**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:September
                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 latest practicable
                date: 29,015,099shares
                of common stock, $.001 par value, as of October 31,
                2006Transitional
                Small Business Disclosure Format (check one): Yes oNo
                x







**VENDINGDATA
      CORPORATION**





**FORM
      10-QSB**





**TABLE
      OF CONTENTS**




**PAGE****PART
                  I - FINANCIAL INFORMATION**
              **1**ITEM1.
                  FINANCIALSTATEMENTS.
              1BALANCESHEETS
              1STATEMENTSOFOPERATIONS
              2STATEMENTS
                  OFCASHFLOWS
              3NOTES
                  TOFINANCIALSTATEMENTS
              4ITEM2.
                  MANAGEMENT’SDISCUSSION
                  ANDANALYSISORPLAN
                  OFOPERATION.
              11CAUTIONARYSTATEMENT
              11OVERVIEW
              11RESULTSOFOPERATIONS
              12LIQUIDITYANDCAPITALRESOURCES
              17OFFBALANCESHEETARRANGEMENTS
              19CRITICALACCOUNTINGPOLICIESANDESTIMATES
              19RISKFACTORS
              20ITEM3.
                  CONTROLSANDPROCEDURES
              24**PART
                  II - OTHER INFORMATION**
              25ITEM6.
                  EXHIBITS.
              25




-i-


**PART
      I - FINANCIAL INFORMATION**




****I****TEM****1. F****INANCIAL****S****TATEMENTS****.****




**VENDINGDATA
      CORPORATION**


**Balance
      Sheets**




**September
                30, 2006**
              **(Unaudited)**
            
            **December
                31,****2005****ASSETS**
              **Current
                assets**:Cash
                and cash equivalents
            
            $
            502,178
            
            $
            935,243Current
                portion of accounts receivable, trade, net of allowance for uncollectibles
                of $316,469 and $276,420
            
            
            2,616,636
            
            
            1,550,559Inventories
            
            
            3,682,986
            
            
            3,045,334Prepaid
                expenses and other
            
            
            184,996
            
            
            117,6556,986,796
            
            
            5,648,791Equipment
                rented to customers, net of accumulated depreciation of $89,685 and
                $228,032
            
            
            111,340
            
            
            146,527Property
                and equipment, net of accumulated depreciation of $2,291,943 and
                $2,408,234
            
            
            3,496,047
            
            
            585,431Intangible
                assets, at cost, net of accumulated amortization of $266,257 and
                $836,281
            
            
            5,494,962
            
            
            1,862,268Goodwill
            
            
            13,094,280Accounts
                receivable, trade, net of current portion, less unamortized
                discount
            
            
            366,203
            
            
            600,430Deferred
                expenses
            
            
            660,727
            
            
            748,171Deposits
            
            
            459,337
            
            
            759,653$
            30,669,692
            
            $
            10,351,271**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities**:Current
                portion of leases payable
            
            $
            550,547
            
            $
            471,269Accounts
                payable
            
            
            2,875,954
            
            
            1,836,234Accrued
                expenses
            
            
            2,371,288
            
            
            794,203Deferred
                revenues, current portion
            
            
            31,604
            
            
            52,248Short-term
                debt
            
            
            6,180,324
            
            
            4,050,000Current
                portion of long term debt
            
            
            1,500,000Customer
                deposits
            
            
            80,654
            
            
            81,85813,590,371
            
            
            7,285,812Long
                -term obligationsDeferred
                revenues, net of current portion
            
            
            79,757
            
            
            161,335Notes
                payable
            
            
            11,500,000
            
            
            11,654,500Leases
                payable, net of current portion
            
            
            407,790
            
            
            421,975Total
                Liabilities
            
            
            25,577,918
            
            
            19,523,622**Stockholders'
                equity**:Preferred
                stock, $.001 par value, 10,000,000 shares authorized, no shares issued
                or
                outstanding
            
            
            —
            
            
            —Common
                stock, $.001 par value, 50,000,000 shares authorized, 28,969,099
                and
                18,141,950 shares issued
            
            
            28,969
            
            
            18,142Treasury
                stock 448,053 common shares
            
            
            (846,820
            )
            
            (846,820
            )Deferred
                officers’ compensation
            
            
            (3,797,006
            )
            
            (3,419,088
            )Additional
                paid in capital
            
            
            90,684,880
            
            
            66,763,192Deficit
            
            
            (80,978,249
            )
            
            (71,687,777
            )5,491,774
            
            
            (9,172,351
            )Total
                liabilities and stockholders’ equity
            
            $
            30,669,692
            
            $
            10,351,271


See
        accompanying notes to financial statements.




