) from continuing operations as originallyreported to the restated amounts reported in the 2006 consolidated financialstatements included in Item 7 of this Amendment No. 1.

 
| Loss from operations, as originally  reported |   | $        | (13,734,719 | ) |
|-----------------------------------------------|--------|----------|-------------|---|
| Amortization of intangibles                   |   | (165,384 | )           |
| Finance Fee adjustments                       |   | (705,659 | )           |
| Loss from operations, as restated             |   | $        | (14,605,762 | ) |

 

Following is areconciliation of loss from continuing operations as originally reported to therestated amounts for second and third quarter for the year ended December 31,2006  and the fourth quarter of the yearended December 31, 2006 and 2005, respectively (only the fourth quarter offiscal year 2005 was impacted by a restatement): 

 
| ** **                                                           | ** ** | **Three months** | ** ** | **Six months** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| **For the period ended June 30, 2006** | ** ** | **ended**             | ** ** | **Ended**           | ** ** |
| Loss from operations, as originally  reported                        |       | $                     | (2,425,178 | )                   | $          | (5,180,077 | ) |
| Finance Fee adjustments                                              |       | (176,414              | )          | (176,414            | )          |
| Loss from operations, as restated                                    |       | (2,601,592            | )          | (5,356,491          | )          |
|                                                                      |            |                       |            |                     |            |  |  |

** **
| ** **                                                                | ** ** | **Three months** | ** ** | **Nine months** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| **For the period ended September 30, 2006** | ** ** | **ended**             | ** ** | **Ended**            | ** ** |
| Loss from operations, as originally  reported                             |       | (4,110,395            | )          | (9,290,472           | )          |
| Amortization of intangibles                                               |       | (82,692               | )          | (82,692              | )          |
| Finance Fee adjustments                                                   |       | (264,621              | )          | (441,035             | )          |
| Loss from operations, as restated                                         |       | (4,457,708            | )          | (9,814,199           | )          |

** **
| **For the year ended December 31,** | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|--------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Loss from operations, as originally  reported                |       | (13,734,719 | )          | (17,567,230 | )          |
| Amortization of intangibles                                  |       | (165,384    | **)**      | **—**  | ** ** |
| Finance Fee adjustments                                      |       | (705,659    | )          | (5,834,299  | )          |
| Loss from operations, as restated                            |       | (14,605,762 | )          | (23,401,529 | )          |

 

**Note 4.  Fair value of financial instruments**

 

The Company’sfinancial instruments consist of cash and cash equivalents, accounts and loansreceivable, accounts payable, short and long-term notes payable and accruals.Management believes the

 

38

----

 

carrying amounts of these financial instruments approximate fair valueor have interest yields that approximate market rates for similar instrumentswith similar risks.

 

**Note 5.**                      Segments

 

The segmentsidentified for geographic region-based enterprise-wide data are as follows:

** **
| ** **    | ** ** | **Year Ended  December 31, 2006** | ** ** | **Year Ended  December 31, 2005** | ** ** |
|---------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **Revenue**                                      | ** ** | **Long-lived  Assets**                           | ** ** | **Revenue** | ** ** | **Long-lived  Assets** | ** ** |
| Gaming:       |       |                                             |       |                                             |       |   |   |   |   |
| North America |       | $                                                | 1,074,116  |                                             | $          | 20,288,176 |   | $ | 2,590,904 |   | $ | 2,236,355 |   |
| Asia          |       | 3,473,950                                        |       | 1,531,561                                        |       | — |   | 357,871 |   |
| Europe        |       | —                                           |       | —                                           |       | 501,584 |   | — |   |
| South America |       | —                                           |       | —                                           |       | 8,250 |   | — |   |
| Non gaming:   |       |                                             |       |                                             |       |   |   |   |   |
| Asia          |       | 3,702,712                                        |       | —                                           |       | — |   | — |   |
| Total Revenue |       | $                                                | 8,250,779  |                                             | $          | 21,819,737 |   | $ | 3,100,738 |   | $ | 2,594,226 |   |

 

The Company’srevenues distributed by product are as follows:

** **
| **Year Ended  December 31, 2006** | ** ** | **Year Ended  December 31, 2005** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| **Shufflers**                                    | ** ** | **Casino Chips**                            | ** ** | **Deck Checkers** | ** ** | **Non-gaming** | ** ** | **Shufflers** | ** ** | **Deck Checkers** | ** ** | **SecureDrop** | ** ** |
|                                             |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| $                                                | 1,186,294  |                                             | $          | 1,798,881 |   | $ | 1,485,174 |   | $ | 3,780,430 |   | $ | 1,868,551 |   | $ | 1,101,852 |   | $ | 130,335 |   |
|                                                  |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For 2006, onecustomer represented 18.1% of total Company sales and another customerrepresented 13.5%, in the gaming sector and non-gaming sectors, respectively.

 

**Note 6.**                      Inventory

 

Inventory consisted of the following at December 31, 2006 and 2005.

 
| ** **       | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------|------------|---------------------------------|------------|---------------------------------|------------|
|             |       |                            |       |                            |       |
| Raw materials    |       | $                               | 633,185    |                            | $          | 824,759 |   |
| Work in progress |       | 121,977                         |       | 66,024                          |       |
| Finished goods   |       | 2,652,199                       |       | 2,154,551                       |       |
|             |       | $                               | 3,407,361  |                            | $          | 3,045,334 |   |

** **

**Note 7.**                      Property and equipment

 

Property and equipment, excluding equipment rented tocustomers, consists of the following at December 31, 2006 and 2005:

** **
| ** **                                      | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Equipment and vehicles, furniture and  fixtures |       | $                               | 5,470,612  |                            | $          | 2,589,886 |   |
| Leasehold improvements                          |       | 496,101                         |       | 500,093                         |       |
|                                            |       | 5,966,713                       |       | 3,089,979                       |       |
| Less accumulated depreciation and  amortization |       | 2,472,897                       |       | 2,504,548                       |       |
|                                            |       | $                               | 3,493,817  |                            | $          | 585,431 |   |

 

A substantialportion of the Company’s furniture and equipment are held under capital leases(Note 10).

 

39

----

 

**Note 8. Intangible assets**

 

Estimatedaggregate amortization of acquired patent rights and other amortizableintangible asset costsare $914,550 annually for the next five years.

 

**Note  9.  Short-term line of credit**

 

Our Australiansubsidiary maintains a US$545,000 overdraft line of credit with a bank of which$7,000 is unused at December 31, 2006. The interest rate on this overdraftfacility when drawn upon is 12.85%.

 

**Note 10.  Convertibledebt with warrants and  capital leasespayable**

 

As ofDecember 31, 2006 and 2005, our long-term obligations consist ofconvertible notes and capital lease obligations as follows:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| 10% notes, secured by trade receivables and  inventory. The notes are convertible at $1.65 per share of common stock for  50% of the note principal amount                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                        |       |                        | $          | 11,654,500 |   |
| 8% senior secured promissory notes with  face value of $13 million 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.  Effective interest is 30.9% |       | $                           | 13,000,000 |                        |       |   |
| Short-term convertible notes classified as  long-term (Note 13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 7,282,168                   |       |                        |       |
| Note payable to an Australian bank at  various interest rates collateralized by equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 1,310,853                   |       |                        |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 21,593,020                  |       | 11,654,500                  |       |
| Capital lease obligations for furniture,  tooling and equipment *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 709,991                     |       | 893,244                     |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 22,303,011                  |       | 12,547,744                  |       |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | (5,240,215                  | )          | (471,269                    | )          |
| Less debt discount                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | (2,837,911                  | )          | —                      |       |
| Long-term portion .                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | $                           | 13,955,613 |                        | $          | 12,076,475 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |            |                             |            |                             |            |  |  |  |

 

----

*                 In a prior year,the Company entered into certain sale-leaseback transactions primarily forassets rented to, or intended to be rented to, customers, under operatingleases. Since the leases contained effective mandatory buyback provisionsresulting in the Company retaining rights to use these assets in its businessfor their remaining useful lives, no gain or loss was recognized on thesale-leaseback transactions pursuant to paragraph 17 of Statement ofFinancial Accounting Standards (SFAS) No. 28, *Accountingfor Sales with Leasebacks*. The amortization of the assets recordedas capital leases is included with depreciation. The effective annual interestrates implicit in the capital leases range from 25% to 28%. The leases expirebetween March 2007 and April 2009.

 

40

----

 

Scheduledmaturities of the debt obligations as of December 31, 2006, are summarizedas follows:

 
| ** **                                  | ** ** | **Capital Leases** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| 2007                                        |       | $                       | 816,798    |       | $          | 2,476,093  |       | $ | 3,292,891 |   |
| 2008                                        |       | 197,820                 |       | 1,696,113  |       | 1,893,933  |       |
| 2009.                                       |       | 85,440                  |       | 1,696,112  |       | 1,781,552  |       |
| 2010                                        |       | —                  |       | 1,722,108  |       | 1,722,108  |       |
| 2011                                        |       | —                  |       | 1,722,107  |       | 1,722,107  |       |
| Beyond 2011or converted to equity (Note 13) |       | —                  |       | 12,957,084 |       | 12,957,084 |       |
| Minimum future lease payments               |       | 1,100,058               |       | 22,269,618 |       | 23,369,676 |       |
| Less interest component                     |       | (13,988                 | )          |       |       | (13,988    | )          |
|                                        |       | 1,086,070               |       | 22,269,618 |       | 23,355,688 |       |
| Current portion                             |       | (816,798                | )          | (5,476,094 | )          | (6,292,892 | )          |
| Less debt discount                          |       |                    |       | (2,837,911 | )          | (2,837,911 | )          |
| Long-term portion                           |       | $                       | 269,272    |       | $          | 13,686,341 |       | $ | 13,955,613 |   |

 

**Note 11.**               Stockholders’ equity

 

**Stockoptions.**

 

The Company has two stockoptions plans, the Amended and Restated 1999 Stock Option Plan and the Amendedand Restated 1999 Directors’ Stock Option Plan, through which 6,000,000 sharesand 300,000 shares are authorized, respectively. As of December 31, 2006, therewere 4,654,412 options for shares of common stock issued under the two plans,out of a total 6,300,000 approved pool of shares.

