**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM10-QSB/A**

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

**Forthe Quarterly Period Ended June 30, 2007**

**OR**

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

**Forthe transition period from            to            .**

**Commissionfile number: 001-32161**

**ElixirGaming Technologies, Inc.**

(Exact name ofregistrant as specified in its charter)

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

 

**1120Town Center Dr, Ste 260Las Vegas, NV 89144**

(Address ofprincipal executive offices, including zip code)

**(702)733-7195**(Registrant’s telephone number, including area code)

Check whether theissuer  (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. YES  x NO  o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

YES  o  NO  x

The number of sharesof registrant’s common stock outstanding as of August 3, 2007 was 36,526,593

Transitional Smallbusiness disclosure Format (check one):     YES  o  NO  x

 

 

 

 

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**ELIXIR GAMING TECHNOLOGIES, INC.**

 

**FORM 10-QSB**

 

**TABLE OF CONTENTS**

 

 

 
| ** **                               | ** **                                                       | **PAGE** |
|------------------------------------------|------------------------------------------------------------------|----------|
| **PART  I — FINANCIAL INFORMATION** |                                                             | **1**    |
| ** **                               |                                                             |     |
| ITEM 1.                                  | FINANCIAL STATEMENTS                                             |     | 1 |
|                                     |                                                             |     |   |
|                                     | CONSOLIDATED  BALANCE SHEETS                                     |     | 1 |
|                                     |                                                             |     |   |
|                                     | CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT                |     | 2 |
|                                     |                                                             |     |   |
|                                     | CONSOLIDATED STATEMENTS OF CASH FLOWS                            |     | 3 |
|                                     |                                                             |     |   |
|                                     | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                       |     | 4 |
|                                     |                                                             |     |   |
| ITEM 2.                                  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS |     | 11 |
|                                     |                                                             |     |   |
|                                     | OVERVIEW                                                         |     | 11 |
|                                     |                                                             |     |   |
|                                     | RESULTS OF OPERATIONS                                            |     | 14 |
|                                     |                                                             |     |   |
|                                     | LIQUIDITY AND CAPITAL RESOURCES                                  |     | 18 |
|                                     |                                                             |     |   |
|                                     | CRITICAL ACCOUNTING POLICIES AND ESTIMATES                       |     | 18 |
|                                     |                                                             |     |   |
|                                     | RISK FACTORS                                                     |     | 20 |
|                                     |                                                             |     |   |
| ITEM 3.                                  | CONTROLS AND  PROCEDURES                                         |     | 24 |
|                                     |                                                             |     |   |
| **PART  II — OTHER INFORMATION**    |                                                             | **25**   |
| ** **                               |                                                             |     |
| ITEM 6.                                  | EXHIBITS                                                         |     | 25 |

 

 

 

 

i

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EXPLANATORY NOTE

 

                ElixirGaming Technologies, Inc., formerly known as VendingData Corporation (the “Company”)is filing this Amendment No. 1 to Quarterly Report on Form 10-QSB for thequarter ended June 30, 2007, to reflect the restatement of its consolidatedfinancial statements for the three months and six months ended June 30, 2007and 2006. The balance sheet information presented as of December 31, 2006, waspreviously restated in an Amendment No. 1 to Annual Report on Form 10-KSB/Afiled on November 13, 2007, along with summarized restated financialinformation for the quarterly periods contained in the year then ended. Therestated consolidated financial statements for the three and six months endedJune 30, 2006, presented in this amendment agree with such summarizedinformation previously presented in Amendment No. 1 to Annual Report on Form10-KSB/A The purpose for and effects of these restatements are described inNote 12 to the consolidated financial statements contained herein.

 

**               **The information in this Amendment No. 1 to Form 10-QSB hasnot been updated from the original filing of the Form 10-QSB other than asrequired to reflect the effects of the restatements described in the precedingparagraph. This amendment also includes conforming changes to Part I Items 1, 2and 3 but does not purport to provide an update or a discussion of any otherdevelopments at the Company subsequent to the original filing.

** **

**ii**

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# **PART I — FINANCIAL INFORMATION**

# **Item 1.  Financial Statements.**

**ELIXIR GAMINGTECHNOLOGIES, INC. (FORMERLY VENDINGDATA CORPORATION)AND SUBSIDIARIES**

### **Consolidated Balance Sheets**

| ** **                                                                                                   | ** ** | **June 30,   2007**            | ** ** | **December 31,  2006 (1)** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------|------------|
| ** **                                                                                                   | ** ** | **(As restated)  (Unaudited)** | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                   | ** ** | ** **                     | ** ** | ** **                 | ** ** |
| **Current assets:**                                                                                          | ** ** | ** **                     | ** ** | ** **                 | ** ** |
| Cash and cash equivalents                                                                                    |       | $                              | 1,791,076  |                       | $          | 333,888 |   |
| Current portion of accounts receivable, net of  allowance for uncollectibles of $118,016 and $267,154        |       | 2,992,435                      |       | 1,856,898                  |       |
| Other receivables                                                                                            |       | —                         |       | 138,181                    |       |
| Inventories                                                                                                  |       | 2,820,390                      |       | 3,407,361                  |       |
| Prepaid expenses and other current assets                                                                    |       | 79,629                         |       | 46,494                     |       |
|                                                                                                         |       | 7,683,530                      |       | 5,782,822                  |       |
| Equipment rented to customers, net of accumulated  depreciation of $64,181 and $67,673                       |       | 45,276                         |       | 94,777                     |       |
| Property and equipment, net of accumulated  depreciation of $2,871,926 and $2,472,897                        |       | 3,786,940                      |       | 3,493,817                  |       |
| Intangible assets, net of accumulated amortization  of $1,258,518 and $819,753                               |       | 8,497,795                      |       | 8,936,561                  |       |
| Goodwill                                                                                                     |       | 11,195,737                     |       | 11,195,737                 |       |
| Accounts receivable, net of current portion, less  unamortized discount                                      |       | 188,950                        |       | 358,841                    |       |
| Deferred expenses                                                                                            |       | 439,311                        |       | 450,404                    |       |
| Prepaid commission                                                                                           |       | 6,010,148                      |       | —                     |       |
| Other assets                                                                                                 |       | 328,065                        |       | 305,282                    |       |
| Total assets                                                                                                 |       | $                              | 38,175,752 |                       | $          | 30,618,241 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                |       |                           |       |                       |       |
| **Current liabilities:**                                                                                     |       |                           |       |                       |       |
| Deferred revenues, current portion                                                                           |       | $                              | 43,702     |                       | $          | 43,599 |   |
| Short-term debt                                                                                              |       | 784,249                        |       | 3,676,600                  |       |
| Capital leases payable, current portion                                                                      |       | 382,508                        |       | 440,719                    |       |
| Current portion of notes payable                                                                             |       | 1,500,000                      |       | 299,494                    |       |
| Accounts payable                                                                                             |       | 3,124,793                      |       | 2,354,163                  |       |
| Accrued expenses                                                                                             |       | 1,117,298                      |       | 3,657,792                  |       |
| Customer deposits                                                                                            |       | 195,242                        |       | 14,257                     |       |
|                                                                                                         |       | 7,147,792                      |       | 10,486,624                 |       |
|                                                                                                         |       |                           |       |                       |       |
| Deferred revenues, net of current portion                                                                    |       | 17,110                         |       | 43,199                     |       |
| Capital leases payable, net of current portion                                                               |       | 165,263                        |       | 269,272                    |       |
| Deferred tax liability                                                                                       |       | 1,765,383                      |       | 1,765,383                  |       |
| Notes payable, net of current portion, net of debt  discount of $2,243,546 and $2,837,911                    |       | 7,813,940                      |       | 13,955,613                 |       |
| Total liabilities                                                                                            |       | 16,909,488                     |       | 26,520,091                 |       |
| ** **                                                                                                   |       |                           |       |                       |       |
| **Stockholders’ equity:**                                                                               |       |                           |       |                       |       |
| Preferred stock, $.001 par value, 10,000,000 shares  authorized, no shares issued and outstanding            |       | —                         |       | —                     |       |
| Common stock, $.001 par value, 70,000,000 shares  authorized, 36,208,534 shares and 30,015,099 shares issued |       | 36,209                         |       | 30,016                     |       |
|  Treasury  stock 448,053 common shares at cost                                                          |       | —                         |       | (846,820                   | )          |
| Additional paid-in capital                                                                                   |       | 125,724,198                    |       | 106,221,270                |       |
| Deferred compensation                                                                                        |       | (3,266,219                     | )          | (8,348,483                 | )          |
| Accumulated other comprehensive loss                                                                         |       | (36,269                        | )          | —                     |       |
| Deficit                                                                                                      |       | (101,191,655                   | )          | (92,557,833                | )          |
| Total stockholders’ equity                                                                              |       | 21,266,264                     |       | 4,098,150                  |       |
| Total liabilities and stockholders’ equity                                                              |       | $                              | 38,175,752 |                       | $          | 30,618,241 |   |
|                                                                                                              |            |                                |            |                            |            |  |  |  |

----

 

(1) The companypreviously restated its consolidated financial statements as of and for theyear ended December 31, 2006 by way of an Amendment No. 1 to Annual Report onform 10-KSB/A for that year filed with the SEC on November 13, 2007.

 

See accompanying notes toconsolidated financial statements.