-1-





**VENDINGDATA
      CORPORATION**


**Statements
      of Operations**


**(Unaudited)**




**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Revenues:**Gaming:Sales
            
            $
            379,433
            
            $
            131,852
            
            $
            2,780,042
            
            $
            1,751,521Rental
            
            
            75,601
            
            
            159,662
            
            
            266,849
            
            
            416,441Other
            
            
            138,982
            
            
            27,469
            
            
            287,018
            
            
            87,909Non-gaming
                revenue
            
            
            1,850,043
            
            
            
            
            
            1,850,0432,444,059
            
            
            318,983
            
            
            5,183,952
            
            
            2,255,871Sales
                returns and allowances, gaming
            
            
            (90,712
            )
            
            (20,002
            )
            
            (431,290
            )
            
            (310,840
            )2,353,347
            
            
            298,981
            
            
            4,752,662
            
            
            1,945,031**Operating
                costs and expenses:**Cost
                of sales
            
            
            2,263,449
            
            
            2,922,709
            
            
            4,198,479
            
            
            4,142,162Selling,
                general and administrative
            
            
            3,062,180
            
            
            2,306,338
            
            
            7,037,662
            
            
            7,174,231Research
                and development
            
            
            448,105
            
            
            591,807
            
            
            1,260,341
            
            
            1,069,4965,773,734
            
            
            5,820,854
            
            
            12,496,482
            
            
            12,385,889Loss
                from operations
            
            
            (3,420,387
            )
            
            (5,521,873
            )
            
            (7,743,820
            )
            
            (10,440,858
            )Interest
                expense, unrelated parties
            
            
            690,008
            
            
            384,665
            
            
            1,546,652
            
            
            1,193,472Interest
                expense, related parties
            
            
            
            
            
            
            
            
            
            
            
            15,063690,008
            
            
            384,665
            
            
            1,546,652
            
            
            1,208,535Net
                loss
            
            $
            (4,110,395
            )
            $
            (5,906,538
            )
            $
            (9,290,472
            )
            $
            (11,649,393
            )Basic
                loss per share
            
            $
            (
                0.15
            )
            $
            (0.35
            )
            $
            (0.41
            )
            $
            (0.68
            )Weighted
                average shares outstanding
            
            
            27,629,090
            
            
            16,864,005
            
            
            22,430,475
            
            
            17,105,093


See
        accompanying notes to financial statements.




-2-


**VENDINGDATA
      CORPORATION**


**Statements
      of Cash Flows**


**(Unaudited)**




**Nine
                Months Ended September 30,****2006**
            
            **2005**Net
                loss
            
            $
            (9,290,472
            )
            $
            (
              11,649,394
            )Adjustments
                to reconcile net loss to net cashused
                in operating activities:Depreciation
            
            
            528,950
            
            
            584,750Amortization
                of deferred interest
            
            
            44,465
            
            
            158,552Non-cash
                compensation expense
            
            
            837,349
            
            
            365,126Increase
                in operating (assets) liabilities:Trade
                accounts receivable
            
            
            (831,850
            )
            
            710,717Other
                receivables
            
            
            154,486
            
            
            (32,391
            )Inventory
            
            
            (637,652
            )
            
            1,510,277Prepaid
                expenses
            
            
            (221,827
            )
            
            (116,516
            )Deferred
                financing and interest expense
            
            
            (546,875
            )Deposits
                with vendors
            
            
            300,316
            
            
            (3,079
            )Accounts
                payable
            
            
            1,039,720
            
            
            1,189,145Accrued
                expenses
            
            
            1,577,084
            
            
            668,671Deferred
                expenses
            
            
            
            
            
            (2,491,333
            )Deferred
                revenues
            
            
            (102,222
            )Customer
                expenses
            
            
            
            
            
            (5,175
            )Customer
                deposits
            
            
            (1,204
            )2,140,740
            
            
            2,538,744Net
                cash used in operating activities
            
            
            (7,149,732
            )
            