 

Information with respect toactivity under the stock option plans is summarized below:

 

Following is asummary of the Company’s stock options:

 
| **Range of  Exercise Price** | ** ** | **Number of  Options  Outstanding** | ** ** | **Weighted average  exercisable price** | ** ** | **Weighted average  remaining contractual life  of shares outstanding  (years)** | ** ** | **Number  exercisable** | ** ** | **Weighted  average  exercisable** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| $ 1.34 - $1.50                    |       | 525,000                                  | (1)   | $                                                 | 1.43       |                                                                                                      | 6.7        |                    | 108,400    |                               | $          | 1.48 |   |
| $ 1.51 - $1.75                    |       | 249,952                                  |       | 1.67                                              |       | 2.5                                                                                                       |       | 113,552                 |       | 1.69                               |       |
| $ 1.75 - $2.00                    |       | 969,733                                  |       | 1.85                                              |       | 3.1                                                                                                       |       | 389,098                 |       | 1.85                               |       |
| $ 2.00 - $13.00                   |       | 1,859,727                                |       | 2.62                                              |       | 4.9                                                                                                       |       | 354,727                 |       | 2.92                               |       |
|                                   |       | 3,604,412                                |       |                                              |       |                                                                                                      |       |                    |       |                               |       |
|                                        |            |                                          |            |                                                   |            |                                                                                                           |            |                         |            |                                    |            |  |  |

 

----

(1)1,050,000 options are exercisable at $1.34 in theevent of a change of control.

 

Following is asummary of transactions involving stock options: 

 
| ** **                 | ** ** | **Shares** | ** ** | **Range of Exercise Prices** | ** ** | **Average Price** | ** ** |
|----------------------------|------------|------------|------------|---------------------------------------------|------------|------------------------|------------|
| Balance, January 1, 2005   |       | 2,188,426  |       | $1.69-$15.00                                |       | $                      | 4.97       |   |
| Granted                    |       | 3,279,686  |       | $1.34-$3.01                                 |       | $                      | 1.89       |   |
| Cancelled                  |       | 1,444,640  |       | $1.66-$15.00                                |       | $                      | 5.73       |   |
| Exercised                  |       | 70,000     |       | $1.75-$2.50                                 |       | $                      | 2.13       |   |
| Balance, December 31, 2005 |       | 3,953,472  |       | $1.34-$15.00                                |       | $                      | 3.55       |   |
| Granted                    |       | 1,605,000  |       | $1.34-$3.03                                 |       | $                      | 2.53       |   |
| Cancelled                  |       | 499,060    |       | $1.69-$13.00                                |       | $                      | 7.83       |   |
| Exercised                  |       | 405,000    |       | $1.75-$2.50                                 |       | $                      | 2.00       |   |
| Balance, December 31, 2006 |       | 4,654,412  |       | $1.34-$13.00                                |       | $                      | 1.99       |   |

 

The weighted average fair value at the date of grant for optionsgranted during 2006 and 2005 as described above were $2.43 per share in 2006and $1.24 per share in 2005.

 

 

41

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**Warrants.**  As of December 31,2006, there were warrants outstanding to purchase a total of 6,588,053* sharesof the Company’s common stock with aweighted average exercise price of $1.68 per share. These include: 

 
| **Warrants** | ** ** | **Exercise Price** | ** ** | **Expiration Date** | ** **   |
|--------------|------------|-------------------------|------------|--------------------------|--------------|
| 1,500,000    |       | $                       | 1.25       |                     | October 2011 |   |
| 840,000      |       | 1.50                    |       | December 2007            |         |
| 50,000       |       | 2.55                    |       | April 2011               |         |
| 375,000      |       | 2.25                    |       | December 2007            |         |
| 75,000       |       | 2.25                    |       | June 2008                |         |
| 275,000      |       | 2.25                    |       | July 2008                |         |
| 75,000       |       | 2.25                    |       | September 2008           |         |
| 200,000      |       | 2.25                    |       | November 2008            |         |
| 2,600,000    |       | 2.00                    |       | November 2011            |         |
| 448,053      |       | 0.01                    |       | April 2010               |         |
|              |            |                         |            |                          |              |  |

 

----

* excluding warrants issuable described in Note 13

 

**Note 12.**               Income taxes

 

At December 31,2006, the Company had net operating loss carryforwards for U.S. federal incometax purposes of approximately $71,591,000, that may be available to offsetagainst future taxable income. These operating loss carryforwards expire in theyears 2010 through 2025. With respect to the U.S, no tax benefit has beenreported in the financial statements, and the potential tax benefits of the netoperating loss carryforwards are effectively offset by a 100% valuationallowance, as a result of significant uncertainties as to ability to realizethem in the future. Inaddition, the Company may be limited in its ability to fully utilize these netoperating loss carryforwards and realize any benefit therefrom in the event ofcertain ownership changes described in U.S. Internal Revenue CodeSection 382.

 

The reconciliation of the effective tax rate to thestatutory rates is as follows:

 
| ** **                                | ** ** | **Tax**    | ** ** | **%**  | ** ** | **Tax**    | ** ** | **%**     | ** ** |
|-------------------------------------------|------------|------------|------------|--------|------------|------------|------------|-----------|------------|
| Income tax benefit at U.S. statutory rate |       | $          | 4,684,467  |   | 34         | %          | $          | 5,972,858 |       | 34 | % |
| Australian tax benefit                    |       | 6,097      |       | 0      | %          |       |       |      |       |
| Effect of permanent differences           |       | (22,029    | )          | 0      | %          | (24,254    | )          |      |       |
| Valuation allowance                       |       | (4,668,535 | )          | 34     | %          | (5,948,604 | )          | 34        | %          |
| Actual                                    |       | $          | —     |   |       |       | $          | —    |       |   |   |

 

Deferred tax assets (liabilities) are composed of thefollowing:

 
| ** **                                                      | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Net operating loss carryforwards, including  $73,000 Australian |       | $                     | 28,303,000 |   | $ | 24,328,000 |   |
| Accrued vacation                                                |       | 38,000                |       | 26,000 |   |
| Deferred rent                                                   |       | 1,000                 |       | 12,000 |   |
| Allowance for uncollectibles                                    |       | 91,000                |       | 99,000 |   |
| Depreciation                                                    |       |                  |       | (312,000 | ) |
| Deferred tax liability                                          |       | (1,765,383            | )          | — |   |
| Less valuation allowance                                        |       | (28,433,000           | )          | (24,153,000 | ) |
|                                                            |       | $                     | (1,765,383 | ) | $ | — |   |

 

**Note  13.**            Commitments and contingencies

 

**Leases.** The Company is obligated under non-cancelable leases for office andwarehouse  facilities expiring in 2011 and2009, respectively. TheCompany also leases office space in other locations

 

42

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includingChina, Australia and certain office equipment under non-cancelable operatingleases with remaining terms in excess of one year.

 

Future minimumrental payment commitments, including scheduled escalation provisions as ofDecember 31, 2006, under the leases are as follows:

 
| 2007 |   | $       | 825,600 |   |
|------|--------|---------|---------|--------|
| 2008 |   | 858,624 |    |
| 2009 |   | 581,468 |    |
| 2010 |   | 604,726 |    |
| 2011 |   | 628,915 |    |

 

Rent expense onall operating leases was $891,989 and $597,404 for 2006 and 2005, respectively.

 

**Legal matters.**** **The Company is a defendant in a patent infringementaction against it. The complaint alleges, among other things, claims for patentinfringement and requests treble damages, and an injunction prohibiting theCompany from infringing on the plaintiff’s patents. On February 28, 2007, thecourt entered an order in favor of the Company. Nevertheless, the ultimateoutcome of this matter cannot be estimated at this time and, accordingly, noprovision has been made in the accompanying financial statements for any lossesthe Company might incur in its connection.

** **

**Sales taxaudit.**  In February 2004, the Stateof 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 hasbeen a shortfall in the payment of the sales/use tax. The Company sold andleased back shufflers and

 

Deck Checkers in prior years. The auditor for the State of Nevada istrying to determine at what level a sales/use tax needs to be collected. TheCompany now collects from our customers in Nevada and remits payments to theState of Nevada. If the State of Nevada determines that the sales of theproducts to the leasing companies is the level at which sales/use tax shouldhave been collected, liability of the leasing companies would be passed to theCompany. The amount of the 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 inconnection with this matter. A hearing with the State of Nevada Department ofTaxation originally scheduled for the fourth quarter 2006 has been postponeddue to a change in the Department’s leadership. The Company intends tovigorously defend its position in this matter.