 

1

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**ELIXIR GAMING TECHNOLOGIES,INC. (FORMERLY VENDINGDATA CORPORATION)AND SUBSIDIARIES**

### **Consolidated Statements of Operations and Deficit**

**(Unaudited)**

| ** **                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |              |
|------------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|-------------------|
| ** **                               | ** ** | **2007**                             | ** ** | **2006**                      | ** ** | **2007**          | ** ** | **2006** | ** ** |   |
| ** **                               | ** ** | **(As restated)**                    | ** ** | **(As restated)**             | ** ** | **(As restated)** | ** ** | **(As restated)** | ** ** |   |
| **Revenues:**                            |       |                                 |       |                          |       |              |   |   |   |   |
| Gaming product sales                     |       | $                                    | 1,439,016  |                          | $          | 1,503,659         |   | $ | 3,177,693 |   | $ | 2,080,866 |   |   |
| Gaming product rentals                   |       | 52,580                               |       | 80,185                        |       | 117,143           |   | 191,249 |   |   |
| Non-gaming product sales                 |       | 1,729,848                            |       | —                        |       | 3,160,725         |   | — |   |   |
| Other                                    |       | 280,645                              |       | 102,971                       |       | 447,301           |   | 127,201 |   |   |
|                                     |       | 3,502,089                            |       | 1,686,815                     |       | 6,902,862         |   | 2,399,316 |   |   |
| ** Operating  costs and expenses:** |       |                                 |       |                          |       |              |   |   |   |   |
| Cost of sales — gaming products     |       | 1,456,253                            |       | 1,220,227                     |       | 2,943,317         |   | 1,935,030 |   |   |
| Cost of sales — non-gaming products |       | 1,550,655                            |       | —                        |       | 3,144,851         |   | — |   |   |
| Selling, general and administrative      |       | 4,787,047                            |       | 1,796,531                     |       | 8,111,700         |   | 3,975,482 |   |   |
| Research and development                 |       | 147,876                              |       | 590,098                       |       | 410,634           |   | 812,237 |   |   |
|                                     |       | 7,941,331                            |       | 3,606,856                     |       | 14,610,502        |   | 6,722,749 |   |   |
| Loss from operations                     |       | (4,439,742                           | )          | (1,920,041                    | )          | (7,707,640        | ) | (4,323,433 | ) |   |
|                                     |       |                                 |       |                          |       |              |   |   |   |   |
| Other income (expense):                  |       |                                 |       |                          |       |              |   |   |   |   |
| Interest expense                         |       | (389,437                             | )          | (681,551                      | )          | (1,017,500        | ) | (1,033,058 | ) |   |
| Other income                             |       | —                               |       | —                        |       | 500,000           |   | — |   |   |
|                                     |       | (389,437                             | )          | (681,551                      | )          | (517,500          | ) | (1,033,058 | ) |   |
|                                     |       |                                 |       |                          |       |              |   |   |   |   |
| **Net loss**                             |       | $                                    | (4,829,179 | )                             | $          | (2,601,592        | ) | $ | (8,225,140 | ) | $ | (5,356,491 | ) |
|                                     |       |                                 |       |                          |       |              |   |   |   |   |
| Basic loss per share                     |       | $                                    | (0.14      | )                             | $          | (0.12             | ) | $ | (0.24 | ) | $ | (0.27 | ) |   |
|                                     |       |                                 |       |                          |       |              |   |   |   |   |
| Weighted average shares outstanding      |       | 35,008,041                           |       | 22,051,398                    |       | 33,691,311        |   | 19,788,084 |   |   |
|                                          |            |                                      |            |                               |            |                   |  |  |  |  |  |  |  |  |  |  |  |

** **

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

** **

**2**

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** **

**ELIXIR GAMINGTECHNOLOGIES, INC (FORMERLY VENDINGDATA CORPORATION)AND SUBSIDIARIES**

**Consolidated Statementsof Cash Flows**

**(Unaudited)**

| ** **                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                           | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | **(As  restated)**                 | ** ** | **(As  restated)** | ** ** |
| **Cash flows from operating activities:**                          |       |                               |       |   |   |
| Net loss                                                           |       | $                                  | (8,225,140 | ) | $ | (5,356,491 | ) |
| Adjustments to reconcile net loss to net cash used  in             |       |                               |       |   |   |
| operating activities:                                              |       |                               |       |   |   |
| Depreciation and amortization of property and  equipment           |       | 263,942                            |       | 124,326 |   |
| Amortization of intangible assets                                  |       | 438,766                            |       | 102,141 |   |
| Amortization of debt discount                                      |       | 409,395                            |       | 262,105 |   |
| Stock-based compensation expense                                   |       | 1,765,587                          |       | 648,352 |   |
| Loss on disposition of assets                                      |       | 33,075                             |       | 12,071 |   |
| Write down of inventory                                            |       | 394,991                            |       | — |   |
| Increase in operating (assets) liabilities:                        |       |                               |       |   |   |
| Accounts receivable                                                |       | (964,378                           | )          | (211,425 | ) |
| Inventory                                                          |       | 272,560                            |       | (89,601 | ) |
| Prepaid expenses and other current                                 |       | (33,135                            | )          | 75,074 |   |
| Deposits with vendors and other long term assets                   |       | 114,069                            |       | (330,797 | ) |
| Accounts payable                                                   |       | 750,905                            |       | (114,920 | ) |
| Accrued expenses, deferred revenues and other  current liabilities |       | (1,449,313                         | )          | (374,824 | ) |
| Net cash used in operating activities                              |       | (6,228,676                         | )          | (5,253,989 | ) |
|                                                               |       |                               |       |   |   |
| **Cash flows from investing activities:**                          | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Acquisition of intangibles                                         |       | —                             |       | (716,500 | ) |
| Deposit for business combination                                   |       | —                             |       | (750,000 | ) |
| Acquisition of property, plant and equipment                       |       | (358,434                           | )          | — |   |
| Sale of property, plant and equipment                              |       | 80,900                             |       | 77,529 |   |
| Net cash used in investing activities                              |       | (277,534                           | )          | (1,388,971 | ) |
|                                                               |       |                               |       |   |   |
| **Cash flows from financing activities:**                          | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Proceeds from sale of stock                                        |       | 8,139,683                          |       | 399,572 |   |
| Proceeds from capital leases                                       |       | —                             |       | 300,000 |   |
| Capital lease payments                                             |       | (206,667                           | )          | (338,596 | ) |
| Proceeds from notes payable                                        |       | —                             |       | 14,250,000 |   |
| Repayment of notes payable                                         |       | (2,624,099                         | )          | (11,000,000 | ) |
| Treasury stock exercised                                           |       | 4,481                              |       | — |   |
| Proceeds from stock subscriptions receivable                       |       | 2,650,000                          |       | — |   |
| Proceeds from issuance of convertible debt                         |       | —                             |       | 2,500,000 |   |
| Net cash provided by financing activities                          |       | 7,963,398                          |       | 6,110,976 |   |
| Increase (decrease) in cash and cash equivalents                   |       | 1,457,188                          |       | (531,984 | ) |
| Cash and cash equivalents at beginning of period                   |       | 333,888                            |       | 935,243 |   |
| Cash and cash equivalents at end of period                         |       | $                                  | 1,791,076  |   | $ | 403,259 |   |
|                                                               |       |                               |       |   |   |
| **Supplemental cash flow information:**                            | ** ** | ** **                         | ** ** | ** ** | ** ** |
| **Non-cash investing and financing activities:**                   | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Intangible assets acquired with stock                              |       |                               |       | $ | 2,520,000 |   |
| Stock issued for business combination deposit                      |       |                               |       | $ | 2,350,000 |   |
| Notes payable paid off with stock                                  |       |                               |       | $ | 5,654,500 |   |
| Warrants issued to distributor as prepaid commission               |       | $                                  | 6,147,000  |   |   |   |
| Loans converted into common stock                                  |       | $                                  | 6,372,168  |   |   |   |

 

3

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**ELIXIRGAMING TECHNOLOGIES, INC (FORMERLY****VENDINGDATA CORPORATION**) **AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**1.             Basis of presentation.**

Theaccompanying unaudited consolidated financial statements, as restated (Note 12)have been prepared in accordance with generally accepted accounting principlespursuant to the rules and regulations incorporated in Regulation SB of theSecurities and Exchange Commission (SEC) and reflect all adjustments, whichmanagement believes are necessary to fairly present the financial position,results of operations and cash flows of Elixir Gaming Technologies, Inc.(formerly VendingData Corporation) and its subsidiaries (the Company), for therespective periods presented. The results of operations for the current  interim periods are not necessarilyindicative of the results that may be expected for the year as a whole. Theaccompanying unaudited consolidated financial statements should be read inconjunction with the restated consolidated financial statements and notesthereto in the Company’s Amendment No. 1 to Annual Report on Form 10-KSB/A forthe year ended December 31, 2006, filed with the SEC on November 13, 2007,from which the balance sheet information as of that date presented herein isderived.

 

**2.             Segments**

TheCompany currently operates in two business segments: (i) gamingoperations and (ii) non-gaming operations, consisting primarily of the DolphinAdvanced Technologies Pty Ltd (DolphinTM) automotive sector. The accountingpolicies of these segments are consistent with the Company’s policies for theunaudited condensed consolidated financial statements.

Thetable below presents information as to the Company’s revenues and operatingloss by segment:

| ** **              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June, 30,** | ** ** |
|-------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **2007**                        | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **              | ** ** | **(As Restated)**               | ** ** | **(As Restated)**              | ** ** | **(As Restated)** | ** ** | **(As Restated)** | ** ** |
| Revenues                |       |                            |       |                           |       |   |   |   |   |
| Gaming operations       |       | $                               | 1,772,241  |                           | $          | 1,686,815 |   | $ | 3,742,137 |   | $ | 2,399,316 |   |
| Non-gaming operations   |       | 1,729,848                       |       | —                         |       | 3,160,725 |   | — |   |
| Total Revenues          |       | $                               | 3,502,089  |                           | $          | 1,686,815 |   | $ | 6,902,862 |   | $ | 2,399,316 |   |
| Operating income (loss) |       |                            |       |                           |       |   |   |   |   |
| Gaming operations       |       | $                               | 315,987    |                           | $          | 466,588 |   | $ | 798,820 |   | $ | 464,286 |   |
| Non-gaming operations   |       | 179,194                         |       | —                         |       | 15,874 |   | — |   |
| Corporate/other         |       | (4,934,923                      | )          | (2,386,629                     | )          | (8,522,334 | ) | (4,787,719 | ) |
| Total operating loss    |       | $                               | (4,439,742 | )                              | $          | (1,920,041 | ) | $ | (7,707,640 | ) | $ | (4,323,433 | ) |
|                         |            |                                 |            |                                |            |  |  |  |  |  |  |  |  |  |  |

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

 

| ** **    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June, 30,** | ** ** |
|---------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **    | ** ** | **2007**                        | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Asia          |       | $                               | 950,032    |                           | $          | 1,417,270 |   | $ | 2,635,637 |   | $ | 1,857,271 |   |
| United States |       | 645,075                         |       | 269,545                        |       | 867,067 |   | 542,045 |   |
| Australia     |       | 1,793,058                       |       | —                         |       | 3,223,935 |   | — |   |
| Europe        |       | 102,316                         |       | —                         |       | 143,012 |   | — |   |
| Other         |       | 11,608                          |       | —                         |       | 33,211 |   | — |   |
|          |       | $                               | 3,502,089  |                           | $          | 1,686,815 |   | $ | 6,902,862 |   | $ | 2,399,316 |   |

 

4

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For the six month periodended June 30, 2007, in the gaming sector, one customer represented 25.97% oftotal sales. Within the non-gaming sector the Company had one customer thatrepresented 16.44% of total sales.