            (9,110,650
            )Cash
                flows from investing activities:Purchase
                of intellectual property
            
            
            (716,500
            )Purchase
                of Dolphin (see note 5)
            
            
            (1,350,000
            )Purchase
                of plant and equipment
            
            
            (1,560,616
            )
            
            (897,707
            )Proceeds
                from disposition of equipment produced for rental
            
            
            35,187Proceeds
                from disposition of equipment
            
            
            405,634
            
            
            4,700Net
                cash used in investing activities
            
            
            (3,186,295
            )
            
            (893,007
            )Cash
                flows from financing activities:Proceeds
                from sale of stock
            
            
            3,034,179
            
            
            3,566,852Purchase
                of treasury stock
            
            
            
            
            
            (846,820
            )Proceeds
                from capital lease financing
            
            
            300,000Repayment
                from leases payable
            
            
            (279,373
            )
            
            (1,743,057
            )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 short term debt
            
            
            398,156Proceeds
                from convertible debt
            
            
            3,500,000Net
                cash provided by financing activities
            
            
            9,902,962
            
            
            9,538,725Increase
                (decrease) in cash and cash equivalents
            
            
            (433,065
            )
            
            (464,932
            )Cash
                and cash equivalents at beginning of period
            
            
            935,243
            
            
            907,660Cash
                and cash equivalents at end of period
            
            $
            502,178
            
            $
            442,728Non-cash
                investing and financing activities:Intangible
                assets acquired with stock
            
            $
            2,690,000Note
                issued for acquisition of Dolphin (see note 5)
            
            $
            5,782,168Stock
                issued as deposit for acquisition (see note 5)
            
            $
            7,817,833Debt
                settled with stock
            
            $
            9,154,500




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. Interim results of operations are
      not indicative of results to be expected for the year.




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




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**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Gaming:North
                America
            
            $
            447,996
            
            $
            298,981
            
            $
            990,002
            
            $
            1,553,981Asia
            
            
            55,308
            
            
            
            
            
            1,912,617
            
            
            267,300Europe
            
            
            
            
            
            
            
            
            
            
            
            99,000South
                America
            
            
            
            
            
            
            
            
            
            
            
            24,750Total
                gaming
            
            
            503,304
            
            
            298,981
            
            
            2,902,619
            
            
            1,945,031Non-gaming:Asia
            
            
            1,850,043
            
            
            
            
            
            1,850,043Total
                Revenue
            
            $
            2,353,347
            
            $
            298,981
            
            $
            4,752,662
            
            $
            1,945,031




-4-




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


****Three
                  Months Ended****
                **September
                  30,**
              
              ****Nine
                  Months Ended****
                **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Secure
                  Drop®
              
              
              
              
              $
              8,641
              
              
              
              
              $
              81,235Shuffler
              
              $
              192,293
              
              
              124,957
              
              $
              602,476
              
              
              1,289,706Deck
                  CheckerTM
              
              
              207,393
              
              
              157,916
              
              
              1,191,797
              
              
              797,021Casino
                  chips
              
              
              55,348
              
              
              
              
              
              1,252,618Non-gaming
              
              
              1,850,043
              
              
              
              
              
              1,850,043Other
              
              
              138,982
              
              
              27,469
              
              
              287,018
              
              
              87,9092,444,059
              
              
              318,983
              
              
              5,183,952
              
              
              2,255,871Sales
                  returns and allowances
              
              
              (90,712
              )
              
              (20,002
              )
              
              (431,290
              )
              
              (310,840
              )$
              2,353,347
              
              $
              298,981
              
              $
              4,752,662
              
              $
              1,945,031Depreciation
                  and amortizationShuffler
              
              $
              7,899
              
              $
              54,469
              
              $
              28,564
              
              $
              159,908Deck
                  Checker
              
              
              3,998
              
              
              9,229
              
              
              13,869
              
              
              27,687Non-gaming
              
              
              66,616
              
              
              
              
              
              66,616Unallocated
              
              
              183,116
              
              
              106,705
              
              
              419,901
              
              
              397,155$
              261,629
              
              $
              171,403
              
              $
              528,951
              
              $
              584,750Operating
                  income (loss)Secure
                  Drop® gross margin
              
              
              
              
              $
              8,412
              
              
              