** **

**Note 14.Subsequent events**

 

On January 18, 2007, theCompany received payment against an effective stock subscription for 1,000,000shares of its common stock at $2.65 per share, plus warrants for 16 millionshares exercisable as per the table below, entered into by agreement andapproved by, the shareholders in 2006. Accordingly, a $2,650,000 subscription receivable is carried as an assetbecause the Company received payment of this amount in January, and the sharesissuable are included in the number of shares outstanding since December 28,2006. The 16 million warrants vest on December 31, 2007 and expire December 31,2010. The warrants are exercisable as follows:

 
| **Warrants** | ** ** | **Exercise price** | ** ** |
|--------------|------------|-------------------------|------------|
| 6,000,000    |       | $                       | 2.65       |   |
| 4,000,000    |       | $                       | 3.00       |   |
| 2,000,000    |       | $                       | 3.50       |   |
| 1,000,000    |       | $                       | 4.00       |   |
| 1,000,000    |       | $                       | 4.50       |   |
| 1,000,000    |       | $                       | 5.00       |   |
| 1,000,000    |       | $                       | 5.50       |   |

 

In January, $7,282,168 inshort-term, convertible notes payable were converted into 2,445,808 shares theCompany’s common stock. Accordingly, pursuant to SFAS No, 6,*Classification ofShort-Term Obligations Expected to Be Refinanced*, these notes were excluded from currentliabilities and classified as long-term as of December 31, 2006.

 

Alsoin January 2007, the Company completed a sale of intellectual property relatedto its discontinued SecureDrop product line for $500,000 in cash.

 

On March 28, 2007, theCompany completed a sale of 1.625 million shares of common stock at $2.65 pershare and warrants to purchase an additional 1.625 million shares also at $2.65per share expiring March 2012 for total cash proceeds of approximately $4.3million.

## ** **

43

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| **ITEM 8.** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|-------------------------------------------------------------------------------------------|

 

None.

## ** **

| **ITEM 8A.** | **CONTROLS AND PROCEDURES** |
|--------------|-----------------------------|

 

a)                                      *Evaluation of Disclosure Controls*. In connection with the preparation of thisAmendment No. 1, our management, with the participation of our chief executiveofficer and chief financial officer, conducted, as of October 2007, are-evaluation of the effectiveness of our disclosure controls and procedures asof December 31, 2006.  Disclosure controlsand procedures are controls and other procedures that are designed to ensurethat information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin 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 informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, as appropriate to allowtimely decisions regarding required disclosure. Based on their current re-evaluation, our chief executive officer andchief financial officer have concluded that our disclosure controls andprocedures were not effective as of December 31, 2006, for the reasonsdescribed below.

 

In connection with thecompletion of its audit of, and the issuance of its report on, our financialstatements for the year ended December 31, 2006 included in our originalannual report on Form 10-KSB for the year ended December 31, 2006 filed withthe SEC on April 13, 2007 (“Original 2006 Form 10-KSB”), our independentregistered public accounting firm, Piercy Bowler Taylor & Kern,identified a significant deficiency and two material weaknesses in our internalcontrols.  The significant deficiencyconcerned authorization of payment of vendor invoices.  The material weaknesses included: (i) ourinability to properly control financial records and analyses, which was evidentin connection with our acquisition of Dolphin, to assure the proper allocationof purchase price to the net assets acquired, and (ii) the collectiveexperience of our personnel responsible for financial reporting.

 

Prior to the April 2007 filingof our Original 2006 Form 10-KSB, management initiated preliminary remediationsteps to address the material weaknesses and the significant deficiencyidentified.  These remediation stepsincluded planning for and documenting the implementation of formal disclosurechecklist processes and procedures to ensure that there is proper authorizationof payment on vendor invoices.  We alsoinitiated a search for an addition to our accounting team with strong publicaccounting financial reporting experience. During the second quarter of fiscal 2007, we strengthened our financialorganization by hiring an additional member to our management team, withextensive experience in SEC reporting and GAAP, who will be responsible forproviding added training and financial discipline to the financial reportingprocess.

 

InAugust 2007, we became aware of certain errors in the reporting of ourfinancial statements for the year ended December 31, 2006, including errors inthe recording of expenses relating to warrants issued with debt during thesecond quarter of 2006 and the classification of $4,300,000 of goodwill.  For further discussion regarding the errors,see Note 3 to the consolidated financial statements included in Item 7 of thisAmendment No.  Prior to their discovery,we had already taken steps to remediate the deficiencies that underlay thesereporting errors, including the hiring of the above-described member to ourmanagement team with extensive experience in SEC reporting and GAAP.  In addition, we subscribed to a comprehensiveonline accounting reference library and adopted use of its disclosure and otherfinancial reporting checklists. We also added to our accounting staff, acertified public accountant formerly with a “Big Four” auditing firm and withsignificant experience in SEC reporting and GAAP.  We are continuing to assess and strengthenour financial organization by seeking additional qualified staff.  Additionally, we are training otherappropriate personnel in the required approach and documentation standard foreach key account analysis.

 

44

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InOctober 2007, and in connection with the restatement of our financial statementfor the fiscal year ended December 31, 2006, an evaluation was performed under thesupervision and with the participation of our management, including our chiefexecutive officer and chief financial officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures as of December31, 2006.  Based on that evaluation, ourmanagement, including our chief executive officer and chief financial officer,has concluded that our disclosure controls and procedures were not effective asof December 31, 2006 as a result of the improper accounting for warrants and goodwill,as described above.

 

(b)                                 *Changesin internal control over financial reporting.*  No change in our internal control overfinancial reporting occurred during the fourth quarter of the fiscal 2006 thatmaterially affected, or is reasonably likely to affect, our internal controlover financial reporting.

 

# **ITEM  8B.     OTHER INFORMATION**

# ** **

# **Notapplicable.**

# ** **

45

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# ** **

# **PARTIII**

 

**ITEM 9.**                              **DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION16(A) OF THE EXCHANGE ACT**

 

The following information isfurnished with respect to each of our executive officers and member of ourboard of directors. Each member of our board of directors serves a one yearterm until his successor is duly elected and appointed at our next annualmeeting of stockholders. There are no family relationships between or among anyof our directors

** **

**ExecutiveOfficers and Directors**

 
| **Name**                 | ** ** | **Age** | ** ** | **Position**                                               |
|--------------------------|------------|---------|------------|------------------------------------------------------------|
| Mark R. Newburg          |       | 52      |       | President, Chief Executive  Officer and Director           |
| Arnaldo F. Galassi       |       | 50      |       | Vice President and Chief Financial Officer                 |
| Peter Zee                |       | 60      |       | Vice President of Engineering and Manufacturing            |
| Walter B. Stowe, Jr.     |       | 58      |       | Vice President of Legal & Compliance, General  Counsel |
| James E. Crabbe          |       | 61      |       | Chairman of the Board of  Directors                        |
| Maj. Gen. Paul A. Harvey |       | 69      |       | Director                                                   |
| Vincent L. DiVito        |       | 47      |       | Director                                                   |
| Robert L. Miodunski      |       | 56      |       | Director                                                   |

 

***Mark R. Newburg***joined our board of directors as ExecutiveDirector in March 2005, was appointed Treasurer in April, 2005, and has servedas our president and chief executive officer since October 2005. Mr. Newburgpreviously served as the president and chief executive officer and as a memberof the board of directors of VirtGame Corp., a developer of software andnetworking applications for the gaming industry, from August 2004 to October2005. From March 2004 to November 2004, Mr. Newburg served as chiefoperating officer to Left Right Marketing Technologies, an internet retailingstart-up in Las Vegas. From March 2003 to March 2004, Mr. Newburg was presidentand chief executive officer of C2Consulting Inc., a firm specializing in areassuch as strategic planning, change management, organizational integration,international operations, and organizational alignment. From July 2001 to March2003, Mr. Newburg served as president of Aristocrat Technologies Inc, anAustralia based designer, builder and marketer of proprietary software andhardware to the international gaming market. Previously, Mr. Newburg had a20 year career at NCR Corporation, a $5.9 billion provider of store automation,self-service, payment, and data-warehousing solutions. Mr. Newburg earned hisMBA from the University of Dayton in June 1985, and dual undergraduate majorswith a BS in both Accounting & Business Administration from the Universityof Findlay in June 1976.

*** ***

***Arnaldo F. Galassi***has served******asour vice president and chief financial officer since October 2005. Mr. Galassihad previously served as a management consultant to our company since March2005. From August 2004 to October 2005, Mr. Galassi served as chief financialofficer of VirtGame Corp. FromMarch 2004 to November 2004, Mr. Galassi served as chief financial officerto Left Right Marketing Technologies, an internet retailing start-up in LasVegas. From June 1997 to October 2003, Mr. Galassi was a treasury director for NCRCorporation. Mr. Galassi earned his MBA from the Rutgers University inDecember 1980, and a BS in history from Ursinus College in June 1979.

*** ***

***Peter Zee*******has served as our****vicepresident of engineering and manufacturing since October 2005. Mr. Zee hadpreviously served as a management consultant to our company since March 2005.Mr. Zee served a chief executive officer of Tech Elite Group, a Hong Kongtechnology company, from March 2004 to September 2005. Prior to March 2004, Mr.Zee was employed by NCR for 34 years, most recently as its vice president,Retail Solutions Division, Asia Pacific. As of January 2007, Mr Zee wasappointed as a non-executive director of Fintronics, a Hong Kong listed companyin the business of acquiring, installing and servicing of automated tellermachines for banks, and as of March 2007 was appointed as a director for NatrolCorporation’s (NASDAQ listed health supplement manufacturing company) Hong Kongsubsidiary (Natrol Hong Kong Limited).

 

46

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***Walter B. Stowe, Jr,*** has served as our vice president of legal and compliance and general counsel sinceMay 2006. From June 2002 to November 2005, Mr. Stowe most recently served asthe vice president of legal and compliance for Aristocrat Technologies Inc. inLas Vegas. From August 2001 to June 2002, Mr. Stowe served as the director ofcompliance and associate corporate counsel for Konami Gaming, Inc., a slotmachine manfacturer. Prior to that, Mr. Stowe had 26 year career with the FBI. Mr Stowe received hs law degree fromthe Marshall-Wythe School of Law at William and Mary College in 1974 and hereceived his A.B. in history from William and Mary College in 1971.

