**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-QSB**


(Mark
      One)


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




For
                the quarterly period ended:
            June
                30, 2006




OR




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




For
                the transition period from:
            
            to





Commission
                file number:
            001-32161





VendingData
                Corporation(Exact
                name of small business issuer as specified in its
                charter)Nevada
            
            91-1696010(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)6830
                Spencer Street, Las Vegas, Nevada 89119(Address
                of principal executive offices)(702)
                733-7195(Issuer’s
                telephone number)(Former
                name, former address and former fiscal year, if changed since last
                report)Indicate
                by check mark whether the issuer is a shell company (as defined in
                Rule
                12b-2 of the Exchange Act).
              Yes 
                 oNoxCheck
                whether the issuer (1) filed all reports required to be filed by
                Section
                13 or 15(d) of the Exchange Act during the past 12 months (or for
                such
                shorter period that the registrant was required to file such reports),
                and
                (2) has been subject to such filing requirements for the past 90
                days.
                Yes   xNo  
                o**APPLICABLE
                ONLY TO CORPORATE ISSUERS**State
                the number of shares outstanding of each of the issuer’s classes of common
                equity, as of the latestpracticable
                date:
            27,015,627shares
                of common stock, $.001 par value, as of July 31, 2006Transitional
                Small Business Disclosure Format (check one): Yes   oNo  
                x








**VENDINGDATA
      CORPORATION**





**FORM
      10-QSB**





**TABLE
      OF CONTENTS**




**Page****PART
                I - FINANCIAL INFORMATION**
            
            
            1ITEM
                1. FINANCIAL STATEMENTS
            
            
            1Balance
                Sheets
            
            
            1Statements
                of Operations
            
            
            2Statements
                of Cash Flows
            
            
            3ITEM
                2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            
            
            9CAUTIONARY
                STATEMENT
            
            
            9OVERVIEW
            
            
            9RESULTS
                OF OPERATIONS
            
            
            10LIQUIDITY
                AND CAPITAL RESOURCES
            
            
            14OFF
                BALANCE SHEET ARRANGEMENTS
            
            
            15CRITICAL
                ACCOUNTING POLICIES AND ESTIMATES
            
            
            15RISK
                FACTORS
            
            
            17ITEM
                3. CONTROLS AND PROCEDURES
            
            
            20**PART
              II - OTHER INFORMATION**
            
            
            21ITEM
                6. EXHIBITS
            
            
            21




-
          i -




**PART
      I - FINANCIAL INFORMATION**




**Item
      1. Financial Statements.**




**VENDINGDATA
      CORPORATION**


**Balance
      Sheets**




**June
                30, 2006**
            
            
            **December
                31,****2005****ASSETS**
            
            
            **(unaudited**)******Current
                assets**:Cash
                and cash equivalents
            
            $
            403,259
            
            $
            935,243Current
                portion of accounts receivable, trade, net of allowance for uncollectibles
                of $284,875 and $276,420
            
            
            1,916,989
            
            
            1,550,559Inventories
            
            
            3,105,165
            
            
            3,045,334Prepaid
                expenses and other
            
            
            42,581
            
            
            117,6555,467,994
            
            
            5,648,791Equipment
                rented to customers, net of accumulated depreciation of $89,176 and
                $228,032
            
            
            145,760
            
            
            146,527Property
                and equipment, net of accumulated depreciation of $365,367 and
                $2,408,234
            
            
            402,042
            
            
            585,431Intangible
                assets, at cost, net of accumulated amortization of $407,687 and
                $836,281
            
            
            4,996,627
            
            
            1,862,268Accounts
                receivable, trade, net of current portion, less unamortized
                discount
            
            
            445,425
            
            
            600,430Deferred
                expenses
            
            
            707,480
            
            
            748,171Deposits
            
            
            4,190,450
            
            
            759,653$
            16,355,778
            
            $
            10,351,271**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities**:Current
                portion of leases payable
            
            $
            391,484
            
            $
            471,269Accounts
                payable
            
            
            1,721,314
            
            
            1,836,234Accrued
                expenses
            
            
            399,145
            
            
            794,203Deferred
                revenues, current portion
            
            
            10,322
            
            
            52,248Short-term
                debt
            
            
            4,000,000
            
            
            4,050,000Customer
                deposits
            
            
            185,404
            
            
            81,8586,707,669
            
            
            7,285,812Long
                -term obligationsDeferred
                revenues, net of current portion
            
            
            169,950
            
            
            161,335Notes
                payable
            
            
            11,500,000
            
            
            11,654,500Leases
                payable, net of current portion
            
            
            508,162
            
            
            421,975Total
                Liabilities
            
            
            18,885,781
            
            
            19,523,622**Stockholders'
                equity**:Preferred
                stock, $.001 par value, 10,000,000 shares authorized, no shares issued
                or
                outstanding
            
            
            —
            
            
            —Common
                stock, $.001 par value, 50,000,000 shares authorized, 23,648,264
                and
                18,141,950 shares issued
            
            
            23,648
            
            
            18,142Treasury
                stock 448,053 common shares
            
            
            (846,820
            )
            
            (846,820
            )Deferred
                officers’ compensation
            
            
            (3,025,243
            )
            
            (3,419,088
            )Additional
                paid in capital
            
            
            78,186,267
            
            
            66,763,192Deficit
            
            
            (76,867,855
            )
            
            (71,687,777
            )(2,530,003
            )
            
            (9,172,351
            )Total
                liabilities and stockholders’ equity
            
            $
            16,355,778
            
            $
            10,351,271




See
      accompanying notes to financial
      statements.




-
          1
          -




**VENDINGDATA
      CORPORATION**


**Statements
      of Operations**




**(unaudited)**




**Three
                Months Ended June 30,**
            
            
            **Six
                Months Ended June
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005****Revenues:**Sales
            
            $
            1,555,833
            
            $
            1,083,609
            
            $
            2,400,609
            
            $
            1,522,844Rental
            
            
            80,185
            
            
            135,439
            
            
            191,249
            
            
            256,779Other
            
            
            102,971
            
            
            31,092
            
            
            148,036
            
            
            60,4391,738,989
            
            
            1,250,140
            
            
            2,739,894
            
            
            1,840,062Sales
                returns and allowances
            
            
            (52,174
            )
            
            (290,838
            )
            
            (340,578
            )
            
            (290,838
            )1,686,815
            
            
            959,302
            
            
            2,399,316
            
            
            1,549,224**Operating
                costs and expenses:**Cost
                of sales
            
            
            1,220,227
            
            
            775,996
            
            
            1,935,030
            
            
            1,204,016Selling,
                general and administrative
            
            
            1,796,531
            
            
            2,488,907
            
            
            3,975,482
            
            
            4,867,893Research
                and development
            
            
            590,098
            
            
            287,680
            
            
            812,237
            
            
            477,6893,606,856
            
            
            3,552,583
            
            
            6,722,749
            
            
            6,549,598Loss
                from operations
            
            
            (1,920,041
            )
            
            (2,593,281
            )
            
            (4,323,433
            )
            
            (5,000,374
            )Interest
                expense, unrelated parties
            
            
            505,137
            
            
            491,985
            
            
            856,644
            
            
            808,807Interest
                expense, related parties
            
            
            
            
            
            15,063
            
            
            
            
            
            15,063505,137
            
            
            507,048
            
            
            856,644
            
            
            823,870Net
                loss
            
            $
            (2,425,178
            )
            $
            (3,100,329
            )
            $
            (5,180,077
            )
            $
            (5,824,244
            )Basic
                loss per share
            
            $
            (0.11
            )
            $
            (0.18
            )
            $
            (0.26
            )
            $
            (0.34
            )Weighted
                average shares outstanding
            
            
            22,051,398
            
            
            16,787,756
            
            
            19,788,084
            
            
            17,096,510




See
      accompanying notes to financial
      statements.