**3.             Lossper share**

Basic loss per share is computed by dividing thereported net loss for the period by the weighted average number of commonshares outstanding during the period.  Loss per share is notpresented on a diluted basis since the assumed exercise of common stockequivalents would have an anti-dilutive effect due to losses.

**4.             Intangible Assets**

Substantially allof the Company’s recorded intangible assets other than goodwill are subject toamortization and are comprised of the following: 

| ** **                     | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                     | ** ** | ** **              | ** ** | ** **             | ** ** |
| Amortizable intangible assets: |       |                    |       |                   |       |
| Patents                        |       | $                       | 4,986,313  |                   | $          | 4,986,314 |   |
| Less accumulated amortization  |       | (888,585                | )          | (638,702               | )          |
|                           |       |                    |       |                   |       |
| Customer relationships         |       | 4,220,000               |       | 4,220,000              |       |
| Less accumulated amortization  |       | (327,308                | )          | (160,154               | )          |
|                           |       |                    |       |                   |       |
| Trademarks                     |       | 550,000                 |       | 550,000                |       |
| Less accumulated amortization  |       | (42,625                 | )          | (20,897                | )          |
| Total                          |       | $                       | 8,497,795  |                   | $          | 8,936,561 |   |

 

**5.             Stockoptions**

Stock option activity for the six-month periods ended June 30, 2007 and2006 is summarized below:

| ** **                                | ** ** | **Shares** | ** ** | **Weighted   Average Exercise  Price** | ** ** | **Remaining  Contractual  Term** | ** ** |
|-------------------------------------------|------------|------------|------------|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | ** ** | ** ** | **(per share)**                        | ** ** | **(years)**                      | ** ** |
| Balance outstanding as of January 1, 2006 |       | 3,953,472  |       | $                                           | 3.55       |                             | 4.61       |   |
| Granted                                   |       | 930,000    |       |                                        |       |                             |       |
| Exercised                                 |       | (168,600   | )          |                                        |       |                             |       |
| Forfeited or expired                      |       | (308,600   | )          |                                        |       |                             |       |
| Balance outstanding as of June 30, 2006   |       | 4,406,272  |       | $                                           | 2.10       |                             | 4.55       |   |
|                                      |       |       |       |                                        |       |                             |       |
| Balance outstanding as of January 1, 2007 |       | 4,654,412  |       | $                                           | 2.17       |                             | 4.52       |   |
| Granted                                   |       | 569,000    |       |                                        |       |                             |       |
| Exercised                                 |       | (965,377   | )          |                                        |       |                             |       |
| Forfeited or expired                      |       | (26,710    | )          |                                        |       |                             |       |
| Balance outstanding as of June 30, 2007   |       | 4,231,325  |       | $                                           | 2.31       |                             | 4.50       |   |
|                                      |       |       |       |                                        |       |                             |       |
| Exercisable as of June 30, 2007           |       | 978,651    |       | $                                           | 2.26       |                             |       |   |

 

Total options outstanding at June 30, 2007 and 2006, includes 1,050,000shares that are issued and vested only through a change in control provision.

 

5

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**6.             Inventory**

Inventory consisted of the following at December 31,2006, and June 30, 2007.

 

| ** **       | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------|------------|-------------------|------------|-----------------------|------------|
| Raw materials    |       | $                 | 303,708    |                  | $          | 633,185 |   |
| Work in progress |       | 176,874           |       | 121,977               |       |
| Finished goods   |       | 2,339,808         |       | 2,652,199             |       |
|             |       | $                 | 2,820,390  |                  | $          | 3,407,361 |   |

 

**7.             Securities Purchase and ProductParticipation Agreement**

OnJune 12, 2007, the Company entered into a Securities Purchase and ProductParticipation Agreement (the “Participation Agreement”) with Elixir GroupLimited, a Hong Kong company (“Elixir”). Pursuant to the ParticipationAgreement, the Company will issue to Elixir its common shares and warrants,subject to Elixir’s sourcing and identification of gaming operators located inthe general Asia region on the Company’s behalf.  The Company will place electronic gamingmachines with gaming operators pursuant to lease agreements between it and theoperators on a revenue sharing basis. Elixir will also sell to the Company the electronic gaming machines tobe placed under the lease agreements. The Participation Agreement and the related transactions are subject tocertain conditions, including the approval of the Company’s stockholders, andare expected to close in the third quarter of 2007.

 

Accordingto the terms of the Participation Agreement, Elixir will have the right to “earn-in”an equity interest in the Company based on the achievement of variousperformance milestones in terms of (a) the cumulative number of the electronicgaming machines that are contracted to be placed and leased pursuant to lease agreementsentered into between the Company and the gaming operators sourced andidentified by Elixir (the “gaming machines under contract”) and (b) thecumulative number of electronic gaming machines physically placed by theCompany and in operation in the gaming premises of gaming operators pursuant tothe lease agreements (the “gaming machines in operation”).  The close of the transaction is subject tothe placement of at least 1,000 gaming machines in operation.  At the close, the Company will issue to Elixir25,000,000 common shares and warrants, with an exercise price of $2.65 pershare, to purchase up to 88,000,000 additional common shares of the Company.The warrants will vest and first become exercisable based on the achievement ofcertain milestones with respect to the number of gaming machines under contractand in operation.  Elixir will beentitled to earn a total of 55,000,000 common shares of the Company (inclusiveof the 25,000,000 shares issued at closing) and the warrants will vest andbecome exercisable subject to achieving the following milestones with respectto the cumulative number of gaming machines under contract and in operation asfollows:

 

| ** ** | **Cumulative  Gaming Machines  Under Contract** | ** ** | **Cumulative  Gaming Machines  in Operation** | ** ** | **Shares Earned  By Elixir** | ** ** | **Vesting of Warrants  Earned By Elixir** | ** ** |
|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------|------------|-------------------------------------------|------------|
|       | 1,000                                           |       | 1,000                                         |       | 25,000,000                   |       | 0                                         |       |
|       | 2,000                                           |       | 1,000                                         |       | 15,000,000                   |       | 22,000,000                                |       |
|       | 3,000                                           |       | 2,000                                         |       | 10,000,000                   |       | 22,000,000                                |       |
|       | 4,000                                           |       | 3,000                                         |       | 5,000,000                    |       | 22,000,000                                |       |
|       | 5,000                                           |       | 4,000                                         |       | 0                            |       | 22,000,000                                |       |
| Total      | 5,000                                           |       | 4,000                                         |       | 55,000,000                   |       | 88,000,000                                |       |

 

In addition to the above,upon the Company’s initial placement of 1,000 gaming machines in operation withgaming operators identified by Elixir, the Company will reduce by $1.00 theexercise price of all warrants (other than 6,000,000 common share warrantspriced at $2.65) sold to Elixir pursuant to a securities purchase agreemententered into in October 2006 (the “2006 Warrants”).  When the cumulative

 

6

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number of gaming machinesunder contract reaches 2,000 units and the cumulative number of gaming machinesin operation reaches 1,000 units, the Company will further reduce by $1.00 theexercise prices of the 2006 Warrants.  Whenthe cumulative number of machines under contract reaches 3,000 units and thecumulative number of machines in operation reaches 2,000 units, the Companywill further reduce by $1.00 the exercise prices of the 2006 Warrants.

In connection with the closing of the transactions contemplated by theParticipation Agreement, the Company will enter into a registration rightsagreement with Elixir. The registration rights agreement requires the Companyto file a selling shareholder registration statement with the SEC, within 30days following the closing of the transactions under the ParticipationAgreement, for purposes of registering the resale of the shares of the Company’scommon stock issued to Elixir pursuant to the transaction, including all sharesthat are issued, or may be issued, upon exercise of the warrants. Pursuant tothe registration rights agreement, the holders of the securities are alsoentitled to certain demand and piggyback registration rights.  There are no liquidated penalties to theCompany in the case of a registration failure as defined by the agreement.

TheCompany’s issuance of its common shares and warrants to Elixir under theParticipation Agreement will be accounted for under EITF No. 96-18, *Accounting for Equity Instruments that are Issued to Other thanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services,*which addresses the accounting for, among other things, the issuance of equityin exchange for services rendered.  Whenthe transaction closes, it is expected that a substantial portion, if not allof the fair value of the shares issued to Elixir will be expensed.

 

**8.              Sale and issuance of stockand warrants**

On May 3, 2007, the Company entered into an agreement with fourinvestors for the Company’s sale of 600,000 shares of its common stock for theaggregate price of $1,650,000 ($2.75 per share).

On March 28, 2007, the Company completed the sale of 1,625,000shares of the Company’s common stock and warrants to purchase 1,625,000 sharesof common stock to an institutional investor for the aggregate price of$4,306,250. The warrants are exercisable at an exercise price of $2.65 pershare for a period of five years beginning on March 28, 2007. In addition, theCompany has agreed to provide the investor with limited rights of first refusalto purchase its securities over a two-year period expiring no later thanMarch 28, 2009. The Company also granted the investor certain registrationrights requiring the Company to file a selling shareholder registrationstatement with the SEC by June 15, 2007, for purposes of registering theresale of the shares of the Company’s common stock issued to the investorpursuant to the transaction, including all shares that are issued, or may beissued, upon exercise of the warrants. The Company is required to pay theinvestor a cash penalty in the event of a failure to file the registrationstatement by June 15, 2007 or the Company’s failure to achieve and maintain theeffectiveness of the registration statement as provided in the registrationrights agreement, however the investor has agreed to waive the penalty forfailure to file by June 15, 2007 and to extend the filing deadline to November23, 2007.  The maximum penalty for a registration failureas defined in the agreement is $250,000.

On January 25, 2007, the Company issued warrants to purchase up to16,000,000 shares of the Company to Elixir as an incentive to meet certainsales targets under a sales representative agreement entered into in October2006. These warrants were accounted for in accordance with FASB Emerging IssuesTask Force Issue No. 96-18, *Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services. *The warrants have a fair market value of $6,147,000 and areclassified in the balance sheet as prepaid commissions and will be amortized tocommission expense at a rate of 8% of the gross revenue generated by Elixir.

On January 18,2007, the Company sold 1.0 million shares of common stock at $2.65 per share toElixir, a wholly-owned subsidiary of Hong Kong-based Melco Group.