 

***James E. Crabbe***has served on our board of directors since May 2000 andwas elected chairman of our board in August 2001. Mr. Crabbe is currentlyengaged in the active management of his personal investment portfolio. He spent34 years in the money management business. In 1980, he co-founded theCrabbe-Huson Group, Inc., an investment management company, of which he servedas president, portfolio manager and analyst until his retirement in 2000.Mr. Crabbe earned his bachelor’s degree from the University of Oregon in1967.

 

***Major General Paul A. Harvey*** has served on our board of directors sinceOctober 2005 and he chairs the compliance committee of the board. GeneralHarvey has served as a consultant to the gaming, hotel and resort industry forthe past five years. General Harvey spent 32 years on active duty in theUnited States Air Force where he held numerous command positions throughout theUnited States, Europe, Africa and the Middle East. Following retirement, he wasthe executive director of the Mississippi Gaming Commission from 1993 through1998. General Harvey served on the board of directors of the National Centerfor Responsible Gaming from 1996 to 2004 (and is on the advisory board to thecurrent chairman), Riviera Holdings Corporation, the owner and operator ofRiviera Hotel & Casino in  Las Vegas,Nevada, and Progressive Gaming International Corporation, a Las Vegas, Nevadabased developer of table and slot game content and software products for thegaming industry.

 

***Vincent L. DiVito*******has served  on our board of directors since October 2005and he chairs the audit committee of the board. Mr. DiVito has served as vicepresident, chief financial officer and treasurer of Lonza, a Swiss-based lifesciences chemical company headquartered in Allendale, New Jersey, since 2000.Previously, Mr. DiVito was the vice president and chief financial officer ofAlgroup Wheaton, a global pharmaceutical and cosmetics packaging company. Mr.DiVito spent two years on the audit team of Ernst & Whinney (now Ernst& Young). Mr. DiVito is a certified public accountant and certifiedmanagement accountant. He is also a member of the board of directors of RivieraHoldings Corporation.

 

***Robert L. Miodunski*******has served  on our board of directors since October 2005and he chairs the compensation committee of the board. Mr. Miodunski served aspresident and chief executive officer of Alliance Gaming Corporation from 1999through 2004. Since 2004, Mr. Miodunski serves as a consultant to AllianceGaming’s board of directors and chief executive officer. From 1994 until 2002,Mr. Miodunski served as president of United Coin Machine Company, a subsidiaryof Alliance Gaming.

 

**Audit Committee**

 

Our board of directors has established an****audit committee, currently comprised of Vincent DiVito, RobertMiodunski, and Major General Paul******Harvey.Mr. DiVito serves as the audit committee chair and has been identified asthe audit committee financial expert.

 

Themembers of our audit committee are independent, as independence for auditcommittee members is defined in Section 121A of the American Stock ExchangeCompany Guide.

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

 

Rulesadopted by the SEC under Section 16(a) of the Securities Exchange Act of 1934,or the Exchange Act, require our officers and directors, and persons who ownmore than 10% of the issued and outstanding shares of our equity securities, tofile reports of their ownership, and changes in ownership, of

 

47

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suchsecurities with the Securities and Exchange Commission on Forms 3, 4 or 5, asappropriate. Such persons are required by the regulations of the Securities andExchange Commission to furnish us with copies of all forms they file pursuantto Section 16(a).

 

Basedsolely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to usduring our most recent fiscal year, and any written representations provided tous, we believe that all of the officers, directors, and owners of more than tenpercent of the outstanding shares of our common stock complied with Section16(a) of the Exchange Act for the year ended December 31, 2006.

 

**Code of Ethics**

 

Wehave adopted a Code of Ethics that applies to all our directors, officers andemployees. The Code of Ethics is designed to serve as the foundation of ourstandards of behavior and to promote honest and ethical conduct, properdisclosure of financial information in our periodic reports, and compliancewith applicable laws, rules, and regulations by our all directors, officers andemployees, including our directors and senior officers who have operating andfinancial responsibilities. Our Code of Ethics is posted on the “Investors”section of our Internet web site athttp://www.vendingdata.com/investors/ethics.

 

**ITEM 10. **                **EXECUTIVE COMPENSATION**

 

**Summary Compensation Table**

 

Thefollowing table sets forth the compensation awarded to, earned by or paid to,our chief executive officer and our other two highest paid executive officersearning in excess of $100,000 for services rendered in all capacities duringfiscal years ended December 31, 2006.

 

** **
| **Name and  Principal  Position  (a)** | ** ** | **Year  (b)** | ** ** | **Salary  ($)  (c)** | ** ** | **Bonus  ($)  (d)** | ** ** | **Stock  Awards  ($)  (e)** | ** ** | **Option  Awards  ($)  (f)** | ** ** | **Non-Equity  Incentive  Plan  Compensation  ($)  (g)** | ** ** | **Nonqualified  Deferred  Compensation  Earnings  ($)  (h)** | ** ** | **All Other  Compensation  (i)** | ** ** | **Total  (j)** | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------------|------------|---------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|
| Mark  Newburg, CEO                          |       | 2006          |       | 286,538              |       | 150,000             |       |                        |       | 282,976                      |       |                                                    |       |                                                         |       | 33,571                                |       | 753,085        |       |
| Arnaldo  Galassi, CFO                       |       | 2006          |       | 186,539              |       | 50,000              |       |                        |       | 90,354                       |       |                                                    |       |                                                         |       | 12,634                                |       | 339,527        |       |
| Peter Zee,  VP Engineering                  |       | 2006          |       | 193,269              |       | 60,000              |       |                        |       | 90,354                       |       |                                                    |       |                                                         |       | 16,725                                |       | 360,348        |       |

 

Thedollar amounts in column (f) reflect the dollar amounts recognized forfinancial statement reporting purposes for the fiscal year ended December 31,2006, in accordance with FAS 123(R). Assumptions used in the calculation ofthis amount are included in footnote (1) to our audited financial statement forthe fiscal year ended December 31, 2006 included elsewhere in this report.

 

**Narrativedisclosure to Summary Compensation Table**

 

*Mark Newburg*onSeptember 29, 2005 we entered into a two year employment agreement with Mr.Newburg. Terms of the agreement provided for:

 

•                  an annual salary of $250,000,

 

•                  a signing bonus of $75,000 split in two equalpayments to be made on the signing of the employment agreement and on December15, 2005,

 

•                  750,000 stock options priced at $1.34 whichshall vest and first become exercisable upon a change of control*,

 

•                  in the event of a change of control, apayment equal to 12 months base salary in effect on the date of the change ofcontrol and an amount equal to 50% of his annual base pay, and,

 

•                  annual bonuses of up to 50% of his salaryprovided certain performance milestones are met.

 

InApril 2006, Mr. Newburg’s annual salary was increased to $300,000 and Mr.Newburg was granted an additional option to purchase 300,000 shares of our commonstock at an exercise price of

 

48

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$2.48per share. In March 2007, Mr. Newburg’s annual salary was increased to$325,000. Additionally, he received a $150,000 bonus and was granted anadditional option to purchase 200,000 shares of our common stock at an exerciseprice of $2.40 per share.

 

*Perquisites*

Mr.Newburg is also entitled to certain perquisites:

 

•                  ability to participate in, at the Company’sexpense, whatever employee benefit plans (medical, dental, vision) the Companymaintains. Additionally, the Company reimburses Mr. Newburg for allout-of-pocket medical, dental and vision expenses not paid under the benefitplans. In 2006, these health benefits amounted to $15,304 and are included inColumn I above.

 

*Arnaldo Galassi*on September 29, 2005 we entered into a twoyear employment agreement with Mr. Galassi. Terms of the agreement providedfor:

 

•                  an annual salary of $150,000,

 

•                  150,000 stock options priced at $1.34 whichshall vest and first become exercisable upon a change of control*,

 

•                  in the event of a change of control, apayment equal to 12 months base salary in effect on the date of the change ofcontrol and an amount equal to 50% of his annual base pay, and,

 

•                  annual bonuses of up to 50% of his salaryprovided certain performance milestones are met.

 

InApril 2006, Mr. Galassi’s annual salary was increased to $200,000 and Mr.Galassi was granted an additional option to purchase 100,000 shares of ourcommon stock at an exercise price of $2.48 per share. In March 2007, Mr. Galassi’s annual salarywas increased to $230,000. Additionally, he received a $50,000 bonus and wasgranted an additional option to purchase 50,000 shares of our common stock atan exercise price of $2.40 per share.

 

*Perquisites*

Mr.Galassi is also entitled to certain perquisites:

 

•                  ability to participate in, at the Company’sexpense, whatever employee benefit plans (medical, dental, vision) the Companymaintains. In 2006, these health benefits amounted to $13,892 and are includedin Column I above.

 

*Peter Zee*on October 1, 2005 we entered into a two year employment agreement with Mr.Zee. Terms of the agreement provided for:

 

•                  an annual salary of $175,000.

 

•                  150,000 stock options priced at $1.34 whichshall vest and first become exercisable upon a change of control*,

 

•                  in the event of a change of control, apayment equal to 12 months base salary in effect on the date of the change ofcontrol and an amount equal to 50% of his annual base pay, and,

 

•                  annual bonuses of up to 50% of his salaryprovided certain performance milestones are met.

 

InApril 2006, Mr. Zee’s annual salary was increased to $200,000 and Mr. Zee wasgranted an additional option to purchase 100,000 shares of our common stock atan exercise price of $2.48 per share. In March 2007, Mr. Zee’s annual salary was increased to $230,000.Additionally, he received a $100,000 bonus and was granted an additional optionto purchase 60,000 shares of our common stock at an exercise price of $2.40 pershare.