-
          2
          -


**VENDINGDATA
      CORPORATION**


**Statements
      of Cash Flows**




**(unaudited)**




**Six
                Months Ended June 30,****2006**
            
            
            **2005**Net
                loss
            
            $
            (5,180,077
            )
            $
            (5,824,244
            )Adjustments
                to reconcile loss to net cash used
                in operating activities:Depreciation
            
            
            289,447
            
            
            331,204Amortization
                of deferred interest
            
            
            30,026
            
            
            115,733Non-cash
                compensation expense
            
            
            612,939
            
            
            367,456Increase
                in operating (assets) liabilities:Trade
                accounts receivable
            
            
            (211,425
            )
            
            234,376Other
                receivables
            
            
            4,098
            
            
            (63,295
            )Inventory
            
            
            (59,831
            )
            
            (988,683
            )Prepaid
                expenses
            
            
            70,976
            
            
            (26,952
            )Deferred
                financing and interest expenses
            
            
            (178,403
            )
            
            (264,251
            )Deposits
                with vendors
            
            
            (330,797
            )
            
            43,501Accounts
                payable
            
            
            (114,920
            )
            
            1,132,078Accrued
                expenses
            
            
            (395,059
            )
            
            402,064Deferred
                revenues
            
            
            (33,311
            )
            
            (77,770
            )Customer
                deposits
            
            
            103,546
            
            
            (1,775
            )(212,714
            )
            
            1,203,686Net
                cash used in operating activities
            
            
            (5,392,791
            )
            
            (4,620,558
            )Cash
                flows from investing activities:Acquisition
                of intangible assets
            
            
            (614,360
            )
            
            (878,841
            )Deposit
                for acquisition
            
            
            (750,000
            )Acquisition
                of plant and equipment
            
            
            (106,058
            )Disposition
                of equipment produced for rental
            
            
            767Proceeds
                from sale of equipment
            
            
            
            
            
            4,700Net
                cash used in investing activities
            
            
            (1,469,651
            )
            
            (874,141
            )Cash
                flows from financing activities:Proceeds
                from sale of stock
            
            
            904,081
            
            
            21,875Proceeds
                from leases payable
            
            
            300,000Repayment
                from leases payable
            
            
            (
                323,622
            )
            
            (1,192,384
            )Proceeds
                from notes payable
            
            
            13,000,000
            
            
            8,750,000Repayment
                of notes payable
            
            
            (6,000,000
            )Repayment
                of short-term debt
            
            
            (4,050,000
            )
            
            (188,250
            )Proceeds
                from convertible debt
            
            
            2,500,000Net
                cash provided by financing activities
            
            
            6,330,459
            
            
            7,391,241Increase
                (decrease) in cash and cash equivalents
            
            
            (531,983
            )
            
            1,896,542Cash
                and cash equivalents at beginning of period
            
            
            935,243
            
            
            924,804Cash
                and cash equivalents at end of period
            
            $
            403,259
            
            $
            2,821,346Non-cash
                investing and financing activities:Intangible
                assets acquired with stock
            
            $
            2,520,000Stock
                issued for acquisition deposit
            
            $
            2,350,000Notes
                payable paid off through issuance of stock
            
            $
            5,654,500




See
      accompanying notes to financial
      statements.




-
          3
          -


**VENDINGDATA
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS (UNAUDITED)**




**Note 1—Basis
      of Presentation**




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




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




Certain
      minor reclassifications in prior period amounts have been made to conform to
      the
      current period presentation.




**Note 2—Segments**




The
      segments identified for geographic region-based enterprise-wide revenue data
      are
      as follows:




**Three
                Months Ended June 30,**
            
            
            **Six
                Months Ended June, 30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**North
                America
            
            $
            269,545
            
            $
            642,502
            
            $
            542,045
            
            $
            1,158,174Asia
            
            
            1,417,270
            
            
            267,300
            
            
            1,857,271
            
            
            267,300Europe
            
            
            
            
            
            49,500
            
            
            
            
            
            99,000South
                America
            
            
            
            
            
            
            
            
            
            
            
            24,750$
            1,686,815
            
            $
            959,302
            
            $
            2,399,316
            
            $
            1,549,224




-
          4
          -




The
      Company's revenues, depreciation and operating income distributed by product
      are
      as follows:




**Three
                Months Ended**
            
            
            **Six
                Months
                Ended****June
                30,**
            
            
            **June
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**RevenuesSecure
                Drop®
            
            $
            0
            
            $
            61,345
            
            $
            0
            
            $
            72,593Shuffler
            
            
            92,876
            
            
            766,775
            
            
            410,183
            
            
            1,092,823Deck
                CheckerTM
            
            
            345,872
            
            
            390,928
            
            
            984,405
            
            
            614,206RFID
                casino chips
            
            
            1,197,270
            
            
            0
            
            
            1,197,270
            
            
            0Other
            
            
            102,971
            
            
            31,092
            
            
            148,036
            
            
            60,4401,738,989
            
            
            1,250,140
            
            
            2,739,894
            
            
            1,840,062Sales
                returns and allowances
            
            
            (52,174
            )
            
            (290,838
            )
            
            (340,578
            
            
            (290,838
            )$
            1,686,815
            
            $
            959,302
            
            $
            2,399,316
            
            $
            1,549,224Depreciation
                and amortizationSecureDrop
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Shuffler
            
            
            10,620
            
            
            54,469
            
            
            20,665
            
            
            104,438Deck
                Checker
            
            
            5,107
            
            
            9,229
            
            
            9,872
            
            
            18,458Unallocated
            
            
            142,131
            
            
            99,310
            
            
            258,910
            
            
            208,308157,858
            
            
            163,008
            
            
            289,447
            
            
            331,204Operating
                income (loss)Secure
                Drop® gross margin
            
            $
            0
            
            $
            55,121
            
            $
            0
            
            $
            64,850Shuffler
                gross margin
            
            
            (94,592
            )
            