** **

**7**

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** **

**9.             Acquisition**

In July 2006, the Company completed the acquisitionof Dolphin Advanced Products (Dolphin). A portion of the consideration includedconvertible debt issued to a former principal of the business. The notewas converted to shares in January 2007. Pursuant to a price resale guaranteeassociated with the acquisition, the Company remains obligated if the holder sells suchshares at market for less than the guaranteed price of $3.50 per share. As ofJune 30, 2007, there were 1,114,286 shares remaining still subject to thisguarantee.

The condensed pro forma,consolidated statement of operations for the three- and six-month periods endedJune 30, 2006, as if the Dolphin acquisition had taken place as of January 1,2006, is as follows:

 

| ** **                       | ** ** | **Three Months Ended   June 30, 2006** | ** ** | **Six Months Ended   June, 30, 2006** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|---------------------------------------|------------|
| Net revenue                      |       | $                                                | 2,386,788  |                                  | $          | 4,600,474 |   |
| Operating expenses               |       | 5,212,462                                        |       | 9,465,541                             |       |
| Loss from operations             |       | (2,825,673                                       | )          | (4,865,067                            | )          |
| Other expenses                   |       | 635,519                                          |       | 1,001,809                             |       |
| Net loss                         |       | $                                                | (3,461,192 | )                                     | $          | (5,866,876 | ) |
| Loss per share                   |       | $                                                | (0.20      | )                                     | $          | (0.33 | ) |
| Weighted average number of share |       | 17,689,358                                       |       | 17,689,358                            |       |

** **

**10.          Contingencies**

*Legal matters.*The Company is a party to certain claims,legal actions, and complaints, including a patent infringement action betweenthe Company and one of its main competitors and the sales tax dispute discussedin the following paragraph. The Company cannot predict or estimate the likelyoutcome of any such litigation or other disputes and accordingly, no provisionhas been made for any minimum estimated losses with regard to such matters.

*Sales taxaudit.*  InFebruary 2004, the State of Nevada initiated a sales/use tax audit of theCompany’s equipment lessors. As of this filing the State of Nevada has not madea determination if there has been a shortfall in the payment of the sales/usetax. If the State of Nevada determines that the sales of the products to theleasing companies is the level at which sales/use tax should have beencollected, liability of the leasing companies could be passed on to the Companyand may not be recoverable. The outcome could range from a refund of $144,000to a potential liability with interest and penalties of up to $500,000.Accordingly, no provision has been made for any possible losses in connectionwith this matter.

**11.          Incometaxes**

At June 30, 2007, the Company had net operating loss carryforwards forU.S. federal income tax purposes of approximately $101,300,000 that may beavailable to offset against future taxable income. These operating losscarryforwards expire in the years 2010 through 2025. With respect to the U.S,no tax benefit has been reported in the financial statements for the currentperiod or prior periods, and since the potential tax benefits of the netoperating loss carryforwards are effectively offset by a 100% valuationallowance, as a result of significant uncertainties resulting from the Company’soperating history, that cause management to be unable to conclude at this timethat realization of such benefits is more likely than not. In addition, as aresult of possible changes in control, the Company may be limited in itsability to fully utilize these net operating loss carryforwards and realize anybenefit therefrom in the event of certain ownership changes described in U.S.Internal Revenue Code Section 382. The Australian tax rate is 30% and ourAustralian subsidiary has a deferred tax asset as at December 31, 2006 ofapproximately $80,000, a deferred tax liability of $1.8 million, andcarryforward losses as of June 30, 2007, are approximately $900,000.

 

 

8

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The transactions under theElixir Participation Agreement will impact the application of the Company’s netoperating loss carry forwards to income earned in future years.  Section 382 of the Internal Revenue Code of1986, as amended, limits the Company’s ability to fully utilize these netoperating loss carryforwards and realize any benefit therefrom in the eventthat a cumulative change in ownership to more than 50% is achieved in atrailing 36 month period (an “ownership change”). In the event of an ownershipchange, the amount of income that the Company may offset each year by itspre-ownership change net operating loss carryforwards is generally limited toan amount determined by multiplying the total fair market value of outstandingCompany stock at the time of the ownership change by the Federal long term taxexempt rate (such rate is 4.32% as of July 2007) in effect on the date of theownership change.

The Company’s management hasevaluated its positions taken in previously filed tax returns for all openyears income tax provision in accordance with Financial Accounting StandardsBoard Interpretation 48 (FIN 48), *Accounting for Uncertaintyin Income Taxes — an interpretation of FASB Statement No. 109.* Basedon its evaluation, management believes that adopting FIN 48 in the firstquarter of 2007 did not have a material effect on the Company’s net operatingloss carryforwards or the related deferred tax assets or the valuationallowance or its deficit as of January 1, 2007.

**Note 12.**  **Restatement**

 

TheCompany is restating its previously issued consolidated financial statements asof June 30, 2007, and for the three months and six months then ended, and forthe comparative periods in 2006, to correct errors which resulted from itsfailure to record expenses of certain warrants issued in connection with debtfinancings completed during the years ended December 31, 2003 and 2006, and theresulting effect on the interim periods presented. The Company previouslyrestated its December 31, 2006, balance sheet in Amendment No. 1 to Annual Report on Form 10-KSB/A for that year filedon November 13, 2007, alongwith summarized restated financial information for the quarterly periodscontained in the year then ended. The restated consolidated financialstatements for the three and six months ended June 30, 2006, presented in thisamendment agree with such summarized information previously presented inAmendment No. 1 to Annual Report on Form 10-KSB/A.

Duringthe three months ended June 30, 2006, the company issued 2,600,000 warrantswith an estimated fair value of $3,380,000 in conjunction with a $13 millionfinancing.  In connection with thepreparation of the Company’s financial statements as of and for the year endedDecember 31, 2006, made part of the Company’s annual report on Form 10-KSBoriginally filed with the SEC on April 13, 2007, the Company failed to recordthe estimated fair value of these warrants as a “debt discount” and thereforefailed to appropriately amortize the cost of these warrants subsequently overthe life of the debt.  In connection withthe preparation of the Company’s financial statements made part of the Company’squarterly report on Form 10-QSB originally filed with the SEC on August 15,2007 (“Original Quarterly Report”), the Company made certain reclassificationadjustments to its December 31, 2006, balance sheet to record the warrants,and  a catch-up amortization entry wasrecorded as of June 30, 2007,  to bringthe total net debt discount current.  Inaddition, in October 2003, the Company issued 900,000 warrants with anestimated fair value of $0.7 million in conjunction with a $7.5 millionfinancing.  At that time, the Companyfailed to record the estimated fair value of these warrants and amortize thecost over the life of the debt.  Inaddition, the Company failed to record a liability in the amount of $375,000 inaccordance with a security price resale guarantee associated with anacquisition in 2006.  In its restatedannual financial statements for 2006, the effects of this and related errors on2006 were also corrected, and the effects on the periods presented herein arecorrected with this restatement.

Alsoin connection with restating its 2006 annual financial statements, the Companydetermined that a $4,300,000 portion of goodwill associated with an acquisitionof that year should have been allocated to 

 

 

9

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certainidentifiable intangibles.  The relatedamortization of these intangibles for the affected periods  is recognized with this Amendment No. 1.  Also, the Company recorded a tax liability inthe amount of $1.8 million for the differences between the assigned values andthe tax basis of recognized assets in a business combination and corrected thecontingent liability by $301,000.

Thefinancial statements and other financial information presented in thisAmendment No. 1 to Quarterly Report on Form 10-QSB/A for the quarter ended June30, 2007, have been restated as described above.  As summary of the effects of theserestatements are summarized in the following table:

 

| Net loss, as originally reported                   |   | $        | (8,627,014 | ) |
|----------------------------------------------------|--------|----------|------------|---|
| Amortization of debt discount                      |   | (496,178 | )          |
| Reversal of catch-up amortization                  |   | 671,469  |       |
| Reversal of previously expensed warrants           |   | 766,967  |       |
| Acquisition costs related to stock price guarantee |   | (375,000 | )          |
| Amortization of intangibles                        |   | (165,384 | )          |
| Net loss, as restated                              |   | $        | (8,225,140 | ) |

 

 

 

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## ** **

## **Item 2.  Management’s Discussion and Analysis or Planof Operations.**

**CAUTIONARY STATEMENT**

You should read the following discussion and analysis in conjunctionwith our unaudited condensed consolidated financial statements and the relatednotes thereto contained elsewhere in this report. The information contained inthis quarterly report on Form 10-QSB is not a complete description of ourbusiness or the risks associated with an investment in our common stock. Weurge you to carefully review and consider the various disclosures made by us inthis report and in our other reports filed with the Securities and ExchangeCommission, or SEC, including our annual report on Form 10-KSB for theyear ended December 31, 2006 and subsequent reports on Form 8-K, whichdiscuss our business in greater detail.

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

Our future results, including results related to forward-lookingstatements, involve a number of risks and uncertainties. No assurance can begiven that the results reflected in any forward-looking statements will beachieved. Any forward-looking statement speaks only as of the date on whichsuch statement is made. Our forward-looking statements are based uponassumptions that are sometimes based upon estimates, data, communications andother information from suppliers, government agencies and other sources thatmay be subject to revision. Except as required by law, we do not undertake anyobligation to update or keep current either (i) any forward-looking statementto reflect events or circumstances arising after the date of such statement, or(ii) the important factors that could cause our future results to differmaterially from historical results or trends, results anticipated or planned byus, or which are 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 timein any forward-looking statement. Some of these important factors, but notnecessarily all important factors, include those matters included in thesection “Risk Factors” further below. Please also refer to the section “RiskFactors” in our annual report on Form 10-KSB for the year endedDecember 31, 2006.

The Company owns or hasrights to certain trademarks that it uses in connection with the sale of itsproducts, including, but not limited to, the following: *VendingData*TM,*Deck Checker*TM, *Random Ejection*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.

### **Overview**

Our strategy is to develop cost-effective niche products for the globalgaming industry. We focus on products that increase the security, productivityand profitability of casino operations. Our strategy involves marketing certainof our products for sale (or rent), depending on the product, the geographic 

 

 

11

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location of the customer and other factors. In the past, we have reliedon our internal sales staff and distributor relationships for the sale andrental of our products. However, in June 2007 we transitioned to an all distributormodel for the United States (US) and the rest of the world.