 

*Perquisites*

Mr.Zee is also entitled to certain perquisites:

 

•                  ability to participate in, at the Company’sexpense, whatever employee benefit plans (medical, dental, vision) the Companymaintains. In 2006, these health benefits amounted to $12,634 and are included inColumn I above.

 

----

*Change of control isdefined as the acquisition, directly or indirectly, in a single transaction ora series of related transactions by any person resulting in the beneficialownership of 50% or more of the combined voting power of the then outstandingvoting securities of the Company entitled to vote.

 

49

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**Outstanding Equity Awards at Fiscal Year-End Table**

 

** **
| ** **      | ** ** | **Option Awards**                                                                  | ** ** | **Stock Awards**                                                                     | ** ** |
|-----------------|------------|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| **Name  (a)**   | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Exercisable  (b)** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Unexercisable  (c)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  option  (#)  (d)** | ** ** | **Option  Exercise  Price  ($)  (e)** | ** ** | **Option  Expiration  Date  (f)** | ** ** | **Number  of  Shares  or Units  of Stock  That  Have  Not  Vested  (#)  (g)** | ** ** | **Market  Value  of  Shares  or  Units  of  Stock  That  Have  Not  Vested  ($)  (h)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Unearned  Shares,  Units or  Other  Rights That  Have Not  Vested  (#)  (i)** | ** ** | **Equity  Incentive  Plan  Awards: Market or  Payout Vale  of Unearned  Shares Units  or Other  Rights That  Have Not  Vested  ($)  (j)** | ** ** |
| Mark Newburg    |       | 191,666                                                                                 | (1)        | 108,334                                                                                   | (1)        | $1.49 |   |   |   | 1/31/15 |   |   |   |   |   |   |   |   |   |
|            |       | 67,000                                                                                  | (2)        |                                                                                      |       | 1.85 |   |   |   | 4/28/08 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 67,000                                                                                    | (2)        | 1.85 |   |   |   | 4/28/09 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 66,000                                                                                    | (2)        | 1.85 |   |   |   | 4/28/10 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 750,000                                                                                   | (3)        | 1.34 |   |   |   |   | (3) |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 200,000                                                                                   | (4)        | 2.48 |   |   |   | 4/7/12 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 200,000                                                                                   | (5)        | 2.40 |   |   |   | 3/7/13 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       |                                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Arnaldo Galassi |       | 34,000                                                                                  | (6)        |                                                                                      |       | 1.92 |   |   |   | 3/1/08 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 33,000                                                                                    | (6)        | 1.92 |   |   |   | 3/1/09 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 33,000                                                                                    | (6)        | 1.92 |   |   |   | 3/1/10 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 150,000                                                                                   | (3)        | 1.34 |   |   |   |   | (3) |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 100,000                                                                                   | (4)        | 2.48 |   |   |   | 4/7/12 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 50,000                                                                                    | (5)        | 2.40 |   |   |   | 3/7/13 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       |                                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Peter Zee       |       | 34,000                                                                                  | (6)        |                                                                                      |       | 1.92 |   |   |   | 3/1/08 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 33,000                                                                                    | (6)        | 1.92 |   |   |   | 3/1/09 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 33,000                                                                                    | (6)        | 1.92 |   |   |   | 3/1/10 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 150,000                                                                                   | (3)        | 1.34 |   |   |   |   | (3) |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 100,000                                                                                   | (4)        | 2.48 |   |   |   | 4/7/12 |   |   |   |   |   |   |   |   |   |
|            |       |                                                                                    |       | 60,000                                                                                    | (5)        | 2.40 |   |   |   | 3/7/13 |   |   |   |   |   |   |   |   |   |

 

----

(1)300,000 options granted as consultant on 1/31/05. Options vest monthly overthree years starting on 1/31/06.

(2)200,000 options granted on 4/28/05. One third of options vest every year.

(3)Options vest and first become exercisable upon a change of control of theCompany.

(4)Options granted on 4/7/06. One third of options vest every year.

(5)Options granted on 3/7/07. One third of options vest every year

(6)  Options granted as consultant on3/1/05. Options vest annually over three years starting on 3/1/06

 

50

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**Director Compensation Table**

 
| **Name  (a)**    | ** ** | **Fees Earned  or Paid  in Cash  ($)  (b)** | ** ** | **Stock  Awards  ($)  (c)** | ** ** | **Option  Awards  ($)  (d)(1)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)  (e)** | ** ** | **Change in Pension  Value and  Nonqualified  Deferred  Compensation  Earnings  ($)  (f)** | ** ** | **All Other  Compensation  ($)  (g)** | ** ** | **Total  ($)  (h)** | ** ** |
|------------------|------------|------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------|------------|
| James Crabbe     |       |                                                       |       |                        |       | 8,000                           |       |                                                        |       |                                                                                                      |       |                                       |       | 8,000               |       |
| Vincent DiVito   |       |                                                       |       |                        |       |                            |       |                                                        |       |                                                                                                      |       |                                       |       |                |       |
| Paul Harvey      |       |                                                       |       |                        |       |                            |       |                                                        |       |                                                                                                      |       |                                       |       |                |       |
| Robert Miodunski |       |                                                       |       |                        |       |                            |       |                                                        |       |                                                                                                      |       |                                       |       |                |       |
| William Purton   |       |                                                       |       |                        |       |                            |       |                                                        |       |                                                                                                      |       |                                       |       |                |       |
| Ron Keil         |       |                                                       |       |                        |       | 21,152                          |       |                                                        |       |                                                                                                      |       |                                       |       | 21,152              |       |
| Robert Smith     |       |                                                       |       |                        |       | 21,152                          |       |                                                        |       |                                                                                                      |       |                                       |       | 21,152              |       |

 

Thedollar amount in column (d) reflect the dollar amount recognized for financialstatement reporting purposes for the fiscal year ended December 31, 2006, inaccordance with FAS 123(R). Assumptions used in the calculation of this amountare included in footnote (1) to our audited financial statement for the fiscalyear ended December 31, 2006 included elsewhere in this report.

 

Ournon-employee members of our board of directors receive an initial grant of100,000 options and effective as March 2007, an annual grant of 15,000 optionson the date of the annual or special meeting of stockholders at which directorsare elected. The exercise price is the then-current market price of our commonstock. Our directors are reimbursed for their out-of-pocket expenses related totheir services as directors or meeting attendance. Commencing April 2007,members of our board of directors that are not employees receive a quarterlyfee of $7,500, and in addition the chairman of our audit committee receives anadditional $7,500 per quarter. In addition, upon joining the board, DirectorsDiVito, Harvey and Miodunski each received options to purchase 100,000 sharesof common stock at $1.34 per share over a 3-year term pursuant to our 1999Stock Option and Grant Plan; and each will receive a grant of 50,000 shares ofcommon stock which accrued in increments of 10,000 shares over the five fiscalquarters beginning in September, 2005 and will be issued during 2007 pursuantto the approval received from our stockholders at the 2006 annual stockholdersmeeting.

 

MessrsKeil and Smith resigned from the board on June 26, 2006. Mr. Purton resignedfrom the board on December 31, 2006.

 
| **ITEM 11.** | **SECURITY OWNERSHIP OF  CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|-----------------------------------------------------------------------------------------------------|

 

**Security Ownership of Certain Beneficial Owners andManagement**

 

Thetable below sets forth the beneficial ownership of our common stock, as ofMarch 9, 2007, by:

 

•                  All of our directors and executive officers,individually;

 

•                  All of our directors and executive officers,as a group; and

 

•                  All persons who beneficially owned more than5% of our outstanding common stock.

 

Thebeneficial ownership of each person was calculated based on 32,511,007shares of our common stock outstanding as ofMarch 9, 2007, according to the record ownership listings as of that date andthe verifications we solicited and received from each director and executiveofficer. The SEC has defined “beneficial ownership” to mean more than ownershipin the usual sense. For example, a person has beneficial ownership of a sharenot only if he owns it in the usual sense, but also if he has the power tovote, sell or otherwise dispose of the share. Beneficial ownership alsoincludes the number of shares

 

51

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thata person has the right to acquire within 60 days of March 9, 2007, pursuant tothe exercise of options or warrants or the conversion of notes, debentures orother indebtedness, but excludes stock appreciation rights. Two or more personsmight count as beneficial owners of the same share. Unless otherwise noted, theaddress of the following persons listed below is c/o VendingData Corporation,1120 Town Center Ste. 260, Las Vegas, Nevada 89144.

 
| **Name of Director or Executive Officer**                                          | ** ** | **Shares(1)** | ** ** | **Percentage** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| James E. Crabbe                                                                                             |       | 7,115,073     | (2)        | 21.89          | %          |
| Paul A. Harvey                                                                                              |       | 84,000        | (3)        | 0.26           | %          |
| Vincent L. DiVito                                                                                           |       | 84,000        | (3)        | 0.26           | %          |
| Robert L. Miodunski                                                                                         |       | 84,000        | (3)        | 0.26           | %          |
| Mark R. Newburg                                                                                             |       | 3,250,460     | (4)        | 10.0           | %          |
| Arnaldo F. Galassi                                                                                          |       | 100,000       | (5)        | 0.31           | %          |
| Peter Zee                                                                                                   |       | 100,000       | (6)        | 0.31           | %          |
| Walter B. Stowe, Jr.                                                                                        |       | 33,333        | (7)        | 0.10           | %          |
| All directors and executive officers as a  group (8 persons)                                           |       | 10,850,866    | (8)        | 33.38          | %          |
|                                                                                                        |       |          |       |           |       |
| **Name and  Address of 5% Holder**                                                                          |       |          |       |           |       |
| William W.  Purton  99 Hotham Street  East Melbourne, Victoria  3002  Australia                        |       | 3,114,286     | (9)        | 9.58           | %          |
| LC Capital  Master Fund LP  c/o Lampe Conway & Co., LLC  680 5th Avenue, Suite 1201  New York, NY 10019 |       | 2,844,848     | (10)       | 8.75           | %          |
| Leonid  Frenkel  c/o Triage Capital LF Group, LLC  401 City Ave, Suite 800  Bala Cynwyd, PA 19004           |       | 2,824,794     | (11)       | 8.69           | %          |
| Bricoleur  Capital Managemenrt LLC  12230 El Camino Real #100  San Diego, CA 92130                          |       | 5,194,325     | (12)       | 15.98          | %          |

 

----

(1)               Unless otherwise noted, the personsidentified in this table have sole voting and sole investment power with regardto the shares beneficially owned by them.