              
              $
              73,262Shuffler
                  gross margin
              
              $
              94,523
              
              
              (164,266
              )
              $
              132,638
              
              
              704,558Deck
                  Checker gross margin
              
              
              142,790
              
              
              149,952
              
              
              855,683
              
              
              711,216Casino
                  chip gross margin
              
              
              5,845
              
              
              
              
              
              552,329Non-gaming
                  gross margin
              
              
              53,954
              
              
              
              
              
              53,954Other
                  costs of good sold
              
              
              (207,214
              )
              
              (2,617,826
              )
              
              (1,040,421
              )
              
              (3,688,067
              )Selling,
                  general, and administrative
              
              
              (3,062,180
              )
              
              (2,306,338
              )
              
              (7,037,662
              )
              
              (7,172,331
              )Research
                  and development
              
              
              (448,105
              )
              
              (591,807
              )
              
              (1,260,341
              )
              
              (1,069,496
              )$
              (3,420,387
              )
              $
              (5,521,873
              )
              $
              (7,743,820
              )
              $
              (10,440,858
              )




**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—Stock-Based
      Compensation**




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




The
      Company has 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
      September 30, 2006, there were 4,849,532 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.




-5-




**Stock
                Options**
            
            **Weighted
                  Average**
                **Exercise
                  Price****Balance,
                December 31, 2005**
            
            
            3,953,472
            
            $
            1.99Options
                granted
            
            
            1,605,000
            
            
            2.19Options
                exercised
            
            
            360,000
            
            
            2.19Options
                cancelled
            
            
            348,940
            
            
            4.00**Balance,
                September 30, 2006**
            
            
            4,849,532
            
            
            2.00**Options
                exercisable (vested) at  September 30,
                2006**
            
            
            974,938
            
            $
            2.24







**Note 5—Business
      Combination**




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




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




As
      of
      September 29, 2006 the greater variance required to be settled in cash would
      be
      based on 90% of the ten day average. Based on the guarantee outlined above,
      the
      cash settlement would calculate to $1,867,278, assuming the ten-day average
      traded price per share discounted to 90% was $2.22.




**Note 6—Other
      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 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.




-6-




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




**Note 7—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
      included detachable warrants to purchase 3.2 million shares at $2.50 per share,
      some of which are recallable based on early retirement of $6 million of the
      debt
      portion of the transaction. In September 2006, the amount of detachable warrants
      were reduced to 2.6 million shares at $2.00 per share, some of which are
      recallable based on early retirement of $6 million of the debt portion of the
      transaction. Interest at 8% is due semi-annually on July 1, and December 1,
      each
      year until repayment. The loan is secured by all the assets of the company.
      In
      addition, if the Company reduces the debt to under $7 million within one year
      of
      the transaction 800,000 of the 2.6 million warrants will be cancelled, within
      two years 600,000 of the 2.6 million warrants will be cancelled and within
      three
      years 200,000 of the 2.6 million warrants will be cancelled.




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




**Note
      8 - Other Significant Transaction**




During
      the quarter ended September 30, 2006, we contracted with Reel Games to become
      a
      distributor for us in the Caribbean. Sales to Reel Games accounted for 12%
      of
      this quarter’s sales revenue and 2% of sales revenue for the nine months ending
      September 30, 2006.




-7-




**Note
      9 - Subsequent Events**




On
      October 11, 2006, the "Company" entered into an Alliance Agreement, an Amended
      and Restated Sales Representative Agreement, and a Securities Purchase Agreement
      with Elixir Group Limited, a Hong Kong company ("Elixir"). The transactions
      contemplated by the Securities Purchase Agreement are subject to the approval
      of
      the Company's shareholders and all regulatory approvals that may be required.




**Alliance
      Agreement**




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




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




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




The
      Alliance Agreement provides that neither party shall be required to give effect
      to any of the above-referenced limitations if doing so would cause the party's
      directors to act in breach of their fiduciary duties, or result in a violation
      of law or breach of a pre-existing contract by such party.




**Amended
      and Restated Sales Representative Agreement**




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




-8-




**Securities
      Purchase Agreement**




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




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




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




-9-




Pursuant
      to the Securities Purchase Agreement, James Crabbe and Mark Newburg, the
      Company's Chairman of the Board and Chief Executive Officer, respectively,
      have
      agreed to vote all of the shares of the Company's common stock under their
      control in favor of the transactions contemplated by the Securities Purchase
      Agreement for the purpose of obtaining any shareholder approvals required
      thereunder.