            616,133
            
            
            38,115
            
            
            809,845Deck
                Checker gross margin
            
            
            211,811
            
            
            359,186
            
            
            712,892
            
            
            538,855RFID
                casino chip gross margin
            
            
            546,484
            
            
            0
            
            
            546,484
            
            
            0Other
                costs of good sold
            
            
            (197,115
            )
            
            (847,134
            )
            
            (833,206
            )
            
            (1,068,342
            )Selling,
                general, & administrative
            
            
            (1,796,531
            )
            
            (2,488,907
            )
            
            (
                3,975,482
            )
            
            (4,867,893
            )Research
                and development
            
            
            (590,098
            )
            
            (287,680
            )
            
            (812,236
            )
            
            (477,689
            )$
            (1,920,041
            )
            $
            (2,593,281
            )
            $
            (
                4,323,433
            )
            $
            (5,000,374
            )





**Note 3—Loss
      per Share**




The
      basic
      loss per share is computed by dividing the net loss for the period by the
      weighted average number of common shares outstanding for the period. Loss per
      share is not presented on a diluted basis since the assumed exercise of common
      stock equivalents would have an anti-dilutive effect due to the existence of
      operating losses.




**Note 4—Change
      in Accounting for Employee Options**




The
      Company was required to adopt Financial Accounting Standards Board Statement
      No.
      123R, *Share-Based
      Payment* ,
      to
      account for its employee stock-based compensation beginning January 1, 2006,
      and
      elected the modified prospective method of transition. However, the adoption
      of
      SFAS No. 123R did not have any effect on the Company’s results of
      operations for the current periods.




**Note 5—Contingencies**




The
      Company is a party to certain claims, legal actions, and complaints, including
      a
      patent infringement action between the Company and one of its main competitors,
      Shuffle Master, and the sales tax dispute discussed in the following paragraph.
      The Company cannot predict or estimate the likely outcome of any such litigation
      or other disputes or whether any such matters would have a material adverse
      effect on its business as presently conducted or as anticipated, and
      accordingly, no provision has been made for any minimum estimated losses with
      regard to such matters. The Company is a defendant in a patent infringement
      action against it. The complaint alleges, among other things, claims for patent
      infringement and requests treble damages, and an injunction enjoining the
      Company from infringing on the plaintiff’s patents. The outcome of this matter
      cannot be estimated at this time and, accordingly, no provision has been made
      in
      the accompanying financial statements for any losses the Company might incur
      in
      its connection. However, in June 2006, we agreed with Shuffle Master to a
      90 day standstill in the litigation in order to pursue settlement
      negotiations.




-
          5
          -


In
      February 2004, the State of Nevada initiated a sales/use tax audit of the
      Company’s, equipment lessors. As of this filing the State of Nevada has not made
      a determination if there has been a shortfall in the payment of the sales/use
      tax. The Company has sold and leased back shufflers and Deck Checkers over
      the
      last five years. The auditor for the State of Nevada is trying to determine
      at
      what level a sales/use tax needs to be collected. The Company now collects
      from
      our customers in Nevada and remits payments to the State of Nevada. If the
      State
      of Nevada determines that the sales of the products to the leasing companies
      is
      the level at which sales/use tax should have been collected, liability of the
      leasing companies would be passed to the Company. The amount of this potential
      liability could range from a refund of $144,000 to the payment of sales/use
      tax
      with interest and penalties of up to $500,000. A hearing was scheduled for
      May
      2005 with the State of Nevada Department of Taxation was delayed due to the
      resignation of the Department’s director. The new Department director has
      re-scheduled the hearing for early Fall 2006. **** The
      Company intends to defend its position in this matter.




**Note 6—New
      Debt Financing**




On
      May 2,
      2006, the Company closed on an $18 million financing transaction with four
      investment funds. The $18 million financing consists of $13 million of 8% senior
      secured promissory notes and a $5 million equity put agreement that can be
      exercised from time to time at the Company’s option. The senior debt placement
      includes detachable warrants to purchase 3.2 million shares at $2.50 per share,
      some of which are recallable based on early retirement of $6 million of the
      debt
      portion of the transaction. Principal payments of $1.5 million are due on the
      anniversary of the transaction for the first four years with the balance due
      in
      March 2011. Interest at 8% is due semi-annually on July 1, and December 1,
      each
      year until repayment. The loan is secured by all the assets of the company.
      Under the terms of the transaction, 50% of proceeds from the sale of any assets
      received by the Company will be applied to the outstanding principal of the
      loan. In addition, if the Company reduces the debt to under $7 million within
      one year of the transaction 800,000 warrants will be cancelled, within two
      years
      600,000 will be cancelled and within three years 200,000 will be cancelled.




As
      referenced above, the transaction includes a $5 million equity put option
      agreement for the Company’s common stock, at a discount of 20% to the market at
      the date of execution of the put. Pursuant to a securities put agreement between
      the Company and the four investment funds, the investment funds have agreed
      to
      purchase up to $5 million of the Company's common stock, in increments of not
      less than $1,000,000, from time to time at the Company's option. The purchase
      price for shares sold pursuant to the securities put agreement will be equal
      to
      80% of the volume-weighted average price of the Company’s common stock on the
      day the Company delivers the requisite purchase notice to the investment funds
      (“Put Conversion Price”), but not in excess of $3.50 per share. In connection
      with the Company’s election to exercise its equity put rights in the aggregate
      amount of $2.5 million during the quarter ended June 30, 2006, the Company
      and
      the investment funds agreed that the Company would issue its secured convertible
      promissory notes (“Put Notes”) to the funds instead of the Company’s common
      shares. The Put Notes are convertible into shares of the Company’s common stock
      at the Put Conversion Price calculated at the time of each election. Two Put
      Notes in the aggregate principal amount of $1.5 million are convertible at
      $2.05
      per share and a third Put Note in the principal amount of $1 million is
      convertible at $1.92 per share. The Put Notes provide that all principal under
      the notes shall automatically convert to shares of the Company’s common stock at
      the Put Conversion Price upon the earlier of (i) the date that the Company
      obtains approval of its shareholders for the conversion of the Put Notes, or
      (ii) August 31, 2006. The Put Notes do not require the repayment of principal
      in
      cash except in the event of default by the Company of its obligations under
      the
      notes. All outstanding principal under the Put Notes accrue interest, payable
      in
      cash, at the rate of 8% per annum. The Company’s obligations under the Put Notes
      are secured by the assets of the Company. The $2.5 million Put Notes are
      included in the Company’s short term debt during the period ended June 30,
      2006.




-
          6
          -




Concurrent
      with closing of the financing, the holders of the Company’s outstanding 10%
      Senior Notes converted approximately $5.2 million of the principal under those
      notes to common shares of the Company as provided for under the terms of the
      10%
      Senior Notes. The Company used the proceeds of the financing to retire the
      balance of the 10% Senior notes and the $5 million 9% line of credit acquired
      by
      the Company in October 2005.