 

(2)               Includes 4,574,066 shares held directlyby Mr. Crabbe, 80,600 shares issuable upon the exercise of stock optionsand 2,460,407 shares held by Mr. Crabbe, as Trustee of the James E. CrabbeRevocable Trust. Mr. Crabbe disclaims any ownership of any shares of commonstock beneficially owned by Phileo Foundation, a charitable foundation of whichMr. Crabbe is a trustee and president, or by Yvonne M. Huson, or herrelated trusts, for which Mr. Crabbe formerly held voting power.

 

(3)               Includes 50,000 shares held directly and34,000 shares issuable upon the exercise of stock options.

 

(4)               Includes 425,666 shares issuable uponthe exercise of stock options and 2,824,794 shares over whichMr. Newburg exercises sole voting control pursuant to a VotingTrust Agreement dated August 28, 2006, by and among Mr. Newburgand the Triage entities.

 

(5)               Includes 1,000 shares held directly byMr. Galassi and 100,000 shares issuable upon the exercise of stock options.

 

(6)               Includes 100,000 shares issuable uponthe exercise of stock options.

 

(7)               Includes 33,333 shares issuable upon theexercise of stock options.

 

(8)               Includes 9,013,059 shares issueddirectly, 841,599 shares issuable upon the exercise of stock options.

 

(9)               Includes 1,807,143 shares held directlyby Mr. Purton and 1,307,143 shares held directly by Synwood Trust which        is controlled by Mr. Purton.

 

(10)         Includes 2,484,848 shares held by LC CapitalMaster Fund, Ltd.: and share beneficially owned by LC Capital Master Fund, Ltd.upon the exercise of 360,000 warrant shares.

 

52

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(11)         Includes 550,984 shares held by Triage CapitalManagement LP; 175,757 shares held by Periscope Partners LP; sharesbeneficially owned by Triage Capital Management LP upon the conversion of1,277,865 warrant shares; shares beneficially owned by Triage CapitalManagement B LP upon the conversion of 784,688 warrant shares; sharesbeneficially owned by Periscope Partners LP upon conversion of 10,000 warrantshares; and shares beneficially owned by Leonid Frenkel upon the conversion of25,500 warrant shares. Mr. Newburg exercises sole voting control pursuantto a Voting Trust Agreement dated August 28, 2006, by and amongMr. Newburg and the Triage entities.

 

(12)         Includes 104,432 shares held by Bric 6 LP;553,204 shares held by Bricoleur Enhanced LP; 742,468 shares held by BricoleurOffshore Ltd.; 1,194,221 shares held by Bricoleur Partners LP; sharesbeneficially owned by Bricoleur Enhanced LP issuable upon the exercise of1,200,000 common stock purchase warrants; and shares beneficially owned byBricoleur Offshore Ltd issuable upon the exercise of 1,400,000 common stockpurchase warrants..

 

**Equity Compensation Plan Information**

 

Wehave two stock options plans, the Amended and Restated 1999 Stock Option Planand the Amended and Restated 1999 Directors’ Stock Option Plan, through which6,000,000 shares and 300,000 shares are authorized, respectively. Pursuant toour stock options plans, as of December 31, 2006, there were optionsoutstanding to purchase 4,804,412 shares of our common stock with a weightedaverage exercise price per share of $2.17 and options remaining to purchase1,495,588 shares of our common stock.

 

Thefollowing table sets forth certain information as of December 31, 2006about our equity compensation plans under which our equity securities areauthorized for issuance.
| ** **                                                  | ** ** | **(a)**                                                                                                                                          | ** ** | **(b)**                                                                                                           | ** ** | **(c)**                                                                                                                                                                                                          | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighed-average  exercise price of  outstanding  options, warrants  and notes rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
| Equity compensation plans approved by  security holders     |       | 11,192,465                                                                                                                                       |       | $                                                                                                                 | 1.79       |                                                                                                                                                                                                             | 1,495,588  |   |
| Equity compensation plans not approved by  security holders |       |                                                                                                                                             |       | —                                                                                                            |       | —                                                                                                                                                                                                           |       |
| **Total**                                                   |       | 11,192,465                                                                                                                                       |       | $                                                                                                                 | 1.79       |                                                                                                                                                                                                             | 1,495,588  |   |

 

Thefirst column reflects outstanding stock options to purchase 4,719,612 shares,outstanding warrants to purchase 6,388,053 warrants, and 84,800 shares ofcommon stock pursuant to our Amended and Restated 1999 Stock Option Plan andour Amended and Restated 1999 Directors’ Stock Option Plan, respectively, whichhave been approved by our stockholders.

 

Thethird column reflects 1,280,388 shares remaining for issuance under our Amendedand Restated 1999 Stock Option Plan and 215,200 shares available under ourAmended and Restated 1999 Directors’ Stock Option Plan.

 
| **ITEM 12.** | **CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS** |
|--------------|-----------------------------------------------------|

 

**Transaction Review**

 

Wehave adopted a policy that any transactions with directors, officers orentities of which they are also officers or directors or in which they have afinancial interest, will only be on terms consistent with industry standardsand approved by a majority of the disinterested directors of our board. Ourbylaws provide that no such transactions by us shall be either void or voidablesolely because of such relationship or interest of directors or officers orsolely because such directors are present at the meeting of our board

 

53

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ora committee thereof which approves such transactions, or solely because theirvotes are counted for such purpose if:

 

•                  The fact of such common directorship orfinancial interest is disclosed or known by our board or committee and noted inthe minutes, and our board or committee authorizes, approves or ratifies thecontract or transaction in good faith by a vote for that purpose withoutcounting the vote or votes of such interested directors; or

 

•                  The fact of such common directorship orfinancial interest is disclosed to or known by the stockholders entitled tovote, and they approve or ratify the contract or transaction in good faith by amajority vote or written consent of stockholders holding a majority of theshares of common stock entitled to vote (the votes of the interested directorsor officers shall be counted in any such vote of stockholders); or

 

•                  The contract or transaction is fair andreasonable to us at the time it is authorized or approved.

 

Inaddition, interested directors may be counted in determining the presence of aquorum at a meeting of our board or a committee thereof that approves suchtransactions. If there are no disinterested directors, we shall obtain amajority vote of the stockholders approving the transaction.

 

Asof December 31, 2006, William Purton, the owner of Dolphin prior to ouracquisition of the company, owed Dolphin $514,260 for funds Dolphin hadadvanced to Mr. Purton. It is anticipated that Mr. Purton will repay thisoutstanding before the end of fiscal 2007.

 

**Securities and Exchange Commission Position on CertainIndemnification**

 

Ourarticles of incorporation obligate us to indemnify our directors and officersto the fullest extent permitted under Nevada law. Chapter 78 of the NevadaRevised Statutes, or NRS, provides for indemnification by a corporation ofcosts incurred by directors, employees, and agents in connection with an action,suit, or proceeding brought by reason of their position as a director,employee, or agent. The person being indemnified must have acted in good faithand in a manner he reasonably believed to be in or not opposed to the bestinterests of the corporation.

 

Insofaras indemnification for liabilities arising under the Securities Act of 1933, orthe Securities Act, may be permitted to our directors, officers or personscontrolling us pursuant to the provisions contained in our amended and restatedarticles of incorporation, our amended and restated bylaws, Nevada law orotherwise, we have been informed that, in the opinion of the SEC, suchindemnification is against public policy as expressed in the Securities Act of1933 and is therefore unenforceable. If a claim for indemnification againstsuch liabilities, other than the payment by us of expenses incurred or paid byone of our directors, officers or controlling persons in the successful defenseof any action, suit, or proceeding, is asserted by such director, officer orcontrolling person, we will, unless in the opinion of our counsel the matterhas been settled by controlling precedent, submit to a court of appropriatejurisdiction the question whether such indemnification by us is against publicpolicy as expressed in the Securities Act of 1933 and will be governed by thefinal adjudication of this issue.

 

**Indemnification Agreements**

 

Wehave entered into indemnification agreements with members of our board ofdirectors and certain of executive officers and other employees in which weagreed to hold harmless and indemnify such directors, officers and employees tothe fullest extent authorized under Nevada law, and to pay any and all relatedexpenses reasonably incurred by the indemnitee. The relevant members of ourboard of directors are James E. Crabbe, Mark R. Newburg, Vincent L. DiVito,Paul A. Harvey, Robert L. Miodunski and former directors Ronald O. Keil andBob L. Smith. The relevant officers and other employees include:  Arnaldo F. Galassi, chief financial officer,and; Peter Zee, senior vice president of engineering and production.