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




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




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




-10-





**I** **TEM** **2. M** **ANAGEMENT’S** **D** **ISCUSSION** **** **AND** **A** **NALYSIS** **** **OR** **P** **LAN** **** **OF** **O** **PERATION** **.** ****




**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 Forms 10 QSB and Form
      8-K, which discuss our business in greater detail.




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




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




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




**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 rent), depending on the product, the geographic
      location of the customer and other factors. We rely on our internal sales staff
      and distributor relationships for the sale and rental of our products. Although
      we anticipate significant sales development and revenue growth, there is no
      assurance that we will generate sufficient revenue, cash flow or profit to
      sustain our operations.




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




-11-


**RESULTSOF
      OPERATIONS**




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




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




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




**Three
                months ended September 20,**
              **2006**
            
            **Three
                months ended September 20,**
              **2005**
            
            **Year
                to**
              **year
                change**
            
            **Percentage
                change**Secure
                DropRevenue
            
            
            -
            
            
            8,641
            
            
            (8,641
            )
            
            -100
            %Cost
                of Sales
            
            
            -
            
            
            230
            
            
            (230
            )
            
            -100
            %Gross
                Margin
            
            
            -
            
            
            8,411
            
            
            (8,411
            )
            
            -100
            %Gross
                Margin %
            
            
            0
            %
            
            97
            %Shuffler
                SalesRevenue
            
            
            140,878
            
            
            38,791
            
            
            102,087
            
            
            263
            %Cost
                of Sales
            
            
            89,871
            
            
            19,357
            
            
            70,514
            
            
            364
            %Gross
                Margin
            
            
            51,006
            
            
            19,434
            
            
            31,572
            
            
            162
            %Gross
                Margin%
            
            
            36
            %
            
            50
            %Shuffler
                RentalsRevenue
            
            
            51,416
            
            
            86,167
            
            
            (34,751
            )
            
            -40
            %Cost
                of Sales
            
            
            7,899
            
            
            43,001
            
            
            (35,102
            )
            
            -82
            %Gross
                Margin
            
            
            43,517
            
            
            43,166
            
            
            351
            
            
            1
            %Gross
                Margin%
            
            
            85
            %
            
            50
            %Deck
                CheckerRevenue
            
            
            183,208
            
            
            84,420
            
            
            98,788
            
            
            117
            %Cost
                of Sales
            
            
            60,604
            
            
            (1,226
            )
            
            61,830
            
            
            -5043
            %Gross
                Margin
            
            
            122,603
            
            
            85,646
            
            
            36,957
            
            
            43
            %Gross
                Margin%
            
            
            67
            %
            
            101
            %Deck
                Checker RentalsRevenue
            
            
            24,185
            
            
            73,495
            
            
            (49,310
            )
            
            -67
            %Cost
                of Sales
            
            
            3,998
            
            
            9,229
            
            
            (5,231
            )
            
            -57
            %Gross
                Margin
            
            
            20,187
            
            
            64,266
            
            
            (44,079
            )
            
            -69
            %Gross
                Margin%
            
            
            83
            %
            
            87
            %Casino
                ChipsRevenue
            
            
            55,348
            
            
            -
            
            
            55,348
            
            
            100
            %Cost
                of Sales
            
            
            49,503
            
            
            -
            
            
            49,503
            
            
            100
            %Gross
                Margin
            
            
            5,845
            
            
            -
            
            
            5,845
            
            
            100
            %Gross
                Margin%
            
            
            11
            %
            
            0
            %Non-gaming
                Product LineRevenue
            
            
            1,850,043
            
            
            -
            
            
            1,850,043
            
            
            100
            %Cost
                of Sales
            
            
            1,796,089
            
            
            -
            
            
            1,796,089
            
            
            100
            %Gross
                Margin
            
            
            53,954
            
            
            -
            
            
            53,954
            
            
            100
            %Gross
                Margin%
            
            
            3
            %
            
            0
            %OtherRevenue
            
            
            48,270
            
            
            7,467
            
            
            40,803
            
            
            546
            %Cost
                of Sales
            
            
            255,485
            
            
            2,852,118
            
            
            (2,596,633
            )
            
            -91
            %Gross
                Margin
            
            
            (207,215
            )
            
            (2,844,651
            )
            