**Note
      7 - Significant Transaction**




In
      June
      2006, pursuant to the criteria set forth in Staff Accounting Bulletin (SAB)
      104,
      the Company recognized $1,197,270 in revenue from a “bill and hold” transaction.
      The transaction was with an international customer, and the goods were held,
      at
      the request of the customer. The transaction was determined to have met the
      SAB
      104 criteria for revenue recognition in the current quarter, including the
      following:




·
            The
                risk of ownership had passed to the
                buyer,


·
            The
                customer made a fixed commitment to purchase the goods, in writing,


·
            The
                buyer requested that the transaction be on a bill and hold basis,
                and that
                the buyer had a substantial business purpose for ordering the goods
                on a
                bill and hold basis,


·
            There
                was a fixed schedule for delivery of the goods,


·
            The
                Company did not retain any specific performance obligations such
                that the
                earnings process is not complete,


·
            The
                ordered goods were segregated from the Company's inventory and not
                be
                subject to being used to fill other orders (because they were manufactured
                to the customer’s unique specifications), and


·
            The
                product was complete and ready for shipment to be completed.




The
      product has been shipped to the customer subsequent to June 30,
      2006.




**Note
      8 - Stockholders’
      equity**




Stock
      options




We
      have
      two stock options plans, the Amended and Restated 1999 Stock Option Plan and
      the
      Amended and Restated 1999 Directors’ Stock Option Plan, through which 5,000,000
      shares and 300,000 shares are authorized, respectively. As of June 30,
      2006, there were 4,569,772 options for shares of common stock issued under
      the
      two plans, out of a total 5,300,000 approved pool of shares.




Information
      with respect to activity under the stock option plans is summarized below.




**Stock
                Options**
            
            
            **Weighted
                  Average**Exercise Price**Balance,
                December 31, 2005**
            
            
            4,116,972
            
            $
            2.04Options
                granted
            
            
            930,000
            
            
            2.49Options
                exercised
            
            
            (168,600
            )
            
            1.84Options
                expired
            
            
            (290,600
            )
            
            2.79Options
                forfeited
            
            
            (18,000
            )
            
            3.68**Balance,
                June 30, 2006**
            
            
            4,569,772
            
            
            2.10**Options
                exercisable (vested) at June 30, 2006**
            
            
            927,905
            
            $
            2.73





-
          7
          -




**Note
      9 - Subsequent Events**




On
      July
      12, 2006, the Company acquired all of the outstanding stock of Dolphin Advanced
      Technologies Pty Ltd. (Dolphin) for a total consideration of $14,910,000,
      including $1,350,000 in cash (including $750,000 paid as a non-refundable
      deposit in April 2006), 2,462,238 shares of the Company’s common stock (of which
      1,000,000 were previously issued as part of the non-refundable deposit in April
      2006) and $5,782,168 face value of non-interest bearing, convertible notes.
      The
      2,462,238 shares were valued as follows: the 1,000,000 shares issued in April
      2006 as a non-refundable deposit were valued based on the trading value of
      the
      stock as of April 18, 2006, net of the 10% discount for the trading restriction,
      and the 1,462,238 share balance were valued at $3.50 per share. The principal
      amount of the notes automatically convert into shares of the Company’s common
      stock at the rate of $3.50 per share (or an aggregate of 1,652,048 common
      shares) upon shareholder approval of the conversion of the notes (or a
      determination that shareholder approval is not required). The principal amount
      under the notes is otherwise due in cash on January 7, 2007.  The resale of
      1,462,238 Company’s shares issued in connection with this business combination
      and the shares issuable upon conversion of the notes are subject to a $3.50
      per
      share price guarantee if sold within two years. Dolphin and its wholly-owned
      subsidiary are engaged in the business of developing and manufacturing products
      for the gaming, automotive, medical and mining industries. The Company’s
      continuing obligations under the arrangement are secured by the non-gaming
      assets of Dolphin and subsidiary.




The
      Company filed a Current Report on Form 8-K with the Securities Exchange
      Commission on July 17, 2006 to report this transaction, which it intends to
      amend by September 27, 2006, to append audited financial statements of Dolphin,
      as required. The following summarized pro forma balance sheet information shows
      the effect this acquisition would have had on the Company’s balance sheet had it
      occurred on June 30, 2006, based on Dolphin’s unaudited balance sheet as of
      March 31, 2006 and management’s preliminary estimate of the allocation of the
      purchase price, including acquisition costs.




**Consolidated
                Pro Forma****June
                30, 2006****ASSETS**
            
            
            **(Unaudited**)****Current
                assets:Cash
                and cash equivalents
            
            $
            403,259Other
                current assets
            
            
            7,335,4597,738,718Property,
                equipment and intangibles, net of accumulated depreciation and
                amortization
            
            
            15,273,705All
                other assets
            
            
            5,343,355$
            28,355,778**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIENCY)**Current
                liabilities
            
            $
            8,587,299Other
                liabilities, net of current portion
            
            
            13,081,74921,669,048Stockholders'
                equity (deficiency):
            
            
            6,686,730Total
                liabilities and stockholders' equity (deficiency)
            
            $
            28,355,778




-
          8
          -




**Item
      2. Management’s Discussion and Analysis or Plan of
      Operation.** ****




**CAUTIONARY
      STATEMENT**




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




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




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




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




**Overview**




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




-
          9
          -




On
      July
      5, 2006, we entered into a Share Sale Agreement (“Agreement”) with William
      Westmore Purton, an individual, and Synwood Pty Ltd, an Australian corporation
      (“Synwood” and together with Mr. Purton, the “Sellers”), pursuant to which we
      have purchased, and the Sellers have sold to us, all of the outstanding capital
      shares of Dolphin Advanced Technologies Pty Ltd. and its wholly-owned subsidiary
      (collectively, “Dolphin”). The purchase and sale of the Dolphin capital shares
      pursuant to the Agreement closed on July 12, 2006.




Pursuant
      to the Agreement, we paid to the Sellers the following consideration in exchange
      for all of the issued and outstanding capital shares of Dolphin: (a) a total
      of
      $1,350,000, of which $750,000 was paid as a non-refundable deposit in April
      2006
      upon the execution of the letter of intent between the parties; (b) 2,462,238
      shares of our common stock, of which 1,000,000 shares were issued in April
      2006
      as part of the non-refundable deposit; and (c) secured convertible promissory
      notes in the aggregate principal amount of $5,782,168. The notes are
      non-interest bearing and all principal under the notes is due and payable on
      January 7, 2007. The notes provide that immediately upon our receipt of any
      shareholder approval of our issuance of the common shares underlying the notes
      (“Conversion Shares”) required by the rules of the American Stock Exchange, or a
      determination that shareholder approval of our issuance of the Conversion Shares
      is not required under the AMEX rules, all outstanding principal will
      automatically be converted into our common shares at the rate of $3.50 per
      share.