 

54

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**ITEM 13.****EXHIBITS**

 

Theexhibits to this Annual Report on Form 10-KSB are set forth below. The exhibitindex indicates each management contract or compensatory plan or arrangementrequired to be filed as an exhibit to this Annual Report on Form 10-KSB.Exhibit

 
| **Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                      |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1        |       | Amended and Restated Articles of Incorporation dated  June 7, 2003 (Incorporated by reference from the Registrant’s Form 8-K,  filed on June 18, 2003).                                                                                                                                       |
| 3.2        |       | Amended and Restated Bylaws of the registrant dated  November 13, 2002, incorporated by reference from the registrant’s Current  Report on Form 8-K filed on January 8, 2003.                                                                                                                           |
| 3.3        |       | Certificate of Amendment to Articles of  Incorporation dated August 23, 2005, incorporated by reference from the  registrant’s Annual Report on Form 10-KSB filed on April 13, 2007                                                                                                                     |
| 3.4        |       | Certificate of Amendment to Articles of  Incorporation dated January 9, 2007, incorporated by reference from the  registrant’s Annual Report on Form 10-KSB filed on April 13, 2007                                                                                                                     |
| 10.1       |       | Shareholder Agreement dated December 14, 1998, by  and between VendingData Corporation and Richard Huson, Bob Smith and Ron  Keil, incorporated by reference from the registrant’s Annual Report on Form  10-KSB filed on March 26, 1999.                                                               |
| 10.2       |       | Form of Warrant Associated with 9.5% Convertible  Note Due 2004, incorporated by reference from the registrant’s Quarterly  Report on Form 10-QSB filed on May 17, 1999.                                                                                                                                |
| 10.3       |       | Lease Agreement dated August 19, 1999, by and  between the registrant and The Howard Hughes Corporation (Affiliate of  General Growth Properties, Inc.) for 1120 Town Center Dr. Suite 260.                                                                                                                  |
| 10.4       |       | Form of Indemnification Agreement, incorporated by  reference from the registrant’s quarterly report on 10-QSB/A filed on August  19, 2003.                                                                                                                                                             |
| 10.5       |       | Amended and Restated 1999 Stock Option Plan,  incorporated by reference from the registrant’s quarterly report on 10-QSB/A  filed on August 19, 2003.*                                                                                                                                                  |
| 10.6       |       | Philadelphia Brokerage Corporation Warrant to  Purchase 25,000 Shares of Common Stock, incorporated by reference from the  registrant’s quarterly report on 10-QSB/A filed on August 19, 2003.                                                                                                          |
| 10.7       |       | Triage Capital Management LP Warrant to Purchase  50,000 Shares of Common Stock, incorporated by reference from the  registrant’s quarterly report on 10-QSB/A filed on August 19, 2003.                                                                                                                |
| 10.8       |       | Mellon HBV SBV, LLC Warrant to Purchase Shares of  Common Stock, incorporated by reference from the registrant’s quarterly  report on 10-QSB/A filed on August 19, 2003.                                                                                                                                |
| 10.9       |       | Amended and Restated 1999 Directors’ Stock Option  Plan, incorporated by reference from the registrant’s registration statement  on Form S-8 filed on September 10, 2003.*                                                                                                                         |
| 10.10      |       | Philadelphia Brokerage Corporation warrant to  Purchase 75,000 Shares of Common Stock, incorporated by reference from the  registrant’s registration statement on Form SB-2 filed on September 25, 2003.                                                                                                |
| 10.11      |       | Distribution Agreement by and between the registrant  and TCS Aces Pty Limited, incorporated by reference from the registrant’s  registration statement on Form SB-2/A filed on December 10, 2003.                                                                                                 |
| 10.12      |       | Distribution Agreement by and between the registrant  and Technical Casino Supplies Ltd, incorporated by reference from the  registrant’s Current Report on Form 8-K filed on February 15, 2005.                                                                                                        |
| 10.13      |       | License and Manufacturing Agreement dated February  27, 2006, between VendingData Corporation and Dolphin Products Pty Limited  (incorporated by reference to Exhibit 10.26 to the registrant’s Annual Report  on Form 10-KSB filed on March 31, 2006).                                                 |
| 10.14      |       | Patent Purchase Agreement dated October 1, 2005  among VendingData Corporation, William Westmore Purton, Dolphin Products Pty  Ltd. and Dolphin Advanced Technologies Pty Ltd. (incorporated by reference to  Exhibit 10.27 to the registrant’s Annual Report on Form 10-KSB filed on March  31, 2006). |
| 10.15      |       | Form of Warrant (incorporated by reference to  Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-QSB filed on  November 14, 2005).                                                                                                                                                           |
| 10.16      |       | Employment Agreement dated September 29, 2005  between VendingData Corporation and Mark Newburg (incorporated by reference  to Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-QSB filed on  November 14, 2005).*                                                                          |

 

55

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| **Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                 |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17      |       | Employment Agreement dated September 29, 2005  between VendingData Corporation and Arnaldo Galassi (incorporated by  reference to Exhibit 10.5 to the registrant’s Quarterly Report on Form 10-QSB  filed on November 14, 2005).*                                  |
| 10.18      |       | Employment Agreement dated October 3, 2005 between  VendingData Corporation and Peter Zee.*                                                                                                                                                                             |
| 10.19      |       | Senior Secured Note Purchase Agreement dated May 2,  2006 among VendingData Corporation and the Bricoleur Funds (incorporated by  reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K  dated May 2, 2006)                                     |
| 10.20      |       | Securities Put Agreement dated dated May 2, 2006  among VendingData Corporation and the Bricoleur Funds (incorporated by  reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K  dated May 2, 2006)                                             |
| 10.21      |       | Security Agreement dated May 2, 2006 among  VendingData Corporation and the Bricoleur Funds (incorporated by reference to  Exhibit 10.3 to the registrant’s Current Report on Form 8-K dated May 2,  2006)                                                         |
| 10.22      |       | Registration Rights Agreement dated May 2, 2006  among VendingData Corporation and the Bricoleur Funds (incorporated by  reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K  dated May 2, 2006)                                              |
| 10.23      |       | Share Sale Agreement dated July 5, 2006 among  VendingData Corporation and William Westmore Purton, and Synwood Pty Ltd  (incorporated by reference to Exhibit 10.8 to the registrant’s Quarterly  Report on Form 10-QSB filed on August 14, 2006)                 |
| 10.24      |       | Registration  Rights Agreement dated July 11, 2006 among VendingData Corporation and  William Westmore Purton, and Synwood Pty Ltd. (incorporated by reference to  Exhibit 10.8 to the registrant’s Quarterly Report on Form 10-QSB filed on  August 14, 2006)     |
| 10.25      |       | Alliance  Agreement dated October 11, 2006 between VendingData Corporation and Elixir  Group Limited (incorporated by reference to Exhibit 10.1 to the registrant’s  Quarterly Report on Form 10-QSB filed on November 14, 2006)                                   |
| 10.26      |       | Amended  and Restated Sales Representative Agreement dated October 11, 2006 between  VendingData Corporation and Elixir Group Limited (incorporated by reference  to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-QSB filed on  November 14, 2006) |
| 10.27      |       | Securities  Purchase Agreement dated October 11, 2006 between VendingData Corporation and  Elixir Group Limited (incorporated by reference to Exhibit 10.3 to the  registrant’s Quarterly Report on Form 10-QSB filed on November 14, 2006)                        |
| 10.29      |       | Securities  Purchase Agreement dated March 27, 2007, incorporated by reference from the  registrant’s Current Report on Form 8-K filed on March 30, 2007                                                                                                           |
| 10.30      |       | Registration  Rights Agreement dated March 28, 2007, incorporated by reference from the  registrant’s Current Report on Form 8-K filed on March 30, 2007                                                                                                           |
| 10.31      |       | Warrant dated March 28, 2007, incorporated by  reference from the registrant’s Current Report on Form 8-K filed on March 30,  2007                                                                                                                                 |
| 14.1       |       | Code of Ethics, incorporated by reference from the  registrant’s annual report on 10-KSB filed March 30, 2004.                                                                                                                                                     |
| 23.1       |       | Consent of Piercy Bowler Taylor and Kern                                                                                                                                                                                                                                |
| 23.2       |       | Consent of Horwath BDO Kendalls Audit &  Assurance (Vic) (Formerly Horwath Melbourne)                                                                                                                                                                               |
| 31.1       |       | Certification under Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                     |
| 31.2       |       | Certification under Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                     |
| 32.1       |       | Certifications Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                                                                                                                                                                      |

 

----

*Management contract or compensatory plan or arrangement

 
| **ITEM 14.** | **PRINCIPAL ACCOUNTING FEES  AND SERVICES** |
|--------------|---------------------------------------------|

 

 

PiercyBowler Taylor & Kern, Certified Public Accountants, Las Vegas, Nevada  (PBTK), served as our principal independentregistered public accounting firm for fiscal years ended December 31, 2006and 2005.

 

Ourboard’s audit committee is responsible for pre-approving all audit andpermissible non-audit services provided by our independent auditor, PBTK, withcertain limited exceptions. The audit

 

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committeehas concluded that the non-audit services provided by PBTK are compatible withmaintaining auditor independence. In 2006 and 2005, no fees were paid to PBTKpursuant to the “de minimus” exception to the pre-approval policy permittedunder the Securities Exchange Act of 1934, as amended.

 

Forthe fiscal years ended December 31, 2006 and 2005, the fees for services billedby PBTK were as follows:
| ** **         | ** ** | **2006** | ** **  | **2005**   | ** ** |
|--------------------|------------|----------|-------------|------------|------------|
| Audit fees         |       | $        | 218,600     |       | $          | 140,387 |   |
| Audit-related fees |       | 4,708    |        | 5,280      |       |
| Tax fees           |       | 20,000   |        | 13,970     |       |
| ** **         | ** ** | **$**    | **243,308** | ** ** | **$**      | **159,637** |   |

 

Auditfees generally included fees related to the audit of our annual financialstatements included in our Forms 10-KSB, the review of our interim financialstatements included in our Forms 10-QSB and the consents and assistance inconnection with other filings and public offering documents filed with theSecurities and Exchange Commission.

