**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-KSB/A**

** **
| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                 |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                |
| ** ** | **For the  fiscal year ended December 31, 2005**                                                                                                                                                                                                                          |
| ** ** | ** **                                                                                                                                                                                                                                                                |
| **o**      | **TRANSITION REPORT UNDER SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                   |
| ** ** | ** **                                                                                                                                                                                                                                                                |
| ** ** | **For the transition period from                       to                ** |

 

**Commissionfile number**

**000-25855**

 

**Elixir Gaming Technologies, Inc.,**

(Name of small business issuer in its charter)

 

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

 

| **1120  Town Center Drive, Suite 260   Las Vegas, Nevada 89144** |
|------------------------------------------------------------------|
| (Address of principal executive offices, including zip code)     |
|                                                             |
| Issuer’s telephone  number: **(702) 733-7195**              |   |
|                                                             |   |
| Securities registered  under Section 12(b) of the Exchange Act:  |   |

 

| **Title of  each class**                                        | ** ** | **Name of  each exchange on which registered** |
|-----------------------------------------------------------------|------------|------------------------------------------------|
| **Common  Stock, $.001 par value**                              | ** ** | **American  Stock Exchange**                   |
| ** **                                                      | ** ** | ** **                                     |
| Securities  registered under Section 12(g) of the Exchange Act: |       |                                           |
|                                                            |
| **Common  Stock, $.001 par value**                              |
| (Title of each class)                                           |

 

Check whether theissuer is not required to file reports pursuant to Section 13 or 15(d) of theExchange Act. o

 

Check whether theissuer (1) filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes xNo o

 

Check if there isno disclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best of theregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB. x

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act) Yes o No x

 

State issuer’srevenues for its most recent fiscal year: **$2,238,746**

 

State theaggregate market value of voting stock held by non-affiliates computed byreference to the average bid and asked price of such common equity, as of aspecified date within the past 60 days. $21,526,916 ($2.25 per share as ofMarch 15, 2006)

 

State the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date. 19,015,540 shares as of March 15, 2006

 

Transitional Small Business Disclosure Format (check one): Yes oNo x

 

 

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**TABLE OF CONTENTS**

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

 

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**EXPLANATORYNOTE—RESTATEMENT OF FINANCIAL INFORMATION**

 

This Amendment No. 1on Form 10-KSB/A (“Amendment No. 1”) is being filed to effect arestatement of the previously issued consolidated financial statements ofElixir Gaming Technologies, Inc. formerly known as VendingData Corporation(either the “Company,” “we” or “our”) as of and for the year ended December 31,2005. The Company is restating its previously issued consolidated financialstatements to correct an error that resulted from the inadvertent failure to recorda financing fee expense of $5,834,299 in the fourth quarter of 2005 related tocertain warrants. Additionally, the Company determined that certain warrantsissued in the year ended December 31, 2003, should have been charged to expensein 2004. The Company has calculated the fair value of these warrants and therelated expense to be approximately $0.8 million. Accordingly, the Company hasmade the necessary adjustment to retained earnings as of January 1, 2005. Thetotal increase to our previously reported net loss resulting from theseadjustments was $5,834,299 for the year ended December 31, 2005.

 

In addition, the Companydetermined that approximately $4.7 million cash outflows from financingactivities were improperly classified as an adjustment to cash flows fromoperating activities in the statement of cash flows as originally presented for2005. The correction of this and other minor errors in the restated statementof cash flows had no effect on our previously reported starting or ending cashbalances. For further discussion regarding the restatement, see Note 2 to theconsolidated financial statements included in Item 8 of this Amendment. As aresult of the restatements set forth in this Amendment No. 1, our seniormanagement has reassessed the effectiveness of our disclosure controls andprocedures as of December 31, 2005, and Item 8A. of this Amendment No. 1 hasbeen revised to reflect their current assessment. The restatements have alsoimpacted our discussion of results of operations and financial condition, andItem 6 of this Amendment No. 1 has been revised to give effect to therestatements.

 

The remaining Itemscontained within this Amendment No. 1 to Annual Report on Form 10-KSB/Aconsist of all other Items originally contained in our Annual Report on Form10-KSB for the year ended December 31, 2005 in the form filed on March 31, 2006(“Original Filing”). This amended Annual Report on Form 10-KSB/A does notreflect events occurring after the filing of the Original Filing or modify orupdate those disclosures in any way other than as required to reflect theeffects of the restatement.

 

# **ThisAmendment amends and restates Item 6 of Part I and Items 7 and 8A ofPart II of the Original Filing to reflect the effects of the restatements.In addition, in accordance with Rule 12b-15 promulgated under theSecurities and Exchange Act of 1934, as amended, this Amendment also includesupdated certifications from our Chief Executive Officer and Chief FinancialOfficer as Exhibits 31.1, 31.2 and 32.1 and 32.2. In addition, this AmendmentNo. 1 contains an updated report of our independent registered accounting firmon the restated and other financial statements included herein and a newconsent (Exhibit 23.1).**

 

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# **PARTI**

# ** **

## **ITEM1. DESCRIPTION OF BUSINESS**

## ** **

**GENERAL**

 

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

 

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

 

•                  The Random Plus Shuffler, isthe next generation of shuffling device that is an updated version of ourpreviously offered Random Ejection Shuffler and the Continuous Random EjectionShuffler. The Random Plus Shuffler is capable of shuffling between one andeight decks of cards. The device also offers additional features such as theswitch in power from alternating current, or AC, to direct current, or DC,conversion to an external power supply, redesign of the cabinet, and theaddition of an external lever to adjust the shuffler for card thickness.