            2,637,437
            
            
            128
            %Gross
                Margin%
            
            
            -429
            %
            
            -38096
            %TotalRevenue
            
            
            2,353,347
            
            
            298,981
            
            
            2,054,366
            
            
            687
            %Cost
                of Sales
            
            
            2,263,449
            
            
            2,922,709
            
            
            (659,260
            )
            
            -23
            %Gross
                Margin
            
            
            89,898
            
            
            (2,623,728
            )
            
            2,713,626
            
            
            -103
            %Gross
                Margin%
            
            
            4
            %
            
            -878
            %




-12-




**SecureDrop
      Sales.** There
      were no system sales generated in the three months ended September 30, 2006,
      due
      to the Company’s decision to discontinue this product line in September,
      2005.




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




**Shuffler
      Rentals.** Average
      rental revenue per unit dropped 15% during the three months ended September
      30,
      2006 compared to the prior year period. Our average cost per unit dropped 13%
      per unit reflecting the manufacturing savings from China.




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




-13-




**Deck
      Checker Rentals.** The
      decrease in Deck Checker rental revenue resulted primarily from the conversion
      of 55% of the rental units to sale units during fourth quarter 2005 and first
      quarter 2006. Cost controls implemented in 2005 resulted in lower depreciation
      costs by 55%.




**Casino
      Chips.** RFID
      casino chips are a new product line introduced during the second quarter of
      2006.. Revenue continued to grow due to international sales. As we further
      automate our production methods, we expect to see improved margins over the
      next
      year. ****




**Non-gaming
      product.** With
      the
      acquisition of Dolphin, there is additional revenue related to Dolphin’s
      automotive and medical lines of business. The lower margins were caused by
      the
      production line preparation costs for non-gaming products mentioned above,
      which
      resulted in an average of three percent gross margins related to
      non-gaming.




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




**General
      and Administrative Expense**




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




**Research
      and Development Expense**




For
      the
      three months ended September 30, 2006, research and development expenses were
      $448,105 or 24% less than the period ended September 30, 2005. The 24% decrease
      in research and development expenses reflects the cost savings associated with
      developing new products in China.




**Other
      (Income)/Expense**




In
      August
      2006, we sold intellectual property related to the discontinued SecureDrop
      product. The fair market value of this IP was written off as a loss in September
      2005. The income related to this sale is $500,000 with sales costs of
      $100,000.




**Interest
      Expense**




For
      the
      three months ended September 30, 2006, we incurred interest expenses of
      $690,000, or 79% more than the three months ended September 30, 2005. The
      increase is due to $66,000 related to the Dolphin line of credit. A non-cash
      portion of the interest expense is attributable to the expensing of a discounted
      warrant conversion. The debt service on our 8% secured note will continued
      until
      May 2011, at which time the principal amount will be paid.




***Comparison
      of*** **Nine Months Ended September 30, 2006 and 2005**




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




-14-




For
      the
      nine months ended September 30, 2006, our cost of sales was $4,198,479, or
      1%
      higher than the nine month period ended September 30, 2005. In September 2005,
      we discontinued the Secure Drop and RES product lines resulting in an inventory
      write down of $2,584,290. A normalized analysis of the cost of sales results
      in
      an increase of $2,640,607. The introduction of the Dolphin non-gaming product
      line accounts for approximately $1,850,000 of this increase.




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




**Nine
                months ended September 20,**
              **2006**
            
            **Nine
                months ended September 20,**
              **2005**
            
            **Year
                to year**
              **change**
            
            **Percentage**
              **change**Secure
                DropRevenue
            
            
            -
            
            
            81,235
            
            
            (81,235
            )
            
            -100
            %Cost
                of Sales
            
            
            -
            
            
            7,973
            
            
            (7,973
            )
            
            -100
            %Gross
                Margin
            
            
            -
            
            
            73,262
            
            
            (73,262
            )
            
            -100
            %Gross
                Margin%
            
            
            0
            %
            
            90
            %Shuffler
                SalesRevenue
            
            
            424,015
            
            
            1,077,230
            
            
            (653,215
            )
            
            -61
            %Cost
                of Sales
            
            
            441,274
            
            
            198,368
            
            
            242,906
            
            
            122
            %Gross
                Margin
            
            
            (17,260
            )
            
            878,862
            
            
            (896,122
            )
            