In July 2006, we acquired all of the capital shares of Dolphin. Dolphinis engaged in the business of producing high-precision plastic injection moldedcomponents and associated tooling, including casino chips and plaques, for thegaming, and automotive industries. As a result of the Dolphin acquisition, wehave two segments for financial reporting purposes, our gaming operations andour non-gaming operation, which consists of the Dolphin operations in theautomotive sector.

Asmore fully described immediately below, in July 2007, we entered into aSecurities Purchase and Product Participation Agreement (the “ParticipationAgreement”) with Elixir Group Limited, a Hong Kong company (“Elixir”), pursuantto which we propose to redirect our business focus to the placement ofelectronic gaming machines in the general Asia region.  While we intend to continue our manufactureand sale of other gaming products, including our shufflers, Deck Checkers, casinochips, and ChipWashers, we expect that following the close of the transactionsunder the Participation Agreement our sales and marketing activities will befocused principally in Asia and other foreign markets.  We expect to surrender our U.S. gaming licensesfollowing the close of the transactions under the Participation Agreement inorder to allow us to devote our resources to an Asia-based business model.  We believe this decision will result insignificant cost savings to us and allow us to focus our time and capital ondeveloping our Asian business.  Upon thesuccessful execution of our Asia-based business model, we may considerreturning to the U.S. gaming device market.

 

**Elixir Transaction**

On June 12, 2007, we entered into the Product ParticipationAgreement with Elixir. Pursuant to the Participation Agreement, we will issueto Elixir our common shares and warrants, subject to Elixir’s sourcing andidentification of gaming operators located in the general Asia region on ourbehalf. We will place electronic gaming machines with gaming operators pursuantto lease agreements between us and the operators on a revenue sharingbasis.  Elixir will also sell to us theelectronic gaming machines to be placed under the lease agreements. TheParticipation Agreement and the related transactions are subject to certainconditions, including the approval of our stockholders. We intend to call ameeting of our stockholders in September 2007 to consider and approve theParticipation Agreement and the related transactions, and subject tostockholder approval and the satisfaction of other conditions set forth in theParticipation Agreement, close the transactions under the ParticipationAgreement as soon as practicable following the stockholders meeting.

According to the terms ofthe Participation Agreement, Elixir will have the right to “earn-in” an equityinterest in our common shares based on the achievement of various performancemilestones in terms of (a) the cumulative number of the electronic gamingmachines that are contracted to be placed and leased pursuant to leaseagreements entered into between us and the gaming operators sourced andidentified by Elixir (the “gaming machines under contract”) and (b) thecumulative number of electronic gaming machines physically placed by us and inoperation in the gaming premises of gaming operators pursuant to the leaseagreements (the “gaming machines in operation”). The close of the transactionis subject to the placement of at least 1,000 gaming machines in operation. Atthe close, we will issue to Elixir 25,000,000 common shares and warrants, withan exercise price of $2.65 per share, to purchase up to 88,000,000 additionalcommon shares of our company. The warrants will vest and first becomeexercisable based on the achievement of certain milestones with respect to thenumber of gaming machines under contract and in operation. Elixir will beentitled to earn a total of 55,000,000 of our common shares (inclusive of the25,000,000 shares issued at closing) and the warrants will vest and becomeexercisable subject to achieving the following milestones with respect to thecumulative number of gaming machines under contract and in operation asfollows: 

 

 

12

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| ** ** | **Cumulative  Gaming Machines  Under Contract** | ** ** | **Cumulative  Gaming Machines  in Operation** | ** ** | **Shares Earned  By Elixir** | ** ** | **Vesting of Warrants  Earned By Elixir** | ** ** |
|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------|------------|-------------------------------------------|------------|
|       | 1,000                                           |       | 1,000                                         |       | 25,000,000                   |       | 0                                         |       |
|       | 2,000                                           |       | 1,000                                         |       | 15,000,000                   |       | 22,000,000                                |       |
|       | 3,000                                           |       | 2,000                                         |       | 10,000,000                   |       | 22,000,000                                |       |
|       | 4,000                                           |       | 3,000                                         |       | 5,000,000                    |       | 22,000,000                                |       |
|       | 5,000                                           |       | 4,000                                         |       | 0                            |       | 22,000,000                                |       |
| Total      | 5,000                                           |       | 4,000                                         |       | 55,000,000                   |       | 88,000,000                                |       |

 

In addition to the above,upon our initial placement of 1,000 gaming machines in operation with gamingoperators identified by Elixir, we will reduce by $1.00 the exercise price ofall warrants (other than 6,000,000 common share warrants priced at $2.65) soldto Elixir pursuant to a securities purchase agreement entered into in October2006 (the “2006 Warrants”).  When thecumulative number of gaming machines under contract reaches 2,000 units and thecumulative number of gaming machines in operation reaches 1,000 units, we willfurther reduce by $1.00 the exercise prices of the 2006 Warrants.  When the cumulative number of machines undercontract reaches 3,000 units and the cumulative number of machines in operationreaches 2,000 units, we will further reduce by $1.00 the exercise prices of the2006 Warrants.

At such time that at least2,000 gaming machines are under contract and 1,000 gaming machines are inoperation, Elixir will likely have earned shares representing in excess of 50%of our outstanding common shares, resulting in a change of voting control ofour company.  Pursuant to theParticipation Agreement, we have also agreed to expand our board of directorsto no more than eight and nominate to its board three persons appointed byElixir, who shall be elected to our board effective as of the close of thetransactions under the Participation Agreement.

The Participation Agreementincludes customary representations, warranties and covenants by Elixir and us.The transactions contemplated by the agreement are conditioned upon completionby Elixir of a satisfactory due diligence investigation of us and the approvalof the agreement and related transactions by our stockholders, including theelection of the Elixir nominees and an amendment to our articles ofincorporation to increase its authorized capital.

The exercise price of thewarrants to be issued to Elixir and the number of shares issuable pursuant tothe warrants are subject to adjustment for stock splits, dividends, rightsofferings and other dilutive events. In addition, the number of shares ofcommon stock for which the warrants may be exercised is subject to adjustmentif we issue shares of our common stock, or securities convertible into orexchangeable for shares of our common stock at a price less than thevolume-weighted average price (“VWAP”) on the record date. Such an adjustmentwill be made every time we issue common stock at a price below the VWAP;however, no adjustment will be made for shares issued in connection with theexercise of outstanding stock options and warrants.

In connection with theclosing of the transactions contemplated by the Participation Agreement, wewill enter into a registration rights agreement with Elixir. The registrationrights agreement will require us to file a selling shareholder registrationstatement with the SEC, within 30 days following the closing of thetransactions under the Participation Agreement, for purposes of registering theresale of the shares of our common stock issued to Elixir pursuant to thetransaction, including all shares that are issued, or may be issued, uponexercise of the warrants. Pursuant to the registration rights agreement, theholders of the securities are also entitled to certain demand and piggybackregistration rights. There are no liquidated penalties to the Company in thecase of a registration failure as defined by the agreement.

 

 

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### **Results of Operations**

##### ***Comparisonof Three Months Ended June 30, 2007 and 2006***

For the three months ended June 30, 2007, we increased revenue by $1.8million, or 106%, to $3.5 million compared to $1.7 million for the prior yearperiod. This increase was primarily driven by the addition of non-gamingproduct revenue due to the acquisition of Dolphin in July 2006 and an increasein shuffler and Deck Checker sales. The increase in revenue was partiallyoffset by a decrease in RFID casino chip sales. Increased sales of shuffler andDeckChecker products during the period were attributable to (a) initial USsales to our new US distributor and (b) initial international sales to our newAsia-based distributor, Elixir. Gross margin decreased to 14% for the threemonths ended June 30, 2007 compared to the prior year period gross margin of28% as a result of an inventory write off of approximately $460,000, a decreasein sales in the second quarter of 2007 of casino chips and the addition of thelower margin non-gaming product line for fiscal 2007. Specific product lineresults for the three months ended June 30, 2007 and 2006 are provided below.

 
| ** **              | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **2007**                        | ** ** | **2006**                      | ** ** | **Percentage change** | ** ** | **2007** | ** ** | **2006** | ** ** | **Percentage change** | ** ** |
| **Shuffler Sales**      | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                 |       | 208,663                         |       | (14,211                       | )          | (1,568 | )% | 251,853 |   | (43,006 | ) | (686 | )% |
| Gross margin %          |       | 60                              | %          | 1,344                         | %          | (165 | )% | 60 | % | 917 | % | (138 | )% |
|                    |       |                            |       |                          |       |   |   |   |   |   |   |   |   |
| **Shuffler Rentals**    | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                 |       | 31,515                          |       | 54,912                        |       | (43 | )% | 75,303 |   | 127,046 |   | (41 | )% |
| Gross margin %          |       | 86                              | %          | 81                            | %          | (39 | )% | 87 | % | 84 | % | (38 | )% |
|                    |       |                            |       |                          |       |   |   |   |   |   |   |   |   |
| **DeckChecker Sales**   | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                 |       | 895,873                         |       | 320,599                       |       | 179 | % | 1,011,784 |   | 926,602 |   | 9 | % |
| Gross margin %          |       | 69                              | %          | 60                            | %          | 225 | % | 70 | % | 72 | % | 7 | % |
|                    |       |                            |       |                          |       |   |   |   |   |   |   |   |   |
| **DeckChecker Rentals** | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                 |       | 21,065                          |       | 25,273                        |       | (17 | )% | 41,840 |   | 64,203 |   | (35 | )% |
| Gross margin %          |       | 95                              | %          | 80                            | %          | (1 | )% | 96 | % | 85 | % | (26 | )% |
| ** **              | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Casino Chips**        |       |                            |       |                          |       |   |   |   |   |   |   |   |   |
| Revenue                 |       | 334,480                         |       | 1,197,270                     |       | (72 | )% | 1,872,057 |   | 1,197,270 |   | 56 | % |
| Gross margin %          |       | (19                             | )%         | 46                            | %          | (111 | )% | 19 | % | 46 | % | (36 | )% |
| ** **              | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Non-gaming products** |       |                            |       |                          |       |   |   |   |   |   |   |   |   |
| Revenue                 |       | 1,729,848                       |       | —                        |       | 100 | % | 3,160,725 |   | — |   | 100 | % |
| Gross margin %          |       | 10                              | %          | —                        |       | 100 | % | 1 | % | — |   | 100 | % |
| ** **              | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other**               | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                 |       | 280,645                         |       | 102,971                       |       | 173 | % | 447,301 |   | 127,201 |   | 252 | % |
| Gross margin            |       | (420,412                        | )          | (144,940                      | )          | 154 | % | (542,588 | ) | (513,463 | ) | (5 | )% |

 

 

**Shufflersales. **Revenue from shuffler salesincreased by increased $223,000, in the second quarter of 2007 over the prioryear period as a result of an increase in unit sales. The increase in unitsales was a result of the sales channel transition to distributors as discussedabove. Gross margin improved to 60% in the second quarter of 2007 as a resultof a decrease in costs associated with the one-time product upgrades during theprior year period. We expect margins to remain at these higher levels.