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




Our
      obligations under the notes and the resale price guarantee of the Consideration
      Shares are secured by Dolphin’s pledge of a security interest in the assets of
      Dolphin that do not relate to the gaming business of the company.




**Results
      of Operations** **** ****




***Comparison
      of Three Months Ended June 30, 2006 and 2005***




For
      the
      three months ended June 30, 2006, we generated gross revenues of $1,738,989
      or
      39% more than the three months ended June 30, 2005. Gross revenue was offset
      by
      sales returns and allowances of $52,174 or 82% less than the three months ended
      June 30, 2005. Net revenues were $1,686,615 or 76% more than the three months
      ended June 30, 2005. Specific product line results for the three months ended
      June 30, 2006 compared to the three months ended June 30, 2005 are provided
      below.




For
      the
      three months ended June 30, 2006, our cost of sales was $1,220,227, or 66%
      more
      than the three months ended June 30, 2005. The introduction of the RFID casino
      chips resulted in an increase in costs of sales of approximately $650,000.
      In
      addition we had increased service costs due to the phase-in of new shuffler
      versions during the quarter - this increased travel related expenses associated
      with service. The gross margin on revenue for the three months ended June 30,
      2006 was $466,588 or 33% more than the three months ended June 30, 2005 due
      to
      the increased level of revenue. The gross margin as a percentage of revenue
      for
      the three months ended June 30, 2006 was 28% compared to 23% for the prior
      year
      period. The higher gross margin as a percentage of revenue in the second quarter
      of 2006 was due to the sales of the RFID casino chip offset by higher cost
      of
      sales related to increased service costs.




-
          10
          -




Three
                months ended
              June
                30, 2006
            
            
            Three
                months ended
              June
                30, 2005
            
            
            Percentage
              change**Secure
                Drop**Revenue
            
            
            0
            
            
            61,345
            
            
            (100
            %)Cost
                of Sales
            
            
            0
            
            
            6,224
            
            
            (100
            %)Gross
                Margin
            
            
            0
            
            
            55,121
            
            
            (100
            %)**Shuffler
                Sales**Revenue
            
            
            37,964
            
            
            696,571
            
            
            (95
            %)Cost
                of Sales
            
            
            176,848
            
            
            89,647
            
            
            97
            %Gross
                Margin
            
            
            (138,884
            )
            
            606,924
            
            
            (123
            %)**Shuffler
                Rentals**Revenue
            
            
            54,912
            
            
            70,204
            
            
            (22
            %)Cost
                of Sales
            
            
            10,620
            
            
            60,995
            
            
            (83
            %)Gross
                Margin
            
            
            44,292
            
            
            9,209
            
            
            381
            %**DeckChecker
                Sales**Revenue
            
            
            320,599
            
            
            325,693
            
            
            (2
            %)Cost
                of Sales
            
            
            128,954
            
            
            22,513
            
            
            473
            %Gross
                Margin
            
            
            191,645
            
            
            303,180
            
            
            (37
            %)**DeckChecker
                Rentals**Revenue
            
            
            25,273
            
            
            65,235
            
            
            (61
            %)Cost
                of Sales
            
            
            5,107
            
            
            9,229
            
            
            (45
            %)Gross
                Margin
            
            
            20,166
            
            
            56,006
            
            
            (64
            %)**RFID
                Casino Chips**Revenue
            
            
            1,197,270
            
            
            0
            
            
            100
            %Cost
                of Sales
            
            
            650,786
            
            
            0
            
            
            100
            %Gross
                Margin
            
            
            546,484
            
            
            0
            
            
            100
            %**Other**Revenue
            
            
            50,797
            
            
            (259,746
            )
            
            (120
            %)Cost
                of Sales
            
            
            247,912
            
            
            587,388
            
            
            (58
            %)Gross
                Margin
            
            
            (197,115
            )
            
            (847,134
            )
            
            89
            %




**SecureDrop
      Sales.** There
      were no system sales generated in the three months ended June 30, 2006, due
      to
      the Company’s decision to discontinue this product line.




**Shuffler
      Sales.** The
      decrease in revenue was due to reduced demand of PokerOneTM and Random PlusTM
shufflers due to a conversion phase in and a reduction in our sales force during
      the quarter ended June 30, 2006. The cost of sales for shufflers increased
      $87,200 or 97% due to costs associated with upgrades for Random
      Plus.




**Shuffler
      Rentals.** The
      $15,292 decrease in shuffler rental revenue reflects the transition of shufflers
      placed on a rental basis as a result of the conversion from rental units to
      purchased units in 2005. Our cost of sales for the three months ended June
      30,
      2006 included cost of shuffler rental depreciation of $10,620 or a reduction
      of
      $50,374.




-
          11
          -




**Deck
      Checker Sales.** The
      slight decrease in Deck Checker sales resulted from the reduced average sales
      price. In the third quarter 2005, we reduced the list price on Deck Checkers
      by
      38%. The decrease in gross margin percentage resulted from the average selling
      price decrease during the quarter.




**Deck
      Checker Rentals.** The
      decrease in Deck Checker rental revenue resulted primarily from the conversion
      of rental units to sale units during prior periods. Our cost of sales included
      Deck Checker M rental
      depreciation of $5,107. ****




**RFID
      Casino Chips.** RFID
      casino chips are a new product this quarter. Revenue increased $1,197,270 due
      to
      international sales. Gross margin was $546,484 or 46%. As we further automate
      our production methods, we expect to see improved margins over the next
      year.




**Other
      Revenue.** The
      increase in other revenues was due to the increase sale of supplies and service
      agreements. We also reduced sales returns and allowances by 82%. Cost of sales
      declined in the current period as a result of a reduction of approximately
      $300,000 of our inventory reserve.




**General
      and Administrative Expense**




For
      the
      three months ended June 30, 2006, our general and administrative expenses were
      $1,796,531, or 28% less than the three months ended June 30, 2005. The decrease
      in general and administrative expenses related primarily to a $763,319 decrease
      in legal costs to defend the Shuffle Master, Inc. lawsuits, and legal/regulatory
      issues pertaining to former senior management.




**Research
      and Development Expense**




For
      the
      three months ended June 30, 2006, research and development expenses were
      $590,098, or 105% more than the period ended June 30, 2006. The increase in
      research and development expenses was due to the final phase development costs
      on our new Chip Washer product.




**Interest
      Expense**




For
      the
      three months ended June 30, 2006, we incurred interest expenses of $505,137,
      or
      0.38% less than the three months ended June 30, 2005. The debt service on our
      8%
      secured note will continue until May 2011, at which time the principal amount
      is
      due.