            -102
            %Gross
                Margin%
            
            
            -4
            %
            
            82
            %Shuffler
                RentalsRevenue
            
            
            178,462
            
            
            212,476
            
            
            (34,014
            )
            
            -16
            %Cost
                of Sales
            
            
            28,564
            
            
            386,780
            
            
            (358,216
            )
            
            -93
            %Gross
                Margin
            
            
            149,897
            
            
            (174,304
            )
            
            324,201
            
            
            -186
            %Gross
                Margin%
            
            
            84
            %
            
            -82
            %Deck
                CheckerRevenue
            
            
            1,103,410
            
            
            593,056
            
            
            510,354
            
            
            86
            %Cost
                of Sales
            
            
            322,244
            
            
            58,118
            
            
            264,126
            
            
            454
            %Gross
                Margin
            
            
            781,165
            
            
            534,938
            
            
            246,227
            
            
            46
            %Gross
                Margin%
            
            
            71
            %
            
            90
            %Deck
                Checker RentalsRevenue
            
            
            88,388
            
            
            203,965
            
            
            (115,578
            )
            
            -57
            %Cost
                of Sales
            
            
            13,869
            
            
            27,687
            
            
            (13,818
            )
            
            -50
            %Gross
                Margin
            
            
            74,518
            
            
            176,278
            
            
            (101,760
            )
            
            -58
            %Gross
                Margin%
            
            
            84
            %
            
            86
            %Casino
                ChipsRevenue
            
            
            1,252,618
            
            
            -
            
            
            1,252,618
            
            
            100
            %Cost
                of Sales
            
            
            700,289
            
            
            -
            
            
            700,289
            
            
            100
            %Gross
                Margin
            
            
            552,329
            
            
            -
            
            
            552,329
            
            
            100
            %Gross
                Margin%
            
            
            44
            %
            
            0
            %Non-gaming
                Product LineRevenue
            
            
            1,850,043
            
            
            -
            
            
            1,850,043
            
            
            100
            %Cost
                of Sales
            
            
            1,796,089
            
            
            -
            
            
            1,796,089
            
            
            100
            %Gross
                Margin
            
            
            53,954
            
            
            -
            
            
            53,954
            
            
            100
            %Gross
                Margin%
            
            
            3
            %
            
            0
            %OtherRevenue
            
            
            (144,272
            )
            
            (222,931
            )
            
            78,659
            
            
            -35
            %Cost
                of Sales
            
            
            896,149
            
            
            3,463,236
            
            
            (2,567,087
            )
            
            -74
            %Gross
                Margin
            
            
            (1,040,420
            )
            
            (3,686,167
            )
            
            2,645,747
            
            
            -72
            %Gross
                Margin%
            
            
            721
            %
            
            1654
            %TotalRevenue
            
            
            4,752,663
            
            
            1,945,031
            
            
            2,807,632
            
            
            144
            %Cost
                of Sales
            
            
            4,198,479
            
            
            4,142,162
            
            
            56,317
            
            
            1
            %Gross
                Margin
            
            
            554,184
            
            
            (2,197,131
            )
            
            2,751,315
            
            
            -125
            %Gross
                Margin%
            
            
            12
            %
            
            -113
            %





-15-




**SecureDrop
      Sales.** There
      were no system sales generated in the nine months ended September 30, 2006,
      due
      to the Company’s decision to discontinue this product line in September
      2005.




**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 in the first half of the 2006.
      Cost of sales increased 122% due to increased rollout costs of upgrades for
      the
      Random Plus and conversion kits for Poker One in the first half of the year.




**Shuffler
      Rentals.** Average
      rental revenue per unit dropped 15% during the nine months ended September
      30,
      2006 compared to the prior year period. Our average cost per unit dropped 13%
      reflecting the manufacturing savings from China. In addition, the number of
      rental units in the market was reduced due to a marketing program that converted
      rental units to sales.




**Deck
      Checker Sales.** The
      increase in Deck Checker sales resulted from increased demand primarily from
      Asian based casinos. A reduced selling price in addition to distributor
      discounts increased unit sales by 288% but also contributed to margin erosion
      of
      55% which was offset by material cost savings of 41% per unit .