 

** **

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** **

**Shufflerrentals.**  Shuffler rental revenue decreased $23,400 in the secondquarter of 2007 from the prior year period as a result of the transition to the new distributionmodel in the US and Asia which is more sales oriented. In the new model, wewill only be selling equipment to distributors and as a result our rentalrevenue for these products will continue to decline.

**DeckCheckersales.**  The increase in DeckChecker sales in the secondquarter of 2007 wasprimarily a result of the sales channel transition to distributors asdiscussed aboveduring the three months ended June 30, 2007. Gross margin increased by 9% to69% and is attributable to lower sales costs associated with sales todistributors. We expect to be able to maintain this higher margin going forward.

**DeckChecker rentals.**  The decrease in Deck Checker rental revenue in the secondquarter of 2007 from the prior year period as a result of the transition to the new distributionmodel in the US and Asia which is more sales (than rental) oriented. In the newmodel, we will only be selling equipment to distributors and as a result ourrental revenue for these products will continue to decline. Our cost of salesincluded Deck Checker rental depreciation of $1,014 during the second quarterof 2007 a reduction from $5,107 for the same period of the prior year.

**Casinochip sales.**  The decrease in revenue from casino chipsales in the second quarter of 2007 was a result of no significant RFID casinochip orders as compared to the corresponding period in the prioryear. Our grossmargin of (19)% was a result of the low volume of sales and low margin sales toexhibitors at gaming exhibitions. Margins are expected to improve during thecurrent fiscal year as sales and average sales prices increase.

**Non-gamingproducts sales.**  With the acquisition of Dolphin in July 2006there is additional revenue of $1,730,000 not related to the gaming businessfor the second quarter of 2007. This segment was not part of the Company duringthe same period in 2006. Almost all of this revenue relates to the automotiveline of business. Our 10% gross margin on these sales is expected to improve aswe improve our production efficiencies.

**Other income. **Theincrease in other revenues was attributable to an increase in service revenuecompared to the corresponding period of the prior year while gross margin wasnegatively impacted by an inventory write off of approximately $460,000resulting from the write-down of legacy products.

###### **General and Administrative Expense**

For the three months ended June 30, 2007, our general andadministrative expenses increased $3.0 million or 166% to $4.8 million comparedto $1.8 million in the corresponding period of the prior year. This increase isprimarily related to the following:

•                  During the second quarter of 2007, ourexpenses for share based compensation totaled $1,390,000 as compared to$115,000 in the corresponding period in the prior year. This increase of$1,275,000 in share based compensation was primarily due to the acceleration ofvesting on certain stock options and an increase in the number of options beingexpensed in the current period compared to the corresponding period of theprior year. We granted approximately 46,500 options in the three month periodended June 30, 2007 compared to 875,000 options in the corresponding period inthe prior year.

•                  During the second quarter of 2007, accountingand consulting expenses increased $154,000 to $436,000 from $283,000 in thecorresponding period in the prior year. This increase is a result of increased costs associated with ourpreparation to comply with Section 404 of the Sarbanes-Oxley Act of 2002 aswell as an increase in accounting fees associated with the Dolphin. We expectthese costs to increase over the current fiscal year.

•                  During the secondquarter 2007, the Company recorded a liability of $375,000 in accordance with asecurity resale price guarantee in connection with a prior year acquisition.

 

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•                  During the second quarter of 2007, weincurred an increase in wages and salaries of $96,000 over the prior yearperiod as a result of the increase in headcount associated with the acquisitionof Dolphin during the third quarter of 2006.

•                  We experienced an increase in legal andregulatory of $444,000 during the second quarter of 2007 as a result of feesrelated to the Elixir transaction, and the filing of various motions inconnection with finalizing the patent litigation.

•                  During the second quarter of 2007, weincurred an increase in rent of $210,000 related to the Dolphin transaction.

•                  Depreciation and amortization expenseincreased approximately $251,000 to $323,000 in current year quarter comparedto $72,000 in the corresponding period of the prior year.  This increase is primarily attributable tothe acquisition of Dolphin in the third quarter of 2006.

 

**Researchand Development Expense**

For the three months ended June 30, 2007, research anddevelopment expenses were $148,000, or 75% less than the three month periodended June 30, 2006. The decrease in research and development expenses was dueto reduced expenses related to the development of our ShufflePro and ChipWasherproducts.

**Other Income and Expense**

Other income and expense decreased $1.5 million for the quarter endedJune 30, 2007 compared to the corresponding period in the prior year.  In the quarter ended June 30, 2006, theCompany recorded a loss on extinguishment of debt of $1.2 million.

###### **Interest Expense**

For the three monthsended June 30, 2007, we incurred interest expenses of $389,437, a decrease of 43%from the corresponding period of the prior year. The decrease in interestexpense was due to the lower amount of principal and rate of interest payableon the principal amount for the second quarter of 2007 as compared to interestexpenses for the first three months of 2006 consisting of the 9% senior securednotes, the 10% senior secured convertible notes and the $5 million 9% line ofcredit. In April 2007, we repaid principal in the amount of $2.15 million ofoutstanding debt with the proceeds from the stock sale described in Note 5,which will reduce our interest expense going forward.

Dolphin wasacquired through a combination of cash and stock and did not utilize a debtcomponent.

##### ***Comparisonof Six Months Ended June 30, 2007 and 2006***

For the six months ended June 30, 2007, we increased revenue by $4.5million, or 188%, to $6.9 million compared to $2.4 million for the prior yearperiod. This increase was primarily driven by the addition of non-gamingproduct revenue due to the acquisition of Dolphin in July 2006 and an increasein shuffler and casino chip sales. Increased sales of shuffler products duringthe period were attributable to (a) initial US sales to our new US distributorand (b) initial international sales to our new Asia-based distributor, Elixir.Gross margin decreased to 12% for the six months ended June 30, 2007 comparedto the prior year period in the as a result of the addition of the lower marginnon-gaming product line for fiscal 2007. Specific product line results for thesix months ended June 30, 2007 and 2006 are provided in the table above (page9).

**Shufflersales. **Revenue from shuffler salesincreased by $295,000, in the first half of 2007 over the prior year period asa result of an increase in unit sales. The increase in unit sales was a resultof the sales channel transition to distributors as discussed above. Grossmargin improved to 60% in the first half of 

 

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2007as a result of a decrease in costs associated with the one-time productupgrades during the prior year period. We expect margins to remain at thesehigher levels.

**Shufflerrentals.**  Shuffler rental revenue decreased $51,700 in the firsthalf of 2007 from the prior year period as a result of the transition to the new distributionmodel in the US and Asia which is more sales oriented. In the new model, wewill only be selling equipment to distributors and as a result our rentalrevenue for these products will continue to decline.

**DeckCheckersales.**  The increase in Deck Checker sales in the firsthalf of 2007 wasprimarily a result of the sales channel transition to distributors asdiscussed aboveduring the six months ended June 30, 2007. Gross margin decreased slightly by2% to 70% and is expected to remain at this level.

**DeckChecker rentals.**  The decrease in Deck Checker rental revenue in the firsthalf of 2007 from the prior year period as a result of the transition to the new distributionmodel in the US and Asia which is more sales (than rental) oriented. In the newmodel, we will only be selling equipment to distributors and as a result ourrental revenue for these products will continue to decline.  Our cost of sales included Deck Checkerrental depreciation of $1,863 during the first half of 2007 a reduction from$9,872 for the same period of the prior year.

**Casinochip sales.**  The 56% increase in revenue from casino chipsales in the first half of 2007 was a result of a significant RFID casino chiporder to a Macau casino as compared to the corresponding period in the prioryear. Our grossmargin of 19% was a result of some low margin sales to exhibitors at gamingexhibitions and is expected to improve during the current fiscal year as salesand average sales prices increase.

**Non-gamingproduct sales.**  With the acquisition of Dolphin in July 2006there is additional revenue of $3,161,000 not related to the gaming businessfor the first half of 2007. This segment was not part of the Company during thesame period in 2006. Almost all of this revenue relates to the automotive lineof business. Our 1% gross margin on these sales is expected to improve as weimprove our production efficiencies.

**Other income. **Theincrease in other revenues was attributable to an increase in service revenuecompared the corresponding period of the prior year as well as the sale of aChipWasher in the first quarter of 2007.

###### **General and Administrative Expense**

For the six months ended June 30, 2007, our general and administrativeexpenses increased $4.1 million on 104% over the corresponding period of theprior year. This increase is primarily related to the following:

•                  During the first half of 2007, our expensesfor share based compensation totaled $1.8 million an increase of $1.2 millionor 188% compared to the corresponding period of the prior year.  The increase in share based compensation wasprimarily due to the increase in stock options expensed in the current periodas compared to $612,000 in the corresponding period in the prior year. Wegranted approximately 569,000 options in the six month period ended June 30,2007 compared to 930,000 options in the corresponding period in the prior year.

•                  During the first half of 2007, consulting andaccounting expenses increased $606,000 to $973,000 compared to $367,000 or 165%compared to the corresponding period in the prior year due to consultingexpenses incurred in preparation of our compliance with Section 404 of theSarbanes-Oxley Act of 2002 We expect these costs to increase over the currentfiscal year.  Additional increasesrelated to the fees paid to consultants for accounting, marketing and financialservices.

•                  During the first half of 2007, thecompany recorded a liability of $375,000 in accordance with a security resaleprice guarantee in connection with a prior year acquisition.

 

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•                  During the first half of 2007, we incurred anincrease in wages and salaries, including commissions, of $720,000 over theprior year period as a result of the increase in headcount associated with theacquisition of Dolphin during the third quarter of 2006.

•                  We experienced an increase in legal andregulatory of $414,000 during the first half of 2007 as a result of feesrelated to the Elixir transaction, and the filing of various motions inconnection with finalizing the patent litigation.