***Comparison
      of Six Months Ended June 30, 2006 and 2005***




For
      the
      six months ended June 30, 2006, we generated gross revenues of $2,739,894,
      or
      49% more than the six month period ended June 30, 2005. Gross revenues were
      offset by sales returns and allowances of $340,578. Net revenues were
      $2,399,316, or 55% more than the six month period ended June 30, 2005 as a
      result of our first RFID casino chip sale. Specific product line results for
      the
      six months ended June 30, 2006 compared to the six months ended June 30, 2005
      are provided below.




For
      the
      six months ended June 30, 2006, our cost of sales was $1,935,030, or 61% higher
      than the six month period ended June 30, 2005 as a result of our first RFID
      casino chip sale. The cost of the RFID casino chip accounted for 54% of the
      increase. In addition we had increased service costs due to the phase-in of
      new
      shuffler versions during the quarter - this increased travel related expenses
      associated with service.




The
      gross
      margin on revenue for the six months ended June 30, 2006 was $464,286, or 19%,
      and 14% more compared to the gross margin on revenue for the year ended June
      30,
      2005. The increase in gross margin of $119,078 from the six months ended June
      30, 2006 to the six months ended June 30, 2005 reflects the increased level
      of
      revenue. The gross margin as a percentage of revenue for the six months ended
      June 30, 2006 was 19% compared to 22% for the prior year period. The lower
      gross
      margin as a percentage of revenue in the second quarter of 2006 was due to
      higher service costs associated with the cost of upgrading Random Plus and
      Poker
      One versions offset by the higher gross margins on the sale of the RFID casino
      chip.




-
          12
          -




Six
                months ended
              June
                30, 2006
            
            
            Six
                months ended
              June
                30, 2005
            
            
            Percentage
                change**Secure
                Drop**Revenue
            
            
            0
            
            
            72,593
            
            
            (100
            %)Cost
                of Sales
            
            
            0
            
            
            7,743
            
            
            (100
            %)Gross
                Margin
            
            
            0
            
            
            64,850
            
            
            (100
            %)**Shuffler
                Sales**Revenue
            
            
            283,137
            
            
            966,514
            
            
            (71
            %)Cost
                of Sales
            
            
            351,403
            
            
            166,072
            
            
            112
            %Gross
                Margin
            
            
            (68,266
            )
            
            800,442
            
            
            (109
            %)**Shuffler
                Rentals**Revenue
            
            
            127,046
            
            
            126,309
            
            
            1
            %Cost
                of Sales
            
            
            20,665
            
            
            116,906
            
            
            (82
            %)Gross
                Margin
            
            
            106,381
            
            
            9,403
            
            
            1031
            %**DeckChecker
                Sales**Revenue
            
            
            920,202
            
            
            483,736
            
            
            90
            %Cost
                of Sales
            
            
            261,640
            
            
            56,893
            
            
            360
            %Gross
                Margin
            
            
            658,562
            
            
            426,843
            
            
            54
            %**DeckChecker
                Rentals**Revenue
            
            
            64,203
            
            
            130,470
            
            
            (51
            %)Cost
                of Sales
            
            
            9,873
            
            
            18,458
            
            
            (47
            %)Gross
                Margin
            
            
            54,330
            
            
            112,012
            
            
            (52
            %)**RFID
                Casino Chips**Revenue
            
            
            1,197,270
            
            
            0
            
            
            100
            %Cost
                of Sales
            
            
            650,786
            
            
            0
            
            
            100
            %Gross
                Margin
            
            
            546,484
            
            
            0
            
            
            100
            %**Other**Revenue
            
            
            (192,542
            )
            
            (230,399
            )
            
            (16
            %)Cost
                of Sales
            
            
            640,664
            
            
            837,943
            
            
            (24
            %)Gross
                Margin
            
            
            (833,206
            )
            
            (1,068,342
            )
            
            28
            %





**SecureDrop
      Sales.** There
      were no system sales generated in the six months ended June 30, 2006, due to
      the
      Company’s decision to discontinue this product line.




**Shuffler
      Sales.** The
      decrease in sales was due, in part, to a reduction in the sales force combined
      with a reduced demand for the PokerOne product. Cost of sales increased 111%
      due
      to increased rollout costs of upgrades for the Random Plus and conversion kits
      for Poker One.




**Shuffler
      Rentals.** The
      decrease in shuffler rental revenue reflects the transition from rental
      contracts to sales contracts in 2005. Cost of sales include shuffler rental
      depreciation of $20,665.




**Deck
      Checker Sales.** The
      increase in Deck Checker sales resulted from increased sales primarily to Asian
      based casinos through our distributor. A reduced selling price in addition
      to
      distributor discounts contributed to margin erosion of 15%.




**Deck
      Checker Rentals** .
      The
      decrease in Deck Checker rental revenue reflects the transition from rental
      contracts to sales contracts in 2005. Cost of sales included rental depreciation
      of $9,872.




**Other
      Revenue.** The
      increase in other revenues is due to increased service revenue offset by higher
      service costs. Sales returns and allowances increased $50,000 or
      17%.




**General
      and Administrative Expense**




For
      the
      six months ended June 30, 2006, our general and administrative expenses were
      $3,975,482, or 18% less than the six months ended June 30, 2005. The decrease
      in
      general and administrative expenses related primarily to a $1,161,400 decrease
      in legal and regulatory costs to defend the Shuffle Master, Inc. lawsuits and
      legal/regulatory issues pertaining to former senior management, offset by an
      increase in options expense, insurance, loss on disposition of assets, trade
      show expenses, and advertising expenses.




-
          13
          -




**Research
      and Development Expense**




For
      the
      six months ended June 30, 2006, research and development expenses were $812,237,
      or 70% more than the six months ended June 30, 2005. The increase in research
      and development expenses was due to the substantial completion in 2006 of the
      development on our new chip washer product line.




**Interest
      Expense**




For
      the
      six months ended June 30, 2006, we incurred interest expenses of $856,644 or
      4%
      more than the six months ended June 30, 2005. The new $13 million debt financing
      at 8% interest will result in lower interest expense going forward but the
      first
      six months of 2006 included both long term debt of $12 million (convertible
      notes) at 12% interest and a $5 million line of credit at 9% interest - both
      of
      these debt issues were repaid as of May 3, 2006. The debt service on our 8%
      secured note will continue until May 2011, at which time the principal amount
      is
      due.




**Liquidity
      and Capital Resources** ****




Our
      working capital has increased from $(1,637,021) at December 31, 2005 to
      $(1,239,675) at June 30, 2006. To fund our continuing operating cash flow
      deficits, on May 2, 2006, the Company closed on an $18 million financing
      transaction with four investment funds managed by Bricoleur Capital Management,
      of San Diego, California (the “Bricoleur Funds”). The $18 million financing
      consists of $13 million of 8% senior secured promissory notes. The senior debt
      placement includes detachable warrants to purchase 3.2 million shares at $2.50
      per share, some of which are recallable based on early retirement of $6 million
      of the debt portion of the transaction.