 

Audit-relatedfees include fees for services that are reasonably related to the performanceof the audit or review of our financial statements, such as accountingconsultations concerning financial accounting and reporting standards.

 

Taxfees generally included fees for professional services rendered with respect totax compliance, tax advice and tax planning, such as the preparation of taxreturns, claims for refunds, payment planning and tax law interpretation.

 

Allother fees generally included fees related to miscellaneous, non-recurringengagements. In 2006, these fees related to the acquisition of Dolphin as wellas other matters.

 

57

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**SIGNATURES**

** **

In accordance with Section 13 or 15(d) of the ExchangeAct, the registrant has duly caused this Amendment No. 1 to annual report onForm 10-KSB/A to be signed on our behalf by the undersigned, thereunto dulyauthorized.

 

 
| ** **              | **ELIXIR GAMING TECHNOLOGIES, INC.** |
|-------------------------|--------------------------------------|
|                    |                                 |
|                    |                                 |
| Date: November 12, 2007 | By:                                  | /s/Gordon Yuen |
|                    |                                 | Gordon Yuen,,  Chief Executive Officer,  Principal Executive Officer |

 

58

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** **

**Exhibit Index**

** **
| **Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                      |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.5        |       | Amended and Restated Articles of Incorporation dated  June 7, 2003 (Incorporated by reference from the Registrant’s Form 8-K,  filed on June 18, 2003).                                                                                                                                       |
| 3.6        |       | Amended and Restated Bylaws of the registrant dated  November 13, 2002, incorporated by reference from the registrant’s Current  Report on Form 8-K filed on January 8, 2003.                                                                                                                           |
| 3.7        |       | Certificate of Amendment to Articles of  Incorporation dated August 23, 2005, incorporated by reference from the  registrant’s Annual Report on Form 10-KSB filed on April 13, 2007                                                                                                                     |
| 3.8        |       | Certificate of Amendment to Articles of  Incorporation dated January 9, 2007, incorporated by reference from the  registrant’s Annual Report on Form 10-KSB filed on April 13, 2007                                                                                                                     |
| 10.28      |       | Shareholder Agreement dated December 14, 1998, by  and between VendingData Corporation and Richard Huson, Bob Smith and Ron  Keil, incorporated by reference from the registrant’s Annual Report on Form  10-KSB filed on March 26, 1999.                                                               |
| 10.29      |       | Form of Warrant Associated with 9.5% Convertible  Note Due 2004, incorporated by reference from the registrant’s Quarterly Report  on Form 10-QSB filed on May 17, 1999.                                                                                                                                |
| 10.30      |       | Lease Agreement dated August 19, 1999, by and  between the registrant and The Howard Hughes Corporation (Affiliate of  General Growth Properties, Inc.) for 1120 Town Center Dr. Suite 260.                                                                                                                  |
| 10.31      |       | Form of Indemnification Agreement, incorporated by  reference from the registrant’s quarterly report on 10-QSB/A filed on August  19, 2003.                                                                                                                                                             |
| 10.32      |       | Amended and Restated 1999 Stock Option Plan,  incorporated by reference from the registrant’s quarterly report on 10-QSB/A  filed on August 19, 2003.*                                                                                                                                                  |
| 10.33      |       | Philadelphia Brokerage Corporation Warrant to  Purchase 25,000 Shares of Common Stock, incorporated by reference from the  registrant’s quarterly report on 10-QSB/A filed on August 19, 2003.                                                                                                          |
| 10.34      |       | Triage Capital Management LP Warrant to Purchase  50,000 Shares of Common Stock, incorporated by reference from the  registrant’s quarterly report on 10-QSB/A filed on August 19, 2003.                                                                                                                |
| 10.35      |       | Mellon HBV SBV, LLC Warrant to Purchase Shares of  Common Stock, incorporated by reference from the registrant’s quarterly  report on 10-QSB/A filed on August 19, 2003.                                                                                                                                |
| 10.36      |       | Amended and Restated 1999 Directors’ Stock Option  Plan, incorporated by reference from the registrant’s registration statement  on Form S-8 filed on September 10, 2003.*                                                                                                                         |
| 10.37      |       | Philadelphia Brokerage Corporation warrant to  Purchase 75,000 Shares of Common Stock, incorporated by reference from the  registrant’s registration statement on Form SB-2 filed on September 25, 2003.                                                                                                |
| 10.38      |       | Distribution Agreement by and between the registrant  and TCS Aces Pty Limited, incorporated by reference from the registrant’s  registration statement on Form SB-2/A filed on December 10, 2003.                                                                                                 |
| 10.39      |       | Distribution Agreement by and between the registrant  and Technical Casino Supplies Ltd, incorporated by reference from the  registrant’s Current Report on Form 8-K filed on February 15, 2005.                                                                                                        |
| 10.40      |       | License and Manufacturing Agreement dated February  27, 2006, between VendingData Corporation and Dolphin Products Pty Limited  (incorporated by reference to Exhibit 10.26 to the registrant’s Annual Report  on Form 10-KSB filed on March 31, 2006).                                                 |
| 10.41      |       | Patent Purchase Agreement dated October 1, 2005  among VendingData Corporation, William Westmore Purton, Dolphin Products Pty  Ltd. and Dolphin Advanced Technologies Pty Ltd. (incorporated by reference to  Exhibit 10.27 to the registrant’s Annual Report on Form 10-KSB filed on March  31, 2006). |
| 10.42      |       | Form of Warrant (incorporated by reference to  Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-QSB filed on  November 14, 2005).                                                                                                                                                           |
| 10.43      |       | Employment Agreement dated September 29, 2005  between VendingData Corporation and Mark Newburg (incorporated by reference  to Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-QSB filed on  November 14, 2005).*                                                                          |
| 10.44      |       | Employment Agreement dated September 29, 2005  between VendingData Corporation and Arnaldo Galassi (incorporated by  reference to Exhibit 10.5 to the registrant’s Quarterly Report on Form 10-QSB  filed on November 14, 2005).*                                                                       |

 

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| **Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                 |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.45      |       | Employment Agreement dated October 3, 2005 between  VendingData Corporation and Peter Zee.*                                                                                                                                                                             |
| 10.46      |       | Senior Secured Note Purchase Agreement dated May 2,  2006 among VendingData Corporation and the Bricoleur Funds (incorporated by  reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K  dated May 2, 2006)                                     |
| 10.47      |       | Securities Put Agreement dated dated May 2, 2006  among VendingData Corporation and the Bricoleur Funds (incorporated by reference  to Exhibit 10.2 to the registrant’s Current Report on Form 8-K dated May 2,  2006)                                             |
| 10.48      |       | Security Agreement dated May 2, 2006 among  VendingData Corporation and the Bricoleur Funds (incorporated by reference to  Exhibit 10.3 to the registrant’s Current Report on Form 8-K dated May 2,  2006)                                                         |
| 10.49      |       | Registration Rights Agreement dated May 2, 2006  among VendingData Corporation and the Bricoleur Funds (incorporated by  reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K  dated May 2, 2006)                                              |
| 10.50      |       | Share Sale Agreement dated July 5, 2006 among  VendingData Corporation and William Westmore Purton, and Synwood Pty Ltd  (incorporated by reference to Exhibit 10.8 to the registrant’s Quarterly  Report on Form 10-QSB filed on August 14, 2006)                 |
| 10.51      |       | Registration  Rights Agreement dated July 11, 2006 among VendingData Corporation and  William Westmore Purton, and Synwood Pty Ltd. (incorporated by reference to  Exhibit 10.8 to the registrant’s Quarterly Report on Form 10-QSB filed on  August 14, 2006)     |
| 10.52      |       | Alliance  Agreement dated October 11, 2006 between VendingData Corporation and Elixir  Group Limited (incorporated by reference to Exhibit 10.1 to the registrant’s  Quarterly Report on Form 10-QSB filed on November 14, 2006)                                   |
| 10.53      |       | Amended  and Restated Sales Representative Agreement dated October 11, 2006 between  VendingData Corporation and Elixir Group Limited (incorporated by reference  to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-QSB filed on  November 14, 2006) |
| 10.54      |       | Securities  Purchase Agreement dated October 11, 2006 between VendingData Corporation and  Elixir Group Limited (incorporated by reference to Exhibit 10.3 to the  registrant’s Quarterly Report on Form 10-QSB filed on November 14, 2006)                        |
| 10.29      |       | Securities  Purchase Agreement dated March 27, 2007, incorporated by reference from the  registrant’s Current Report on Form 8-K filed on March 30, 2007                                                                                                           |
| 10.30      |       | Registration  Rights Agreement dated March 28, 2007, incorporated by reference from the  registrant’s Current Report on Form 8-K filed on March 30, 2007                                                                                                           |
| 10.31      |       | Warrant dated March 28, 2007, incorporated by  reference from the registrant’s Current Report on Form 8-K filed on March 30,  2007                                                                                                                                 |
| 14.1       |       | Code of Ethics, incorporated by reference from the  registrant’s annual report on 10-KSB filed March 30, 2004.                                                                                                                                                     |
| 23.1       |       | Consent of Piercy Bowler Taylor and Kern                                                                                                                                                                                                                                |
| 23.2       |       | Consent of Horwath BDO Kendalls Audit &  Assurance (Vic) (Formerly Horwath Melbourne)                                                                                                                                                                               |
| 31.1       |       | Certification under Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                     |
| 31.2       |       | Certification under Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                     |
| 32.1       |       | Certifications Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                                                                                                                                                                      |

 

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