•                  We experienced an increase in rent of$198,500 during the first half of 2007 as a result of the increase in rentassociated with the acquisition of Dolphin during the third quarter of 2006.

**Researchand Development Expense**

For the six months ended June 30, 2007, research anddevelopment expenses were $411,000, or 49% less than the six-month period endedJune 30, 2006. The decrease in research and development expenses was due toreduced expenses related to the development of our ShufflePro and ChipWasherproducts.

###### **Interest Expense**

For thesix months ended June 30, 2007, we incurred interest expenses of $1,017,500, a decreaseof 2% from the corresponding period of the prior year. In April 2007, we repaidprincipal in the amount of $2.15 million of outstanding debt with the proceedsfrom the stock sale described in Note 5, which reduced our interest expense,and will continue to recduce going forward.

 

### **Liquidity and Capital Resources**

Our working capitaldeficiency decreased by approximately $3.7 million compared to December 31,2006. The decrease is due to increased cash on hand, increased current accountsreceivable, and decreased short term debt.

We have historically incurred losses from operations. During the fiscalyear ended December 31, 2006 and the six months ended June 30, 2007, weincurred negative cash flow from operations of ($7,709,000) and ($6,229,000),respectively. Management believes that our proposed placement of electronicgaming machines in the Asia region pursuant to the Elixir ParticipationAgreement described above will generate positive cash flow for the companycommencing in the second half of 2007. However, there can be no assurance thatwe will be able to consummate the transactions under the ParticipationAgreement or, if we are able to consummate the transactions, that we will besuccessful in generating cash flow from operations. The transactions under theParticipation Agreement represent a material change in our business model, andthat business model has not been proven by us.

Apart from the impact of the Elixir Participation Agreement our abilityto maintain adequate liquidity in the medium-to-long term will be impacted byany continuing losses from operations and management’s plans to address andovercome prior operating losses. Management has developed and refined its 2007operating plan to increase its sales through the rollout of new shufflerproducts, sale of its high frequency RFID casino chip product to new casinoopenings in Macau, and improving its sales efforts domestically andinternationally through newly announced distributorship arrangements withElixir in Asia and Suzo-Happ in the rest of the world. While managementcontinues in its endeavors to attain a profitable level of operations, therecan be no assurance that we will be able to substantially increase revenues andcontrol expenses at levels that will allow us to operate on a cash flowpositive basis.

### **Critical Accounting Policies and Estimates**

Following is a summary of what our management believes are the criticalaccounting policies related to our operations. The application of thesepolicies, in some cases, requires management to make subjective 

 

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judgments and estimates regarding the effect of matters that areinherently uncertain. See Note 1, “Description of Business and SignificantAccounting Policies,” to financial statements included in this report for amore detailed discussion of our accounting policies. Except as described below,we do not employ 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 financial statements,management reviews and evaluates the collectability of our trade receivablesand adjusts our allowance for estimated uncollectible accounts as deemednecessary in the circumstances. These estimates have the potential forcritically affecting results of operations for any given period. Factorsconsidered by management in making such estimates and adjustments include anyconcentrations among customers, changes in our relationships therewith, paymenthistory and the apparent financial condition of our 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*.

Weprovide currently for estimated warranty repair costs associated with salescontracts. Although there are no extended warranties offered for our products,and our recorded warranty liability is, therefore, not material, we do providefor maintenance contracts that are billed and recognized on a monthly basis.

Ifthe customer 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.

***IntangibleAssets.***

We currently amortize ourintangible assets (patent and technology rights) on a straight-line basis overcurrently estimated useful lives of 10 years. Management believes that theuseful life of patents and technology rights equals the full term of thepatent.

 

 

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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.

***Income taxes***

With respect to the U.S, thepotential tax benefits of the Company’s net operating loss carryforwards areeffectively offset by a 100% valuation allowance, as a result of significantuncertainties resulting from the Company’s operating history, that causemanagement  to be  unable to conclude at this time thatrealization of such benefits is more likely than not. In addition, as a resultof possible changes in control, the Company may be limited in its ability tofully utilize these net operating loss carryforwards and realize any benefittherefrom in the event of certain ownership changes described in U.S. InternalRevenue Code Section 382. The Australian tax rate is 30% and our Australiansubsidiary has a deferred tax asset as at December 31, 2006 of approximately$80,000 and carryforward losses as of June 30, 2007, are approximately$900,000.

The Company’s management hasevaluated its positions taken in previously filed tax returns for all openyears income tax provision in accordance with Financial Accounting StandardsBoard Interpretation 48 (FIN 48), *Accounting for Uncertaintyin Income Taxes — an interpretation of FASB Statement No. 109.* Basedon its evaluation, management believes that adopting FIN 48 in the firstquarter of 2007 did not have a material effect on the Company’s net operatingloss carryforwards or the related deferred tax assets or the valuationallowance or its deficit as of January 1, 2007.

***Recent Accounting Pronouncements***

In September2006, Financial Accounting Standards Board(FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 157, *FairValue Measurements*, which defines fair value, establishes a frameworkfor measuring fair value and expands disclosures about fair value measurements.SFAS No. 157 will become effective for financial statements issuedfor fiscal years beginning after November 15, 2007. In February 2007, theFASB issued SFAS No. 159, *The**Fair Value Option for Financial Assets andFinancial Liabilities — Including an**amendment of FASB Statement No. 115*, which will permitthe option of choosing to measure certain eligible items at fair value atspecified election dates and report unrealized gains and losses in operations.SFAS No. 159 will become effective for us for financial statementsissued for periods beginning in 2008. We are currently evaluating the effectthat SFAS Nos. 157 and 159, if any, will have on our future financialposition, results of operations and operating cash flows.

### **RiskFactors**

***We may require additional funding in the future to continue to operateour business. ***We had workingcapital of $535,738 at June 30, 2007, and our working capital has since decreaseddue to continuing negative cash flow from operations.

Management believes that our proposed placement of electronic gamingmachines in the Asia region pursuant to the Elixir Participation Agreementdescribed above will generate positive cash flow for the company commencing inthe second half of 2007. However, there can be no assurance that we will beable to consummate the transactions under the Participation Agreement or, if weare able to consummate the transactions, that we will be successful ingenerating cash flow from operations. The transactions under the ParticipationAgreement represent a material change in our business model, and that businessmodel has not been proven by us.

If we are unableto consummate the transactions under the Elixir Participation Agreement, webelieve that we will need at least $10 million of additional capital over thenext 12 months in order to fund our 

 

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operations. The Company mayneed to raise additional funds through various financing sources, including thesale of our equity and debt securities and the procurement of commercial debtfinancing. However, as result of ourpresent level of debt and certain restrictions on our ability to incuradditional indebtedness under our exiting credit agreements, it is unlikely wewill be able to obtain additional debt-based capital, unless a significantportion of the proceeds are used to retire existing debt. There can beno guarantees that such funds will be available on commercially reasonableterms, if at all. If such financing is not available on satisfactory terms, wemay be unable to expand or continue our business as desired and operatingresults may be adversely affected. Any debt financing will increase expensesand must be repaid regardless of operating results and may involve restrictionslimiting our operating flexibility. If we issue equity securities to raiseadditional funds, the following results may occur:

•                  the percentage ownership of our existingstockholders will 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 lossesand anticipate continued operating losses for at least the near term.*** For the three months ended June 30, 2007 andthe years ended December 31, 2006 and 2005, we have incurred net losses of$4,829,179, $14,605,762 and $23,401,529, respectively, and our operations haveused $6,228,676, $7,709,812 and $10,085,798 of cash, respectively. As of June30, 2007, December 31, 2006 and December 31, 2005, we had accumulateddeficits of $101,191,655, $92,557,833 and $78,352,071, respectively. We expectto continue to experience negative cash flow from operations until such time aswe are able to substantially increase revenues and control expenses at levelsthat will allow us to operate on a cash flow positive basis. Managementbelieves that our proposed placement of electronic gamingmachines in the general Asia region pursuant to the Elixir Participation Agreement described abovewill generate positive cash flow for the company commencing in the first halfof 2008.  However, there can be noassurance that we will be able to consummate the transactions under theParticipation Agreement or, if we are able to consummate the transactions, thatwe will be successful in generating cash flow from operations. The transactionsunder the Participation Agreement represent a material change in our businessmodel, and that business model has not been proven by us.  There can be no assurance we will be able tobecome profitable. Revenues may not grow in the future, and we may not generatesufficient revenues for profitability. If we become profitable, we may not beable to sustain profitable operations.

The Participation Agreement includes customary representations,warranties, and covenants by Elixir and us. The transactions contemplated bythe agreement are conditioned upon completion by Elixir of a satisfactory duediligence investigation of our company and the approval of the agreement andrelated transactions by our stockholders, including the election of the Elixirnominees and an amendment to VendingData’s articles of incorporation toincrease its authorized capital. There can be no assurance we will be able tosatisfy the conditions to Elixir’s obligations to close the transactions underthe Participation Agreement. If we are able to consummate the closing under theParticipation Agreement, we may not obtain the expected benefits under theagreement as a result of risks and uncertainties concerning Elixir’sprojections for the placement of gaming machines and the net win (and our shareof the net-win) from such gaming machines.

***If weare able******to consummate the ParticipationAgreement with Elixir, o******ur shareholders will undergosignificant equity dilution pursuant to the transactions contemplated by theParticipation Agreement***. If we are successful in consummating the transactionsunder the Participation Agreement, our shareholders will experience significantequity dilution due to the number of shares we will need to issue under theagreement. At the closing of the transactions under the ParticipationAgreement, Elixir will 

 

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hold at least26,000,000 shares of our common stock, which includes the 1,000,000 commonshares it purchased from us in January 2007. Assuming that we issue no furthercommon shares between now and the closing, Elixir’s 26,000,000 common shareswill represent approximately 43% of our issued and outstanding common shares.If Elixir earns all 55,000,000 common shares under the Participation Agreement,and all 88,000,000 warrants issued to Elixir thereunder vest and becomeexercisable, Elixir will own approximately 61% of our issued and outstandingcommon shares (assuming we issue no further common shares between now and then)and approximately 70% of our issued and outstanding common shares on a fullydiluted basis (assuming we issue no further common shares or options, warrantsor the like to purchase our common shares between now and then).