**Deck
      Checker Rentals** .
      The
      decrease in Deck Checker rental revenue reflects the marketing program initiated
      in September 2005 to transition from rental contracts to sales contracts. This
      program resulted in decreasing rental units by 55%. Cost savings helped reduce
      the rental depreciation by 41%. ****




**Casino
      Chips.** RFID
      casino chips are a new product released in June 2006. Revenue continued to
      grow
      to $1,252,618 due to international sales. Gross margin was $552,329 or 44%.
      As
      we further automate our production methods, we expect to see improved margins
      over the next year. ****




**Non-gaming
      Product.** With the
      acquisition of Dolphin, there is additional revenue related to Dolphin’s
      automotive and medical lines of business. The lower than planned margins were
      caused by the production line preparation costs for non-gaming products
      mentioned above, which resulted in an average of three percent gross margins
      related to non-gaming.




-16-




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




**General
      and Administrative Expense**




For
      the
      nine months ended September 30, 2006, our general and administrative expenses
      were $7,037,662, or 2% less than the nine months ended September 30, 2005.
      Dolphin expenses accounted for $794,798 of the increase while stock option
      expense accounted for $837,000. This is offset by a decrease in legal and
      regulatory costs to defend the Shuffle Master, Inc. lawsuits and
      legal/regulatory issues pertaining to former senior management.




**Research
      and Development Expense**




For
      the
      nine months ended September 30, 2006, research and development expenses were
      $1,260,341, or 18% more than the nine months ended September 30, 2005. The
      increase in research and development expenses is due to the substantial
      completion in the fist half of 2006 of the new chip washer product line.




**Interest
      Expense**




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




**L** **IQUIDITY** **** **AND** **C** **APITAL** **R** **ESOURCES** ****




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




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




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




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




-17-




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 in May 2006. The balance of the proceeds was available to
      us
      for general working capital purposes.




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 **.**




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




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




**Net
      Cash Used In Investing Activities.** The net
      cash used in investing activities reported for the nine months ended September
      30, 2006 consisted of $(3,186,295) from the acquisition of intangible assets,
      acquisition of plant and equipment in China the cash portion of the
      consideration paid by us in the Dolphin acquisition.




**Net
      Cash Provided By Financing Activities.** Net cash
      provided by financing activities reported for the nine months ended September
      30, 2006 consisted primarily of $13,000,000 provided by the Bricoleur financing,
      $3.5 million proceeds from put agreement, $3,034,179 in the sale stock
      associated with options and warrants, $9,154,500 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.




-18-




**Off
      Balance Sheet Arrangements**




We
      do not
      have any off balance sheet arrangements.




**C** **RITICAL** **A** **CCOUNTING** **** **P** **OLICIES** **** **AND** **E** **STIMATES**


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 the sale of our casino chip and RFID casino chip products
      upon shipment against customer contracts or purchase orders.




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.




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 stored
      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.




***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.




-19-




***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.




**R** **ISK** **F** **ACTORS**




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




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




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




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




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




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***We
      may be unable to adequately protect our intellectual property
      rights*** .
      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.




***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;




-22-




·
            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 79% of revenue for the nine months ending
      September 30, 2006 compared to 20% in 2005. We believe the distributors that
      we
      have engaged are experienced and reputable; however, if we are unable to manage
      these relationships, our ability to generate revenue and profits in the non-U.S.
      market may be adversely affected. To the extent that we engage in direct sales
      outside the U.S., we have limited sales experience and history in foreign
      markets.




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




-23-




**I****TEM****3.**
              **C****ONTROLS********AND****P****ROCEDURES******


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




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




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




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




-24-


**PART
      II - OTHER INFORMATION**




**I** **TEM** **6. E** **XHIBITS** **.**


(a)  Exhibits .




10.1
            
            Alliance
                Agreement dated October 11, 2006 between the Compnay and Elixir Group
                Limited10.2
            
            Amended
                and Restated Sales Representative Agreement dated October 11, 2006
                between
                the Compnay and Elixir Group Limited10.3
            
            Securities
                Purchase Agreement dated October 11, 2006 between the Compnay and
                Elixir
                Group Limited31.1
            
            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).




-25-


**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.




**VENDINGDATAC****ORPORATION**
                (Registrant)Date: November
              14, 2006
            By:
            /s/
              Mark R. NewburgMark
              R. NewburgIts:
            President,
                Chief Executive Officer and Treasurer (Principal Executive
                Officer)




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




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