In
      connection with this debt financing, we also entered into a definitive agreement
      with the purchasers of our notes whereby we may, at our sole option, require
      them to purchase up to $5 million of our common stock. This agreement has a
      term of five years and grants us a binding “put” right to sell our shares at a
      20% discount to the volume weighted average price of our shares on the day
      of a
      drawdown, subject to a ceiling price of $3.50 per share. In connection with
      our
      election to exercise our equity put rights in the aggregate amount of $2.5
      million during the quarter ended June 30, 2006, we issued our secured
      convertible promissory notes (“Put Notes”) to the funds instead of our common
      shares. The Put Notes are convertible into shares of our common stock at the
      Put
      Conversion Price calculated at the time of each election. Two Put Notes in
      the
      aggregate principal amount of $1.5 million are convertible at $2.05 per share
      and a third Put Note in the principal amount of $1 million is convertible at
      $1.92 per share. The Put Notes provide that all principal under the notes shall
      automatically convert to shares of our common stock at the Put Conversion Price
      upon the earlier of (i) the date that we obtain approval of our shareholders
      for
      the conversion of the Put Notes, or (ii) August 31, 2006. The Put Notes do
      not
      require the repayment of principal in cash except in the event of default by
      us
      of its obligations under the notes. All outstanding principal under the Put
      Notes accrue interest, payable in cash, at the rate of 8% per annum. Our
      obligations under the Put Notes are secured by the assets of the company. We
      expect that the Put Notes will convert to our common shares during the third
      quarter.




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




In
      addition to retiring our preexisting notes, we used approximately $5 million
      of
      the proceeds from the Bricoleur financing described above to retire our existing
      9% line of credit. The balance of the proceeds is available to us for general
      working capital purposes.




-
          14
          -




As
      a
      result of the Bricoleur financing, we will continue to incur significant
      interest expense in the future, however at a reduced rate as a result of the
      lower principal amount of aggregate indebtedness and an overall lower rate
      of
      interest **.**




After
      giving effect to the Bricoleur financing, and assuming the conversion of the
      Put
      Notes to our common shares in the third quarter, we had working capital of
      $1,239,675 as of June 30, 2006, with the ability to draw an additional $2.5
      million of funds under the securities put option agreement. We believe that
      the
      Bricoleur financing, in addition to our existing cash and cash equivalents
      together with expected cash generated by operations, will meet our working
      capital needs, capital expenditures, and commitments through, at least through
      the end of this year. We will endeavor to raise additional required funds
      through various financing sources, including the sale of our equity and debt
      securities and the procurement of commercial debt financing. However, as result
      of our present level of debt and certain restrictions on our ability to incur
      additional indebtedness under our agreement, it is unlikely we will be able
      to
      obtain additional debt-based capital, unless a significant portion of the
      proceeds are used to retire existing debt. There can be no guarantees that
      such
      funds will be available on commercially reasonable terms, if at all. If such
      financing is not available on satisfactory terms, we may be unable to expand
      or
      continue our business as desired and operating results may be adversely
      affected.




**Net
      Cash Used In Investing Activities.** The net
      cash used in investing activities reported for the six months ended June 30,
      2006 consisted of $(1,469,651) from the acquisition of intangible assets and
      deposit monies associated with the Dolphin Technologies Letter of Intent.




**Net
      Cash Provided By Financing Activities.** Net cash
      provided by financing activities reported for the six months ended June 30,
      2006
      consisted primarily of $13,000,000 provided by the Bricoleur financing, $2.5
      million proceeds from put agreement, $5,654,500 in conversion of debt to stock,
      offset by $6,000,000 in repayment of notes and $4,050,000 in repayment of line
      of credit.




During
      the periods ended in 2005 and 2004, our sources of capital included primarily
      net proceeds of $15,500,000 from a public stock offering and convertible
      debentures in the amounts of $3,250,000 and $12,000,000,
      respectively.




**Off
      Balance Sheet Arrangements**




We
      do not
      have any off balance sheet arrangements.




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




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




***Revenue
      Recognition.***




We
      recognize revenue from the sale of our shuffler and Deck Checker products upon
      shipment against customer contracts or purchase orders. Sales are recognized
      immediately when shufflers that are rented are converted to purchases depending
      on the creditworthiness and payment history of the casino company since payment
      terms are from 20 to 48 months.




We
      recognize revenue from our sales to independent distributors at the time that
      the distributor takes possession of our product.




Revenue
      from shuffler rentals is recorded at the first of each month in accordance
      with
      rental contract terms. All rental contracts are cancelable upon 30−day written
      notice by the customer. Maintenance expense for rental units is recorded in
      the
      period it is incurred.




-
          15
          -




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




If
      the
      customer does not possess the required creditworthiness or an established
      payment history with us, we would then book the revenue as an installment sale
      and recognize it over time as payments are received.




Although
      sales are not generally made with a right to return, upon occasion, usually
      associated with the performance warranty, sales returns and allowances are
      recorded after returned goods are received and inspected.




The
      Company also recognizes revenue on bill and hold transactions when the product
      is completed and is ready to be shipped and the risk of loss is transferred
      to
      the customer. In a certain case, at the customers’ request, the Company is
      storing the product for a brief period of time. Management evaluates the
      criteria set forth in SAB 104 related to "bill-and-hold" transactions, precedent
      to revenue recognition whenever delivery has not occurred. In the current
      quarter, the Company recognized $1,197,270 in revenue. The transaction was
      with
      an international customer, and the goods were held, at the request of the
      customer. The transaction was determined to have met the SAB 104 criteria for
      revenue recognition in the current quarter, including the following:




·
            The
                risk of ownership had passed to the
                buyer,


·
            The
                customer made a fixed commitment to purchase the goods, in writing,


·
            The
                buyer requested that the transaction be on a bill and hold basis,
                and that
                the buyer had a substantial business purpose for ordering the goods
                on a
                bill and hold basis,


·
            There
                was a fixed schedule for delivery of the goods,


·
            The
                Company did not retain any specific performance obligations such
                that the
                earnings process is not complete,


·
            The
                ordered goods were segregated from the Company's inventory and not
                be
                subject to being used to fill other orders (because they were manufactured
                to the customer’s unique specifications), and


·
            The
                product was complete and ready for shipment to be completed.