***Thetransactions contemplated by the Participation Agreement will lead to a changein the control of VendingData***.  At theclosing of the transactions under the Participation Agreement with Elixir,Elixir will have the power to significantly influence all matters requiringapproval by our stockholders, including the election of directors and approvalof mergers and other significant corporate transactions. Based on its abilityto earn-in additional common shares or exercise its warrants, Elixir will havethe ability to acquire in excess of 51% of our outstanding common shares andthereby control all matters requiring approval by our stockholders, includingthe ability to elect our entire board of directors.  Pursuant to the Participation Agreement,Elixir has agreed to vote its shares in support of the election of two of ourpresent directors for a period of two years following the closing. However, ourstockholders should assume that following the closing, Elixir will have theability to elect at least a majority of directors and thereby control ourmanagement and all stockholder actions. This concentration of ownership will makeit difficult for other stockholders to effect substantial changes in ourcompany, and also will have the effect of delaying, preventing or expediting,as the case may be, a further change in control of our company.

***Theaccounting treatment of the transactions under the Participation Agreement willnegatively impact our reportable net profit (loss) over the life of the gamingmachine lease agreements that relate to the equity earned by Elixir***. Our issuance of common shares and warrants to Elixir under theParticipation Agreement will be accounted for under *EITF No.96-18, Accounting for Equity Instruments that are Issued to Other thanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services*,which addresses the accounting for, among other things, the issuance of equityin exchange for services rendered. As electronic gaming machines are placedwith gaming operators in satisfaction of the milestones set forth in theParticipation Agreement, and Elixir earns equity thereby, we will debit deferredcosts and credit accrued unit placement cost liability, in the dollar amount ofshares earned using the value of the shares earned based on market price as ofthe date of placement. As revenue is earned, the deferred costs will beamortized over the life of the lease agreement relating to the applicableelectronic gaming machines. Assuming a share price of $3.00 for our commonstock throughout the period Elixir earns all 55,000,000 common shares under theParticipation Agreement, we would realize a cumulative total of approximately$165,000,000 in non-cash charges to its income statement over the life of thegaming machine lease agreements that relate to the common shares earned byElixir. Although this amount is a non-cash charge and would not negativelyimpact cash flow from operations or EBITDA, the charges are likely tomaterially negatively impact our reportable net profit (loss) from operations.

 

 

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***Thetransactions under the Participation Agreement represent a material change inour business model, and that business model has not been proven by us*****.**  Our decisionto pursue the transactions under the Participation Agreement, and specificallyour decision to issue the significant equity to Elixir based upon the resultingplacement of electronic gaming machines, was based in large part on certain proforma financial projections and underlying forecasts and assumptions concerningfuture events and circumstances, including, but not limited to, Elixir’sability to source and identify gaming operators in the Asia market with whichwe might place electronic gaming machines and the commercial success of thosemachines, which our management believed to be significant to our futureoperations under the Participation Agreement. Some assumptions will invariablynot materialize and some unanticipated events and circumstances occurringsubsequently may affect other assumptions. Therefore, the actual resultsachieved may vary from the pro forma projections considered by our management,and the variations may be material. No assurance can be given that our futureresults of operations under the Participation Agreement will meet with consumeracceptance or market success.

***We may be unable to adequatelyprotect our intellectual property right***.  Our success depends upon maintaining theconfidentiality and proprietary nature of our intellectual property rights. Our ability tocompete may be damaged, and our revenues may be reduced if we are unable toprotect our intellectual property rights adequately. To protect theserights, we rely principally on a combination of:

•                  contractual arrangementsproviding for non-disclosure and prohibitions on use;

•                  patents and pending patentapplications;

•                  trade secret, copyright andtrademark laws; and

•                  certain built-in technicalproduct features.

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

***It is possible that our futureproducts will be the subject of future patent litigation if the products aresold and installed in the United States and, if commenced, could subject us tocontinuing litigation costs and risks.*** To the extent that we introduce new productsthat incorporate the same or similar technology, it is likely that a competitorwill bring one or more claims against us seeking damages, injunctive or otherequitable relief, or both. We cannot predict the outcome of any present orfuture litigation that may occur.

Ifour future products incorporate technology that infringes the proprietaryrights of third parties and we do not secure licenses from them, we could beliable for substantial damages that would cause a material reduction inrevenues and impair our prospects for achieving growth and profitability.

Infurtherance of the development of our services or products, we may need toacquire licenses for intellectual property to avoid infringement of third partyrights or claims of infringement.  Theselicenses may not be available on commercially reasonable terms, if at all. Claimsfor infringement, if made, could damage our business prospects, our results ofoperations and financial condition, whether or not the claims have merit, by:

•                  consuming substantial timeand financial resources required to defend against them;

 

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•                  diverting the attention ofmanagement from growing our business and managing operations;

•                  resulting in costlylitigation; and

•                  disrupting product sales andshipments.

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

***We rely on distributors ininternational markets, and our limited sales experience in foreign countriescould cause us to lose sales.*** Substantially all sales of our productsoutside the U.S. are achieved through distributor relationships, and by thesecond half of 2007, our U.S. sales will also be achieved through a distributorrelationship. We believe the distributors that we have engaged are experiencedand reputable; however, if we are unable to manage these relationships, ourability to generate revenue and profits in the non-U.S. market may be adverselyaffected. To the extent that we engage in direct sales outside the U.S., wehave limited sales experience and history in foreign markets.

***Our management holds acontrolling interest in our common stock, giving our management significantpower to control matters submitted to our stockholders. ***As of August 3, 2007, ourexecutive officers and members of our board beneficially own approximately9,290,178 shares of common stock, or approximately 25% of the outstandingshares of our common stock. Accordingly, until such time, if ever, that weconsummate the transactions under the Elixir Participation Agreement thesestockholders have the power to significantly influence all matters requiringapproval by our stockholders, including the election of directors and approvalof mergers and other significant corporate transactions. This concentration ofownership may make it more difficult for non management stockholders to effectsubstantial changes in our company, and also has the effect of delaying,preventing or expediting, as the case may be, a change in control of our company.

***Ourboard of directors may issue blank check preferred stock, which may affect thevoting rights of our holders and could deter or delay an attempt to obtaincontrol 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 3.**                             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 June 30, 2007. Disclosure controls and procedures are controls and otherprocedures that are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin 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 

 

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that we file under the Exchange Act is accumulated and communicated toour management, as appropriate to allow timely decisions regarding requireddisclosure. Based on their current re-evaluation, management has concluded thatour disclosure controls and procedures were not effective as of June 30, 2007,as a result of the improper accounting for warrants and financing fees and theimproper amortization of certain costs that resulted in the restatementscontained in this amendment, and for other the reasons described below..

In connection with their audit of our 2006 annual consolidatedfinancial statements, prior to restatement, our auditors reported to our auditcommittee two material weaknesses and a significant deficiency in our internalcontrol over financial reporting.  Thesignificant deficiency concerns lack of evidence of authorization of payment ofvendor invoices. The material weaknesses include: (1) our inability to properlycontrol financial records and analyses relative to business combinations, whichwas evident in connection with our acquisition of Dolphin, to assure the properallocation of purchase price to the net assets acquired and proper disclosuresrelative to the acquisition, and (2) the collective experience of our personnelresponsible for financial reporting.

*(b)          Changes in Internal Control*.

Subsequent to our audit committee’s receipt of the foregoing reportfrom our auditors, management initiated preliminary remediation steps toaddress the material weaknesses and the significant deficiency identified.These remediation steps include planning for and documenting the implementationof formal disclosure checklist processes and procedures to ensure that there isproper authorization of payment on vendor invoices. We also initiated a searchfor an addition to our accounting team with strong public accounting financialreporting experience. During the second quarter of fiscal 2007, we strengthenedour financial organization by hiring an additional member to our managementteam, with extensive experience in SEC reporting and generally acceptedaccounting principles (GAAP), who will be responsible for providing addedtraining and financial discipline to the financial reporting process.

Also,in August 2007, we became aware of certain errors in reporting of our financialstatements for the quarter ended June 30, 2007. For further discussion regarding the errors, see Note 10 to thecondensed consolidated financial statements included in this Amendment No. 1.Prior to their discovery, we had already taken steps to remediate thedeficiencies underlying these reporting errors, including the hiring of theabove-described member to our management team, with extensive experience in SECreporting and GAAP In addition we subscribe to a comprehensive onlineaccounting 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 other appropriate personnel in the required approach anddocumentation standard for each key account analysis.

 

No other change in our internal control over financial reportingoccurred during the quarter ended June 30, 2007, that has materially affected, or is reasonably likely to affect,our internal control over financial reporting.

 

# **PARTII — OTHER INFORMATION**

## **Item6.  Exhibits.**

(a)           Exhibits. 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                    | ** ** | **Method  of Filing**          |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|
| 10.1             |       | Securities Purchase Agreement dated May 3, 2007  between VendingData Corporation and the investors named therein                                                   |       | Filed electronically  herewith |
|             |       |                                                                                                                                                               |       |                           |
| 10.2             |       | Registration Rights Agreement dated May 3, 2007  between VendingData Corporation and the investors named therein                                                   |       | Filed electronically  herewith |
|             |       |                                                                                                                                                               |       |                           |
| 10.3             |       | Securities Purchase and Product Participation  Agreement dated June 12, 2007 between VendingData Corporation and Elixir  Group Limited                        |       | (1)                            |
|             |       |                                                                                                                                                               |       |                           |
| 31.1             |       | Certifications Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                         |       | Filed electronically  herewith |
|             |       |                                                                                                                                                               |       |                           |
| 31.2             |       | Certifications Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                         |       | Filed electronically  herewith |
|             |       |                                                                                                                                                               |       |                           |
| 32.1             |       | Certification of Principal Executive Officer and  Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 (18 U.S.C. Section 1350). |       | Filed electronically  herewith |

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(1)  Incorporated by reference from Registrant’sCurrent Report on Form 8-K dated June 13, 2007.

 

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** **

**SIGNATURE**

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| ** ** | ** **         | **Elixir Gaming Technologies, inc.** |
|------------|--------------------|--------------------------------------|
|       |               | (Registrant)                         |   |
|       |               |                                 |   |
| Date:      | November 12,  2007 | By:                                  | /s/ Gordon Yuen |
|       |               |                                 | Gordon Yuen |
|       |               | Its:                                 | President,  Chief Executive Officer |
|       |               |                                 |   |
|       |               |                                 |   |
| Date:      | November 12,  2007 | By:                                  | /s/ David R.  Reberger |
|       |               |                                 | David R. Reberger |
|       |               | Its:                                 | Chief  Financial Officer |
|       |               |                                 |   |
|            |                    |                                      |  |  |

** **

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