***Intangible
      Assets.***




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




***Recent
      Accounting Pronouncements.***




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




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




-
          16
          -




**Risk
      Factors**




***We
      may*** ***require*** ***additional funding in the future to continue to operate our business.*** We
      had
      working capital deficit of $(1,239,674) as of June 30, 2006. In May 2006, we
      entered into an agreement to provide us with $18 million additional debt and
      equity financing, and believe that this financing, in addition to our existing
      cash and cash equivalents together with expected cash generated by operations,
      and non-core asset dispositions, will meet our working capital needs, capital
      expenditures, and commitments at least through the end of this year. In the
      event it is not sufficient, we will endeavor to raise additional required funds
      through various financing sources, including the sale of our equity and debt
      securities and the procurement of commercial debt financing. However, as result
      of our present level of debt and certain restrictions on our ability to incur
      additional indebtedness under our agreement, it is unlikely we will be able
      to
      obtain additional debt-based capital, unless a significant portion of the
      proceeds are used to retire existing debt. There can be no guarantees that
      such
      funds will be available on commercially reasonable terms, if at all. If such
      financing is not available on satisfactory terms, we may be unable to expand
      or
      continue our business as desired and operating results may be adversely
      affected. Any debt financing will increase expenses and must be repaid
      regardless of operating results and may involve restrictions limiting our
      operating flexibility. If we issue equity securities to raise additional funds,
      the following results may occur:




·
            the
                percentage ownership of our existing stockholders will be reduced;




·
            our
                stockholders may experience additional dilution in net book value
                per
                share; or




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




***We
      have a history of significant operating losses and anticipate continued
      operating losses for at least the near term.*** For
      the
      six months ended June 30, 2006 and the years ended December 31, 2005 and
      2004, we have incurred net losses of $ 5,180,077, $17,567,230 and $9,538,200,
      respectively, and our operations have used $5,392,792 , $14,816,322 and
      $10,660,133 of cash, respectively. As of June 30, 2006, December 31, 2005
      and December 31, 2004, we had accumulated deficits of $76,867,855, $71,687,777
      and $54,120,547, respectively. Based on our presently known commitments and
      plans, we believe that we have sufficient funding through the end of 2006.
      If we
      are unable to generate additional funds from operational cash flow, we will
      be
      required to locate additional sources of capital from private or public
      placements of debt or equity, or from institutional or other lending sources.
      If
      our revenues do not increase very substantially, or if our spending levels
      exceed our expectations, we will not become profitable. Revenues may not grow
      in
      the future, and we may not generate sufficient revenues for profitability.
      If we
      become profitable, we may not be able to sustain profitable operations.




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




-
          17
          -




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




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




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




·
            contractual
                arrangements providing for non-disclosure and prohibitions on
                use;




·
            patents
                and pending patent applications;




·
            trade
                secret, copyright and trademark laws;
                and




·
            certain
                built-in technical product
                features.




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




***Adverse
      results in current litigation could result in substantial monetary damages
      and
      impacts on the manufacture and sale of certain of our shuffler
      products.***  Shuffle
      Master, our principal competitor in the shuffler market, has one lawsuit against
      us for patent infringement. We believe our position to be meritorious based
      on
      the Markman hearing ruling as well as a subsequent ruling by the Federal Circuit
      Court in December 2005, and we have reasonable defenses to Shuffle Master’s
      claims. However, we cannot determine whether we will ultimately prevail in
      the
      lawsuit, nor whether damages, if awarded, would significantly impact our ability
      to continue to manufacture and sell particular products within the United States
      and its territories. If we do not prevail, we will be unable to sell the
      PokerOne shuffler products in the United States unless we change certain
      components used in the shuffler or obtain appropriate licenses from Shuffle
      Master to use the playing card shuffler apparatus. In June 2006, we agreed
      with Shuffle Master to a 90 day standstill in the litigation in order to pursue
      settlement negotiations.




-
          18
          -




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




If
      our
      future products incorporate technology that infringes the proprietary rights
      of
      third parties and we do not secure licenses from them, we could be liable for
      substantial damages that would cause a material reduction in revenues and impair
      our prospects for achieving growth and profitability.




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




·
            consuming
                substantial time and financial resources required to defend against
                them;




·
            diverting
                the attention of management from growing our business and managing
                operations;




·
            resulting
                in costly litigation; and




·
            disrupting
                product sales and shipments.




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




***We
      rely*** ***on
      distributors in international markets, and our limited sales experience in
      foreign countries could cause us to lose sales.*** Substantially
      all sales of our products outside the U.S. are achieved through distributor
      relationships. This accounts for 24% of revenue for the six months ending June
      30, 2006. We believe the distributors that we have engaged are experienced
      and
      reputable; however, if we are unable to manage these relationships, our ability
      to generate revenue and profits in the non-U.S. market may be adversely
      affected. To the extent that we engage in direct sales outside the U.S., we
      have
      limited sales experience and history in foreign markets.




***Our
      management holds a controlling interest in our common stock, giving our
      management significant power to control matters submitted to our stockholders.*** As
      of
      July 31, 2006, our executive officers and members of our board beneficially
      own
      approximately 13,101,151 shares of common stock, or approximately 48% of the
      outstanding shares of our common stock. Accordingly, these stockholders have
      significant power to control matters requiring approval by our stockholders,
      including the election of directors and approval of mergers and other
      significant corporate transactions. This concentration of ownership may make
      it
      more difficult for non management stockholders to effect substantial changes
      in
      our company, and also has the effect of delaying, preventing or expediting,
      as
      the case may be, a change in control of our company.




-
          19
          -


**Item
          3.** **Controls
          and Procedures** ****




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




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




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




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




-
          20
          -




**PART
      II - OTHER INFORMATION**




**Item
      6. Exhibits.**


(a)
              Exhibits.


10.1
            8%
                Senior Secured Note Purchase Agreement dated May 1, 2006 between
                the
                Company and the Bricoleur Funds*




10.2
            Amended
                and Restated Securities Put Agreement dated May 1, 2006 between the
                Company and the Bricoleur Funds*




10.3
            Security
                Agreement dated May 1, 2006 between the Company and the Bricoleur
                Funds*




10.4
            Registration
                Rights Agreement dated May 1, 2006 between the Company and the Bricoleur
                Funds*


10.5
              Form
                  of 8% Note*
 10.6
                Form
                    of Warrant*
 10.7
                  Form
                      of Put Note*


10.8
            Share
                Sale Agreement dated July 5, 2006 between the Company and William
                Westmore
                Purton, and Synwood Pty Ltd




10.9
            Registration
                Rights Agreement dated July 11, 2006 between the Company and William
                Westmore Purton, and Synwood Pty
                Ltd.




10.10
            Form
                of Unsecured Convertible Promissory Note


31.1
              Certifications
                    Pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002.
 31.2
                Certifications
                      Pursuant to Section 302 of the Sarbanes-Oxley Act of
                      2002.


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


____________________


*
      Filed
      as an exhibit to the Company’s Form 8-K filed with the Securities and Exchange
      Commission on May 8, 2006





-
          21
          -


**SIGNATURE**




In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**VendingData
              Corporation**(Registrant)Date: August
              14, 2006
            By:
            /s/ Mark
              R.
              NewburgMark
                R. NewburgIts:
            President, Chief Executive Officer and Treasurer(Principal
                Executive Officer)Date: August
              14, 2006
            By:
            /s/
                Arnaldo F. GalassiArnaldo
                F. GalassiIts:
            Chief Financial Officer and Secretary(Principal
                Financial Officer)




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