 

•                  The PokerOne Shuffler, ahigh-speed card-shuffler designed for use with single deck poker variationgames.

 

•                  High frequency RFID casinochip, a traditional casino chip imbedded with a RFID tag that allows casinos toidentify counterfeit casino chips and assist casinos in tracking table play.The chip will begin to be sold in 2006.

 

•                  The ChipWasher is a productthat washes and sanitizes gaming chips. This product is expected be availableby the second half of 2006.

 

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

 

We are headquartered in LasVegas, Nevada with manufacturing operations in Guangdong Province, China. Wemaintain our principal offices at 6830 Spencer Street, Las Vegas, Nevada 89119.Our telephone number and facsimile number are (702) 733-7195 and(702) 733-7197, respectively, and our website is www.vendingdata.com.Information contained in, or accessible through, our website does notconstitute part of this report.

 

Weown or have rights to certain trademarks that we use in connection with thesale of our products, including, but not limited to, the following: *VendingData*TM, *Deck Checker*TM, *Random Ejection*TM, *Random Plus*TMand *PokerOne*TM, *ChipWasher*TMand *DeckSetter*®. This report also makesreference to trademarks and trade names of other companies.

 

**RECENT DEVELOPMENTS**

 

OnMarch 29, 2006, we entered into an agreement to issue and sell our securedpromissory notes for aggregate gross proceeds of $7 million. These notes willbear interest at an annual rate of 7% and mature on March 31, 2011. We expectto issue these notes and receive the net offering proceeds in early April 2006.In connection with this debt financing, we also entered into a definitiveagreement 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. Thisagreement, sometimes referred to as equity line of credit, has a term of fiveyears and grants us a binding “put” right to sell our shares at a 20% discountto 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 addition, we

 

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have reached an agreement in principal toissue and sell an additional $6 million of our common stock at price of $2.50per share for a total of 2.4 million shares.

 

Thefinancings described in the preceding paragraph are conditioned upon theconcurrent pay off or conversion into common stock of all of our outstandingsenior secured convertible promissory notes. As of the date of this report, wehad approximately $11.6 million principal amount of senior secured convertiblepromissory notes outstanding. Of this amount, the holders of these notes areexpected to convert approximately $5.6 million in principal and interest intoshares of our common stock and we expect to pay off the remaining $6.0 millionoutstanding balance with a portion of the proceeds from the financingsdescribed above.

 

Inaddition to retiring our preexisting notes, we expect to use approximately $5million of the proceeds from the financings described above to pay down ourexisting line of credit. The balance of $7 million of proceeds would beavailable to us for general working capital purposes. We believe that we willhave sufficient funds to meet our working capital needs for the next 12 months.

 

OnOctober 1, 2005, we entered into a patent purchase agreement with WilliamWestmore Purton, an individual, Dolphin Products Pty Ltd, an Australiancorporation (“DPP”), and Dolphin Advanced Technologies Pty Ltd, an Australiancorporation (together with DPP, “Dolphin”), pursuant to which we agreed topurchase from Dolphin patents for certain microchip technology for use in thegaming industry (the “RFID Patents”). Pursuant to the purchase agreement, weagreed to purchase the RFID Patents in exchange for $750,000 in cash and theissuance to Mr. Purton of 1,000,000 shares of our common stock. The cashpurchase price was payable in installments, starting with a non-refundablepayment of $125,000 on the execution date of the purchase agreement. A secondinstallment of $125,000 was payable seven days after the date on which wenotified Dolphin that we are satisfied with the results of our due diligenceinvestigation. The remaining balance of $500,000 is payable in six (6) equalmonthly installments beginning on January 31, 2006. With the exception of theinitial payment, payment of the cash purchase price was subject to (i) oursatisfaction with our due diligence investigation, and (ii) the execution anddelivery by Dolphin and us of a licensing and manufacturing agreement pursuantto which we would license the Patents to Dolphin for the manufacture of casinogaming chips. The 1,000,000 common shares were issuable at the time the secondinstallment of the cash purchase price is paid.

 

OnFebruary 27, 2006, we entered into a licensing and manufacturing agreement withDolphin Products Pty Limited, of Melbourne, Australia. Pursuant to theagreement, Dolphin has received the exclusive rights to manufacture our RFIDchip product. The agreement has a term of 10 years. Our entry into thelicensing and manufacturing agreement with Dolphin effectively consummates ourpurchase of the RFID chip and related patents and technology from Dolphin andits affiliates, William Purton and Dolphin Advanced Technologies Pty Limited.We issued 1,000,000 common shares to Mr. Purton in February 2006.

 

**BUSINESS STRATEGY**

** **

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

 

•                  ***Development of product lines with limited competition.***Our ability to offer new products such asthe high frequency RFID casino chip and the ChipWasher, which provide us withtwo product lines with limited or no competition, respectively.

 

•                  ***Expansion intoadditional domestic and international gaming markets for our products.***The worldwide expansion of gaming shouldprovide new markets for our products, and we have targeted sales opportunitiesin these new markets in addition to our traditional established gaming markets.To help address these markets we continue to look at various distributionalchannels in the US and internationally.

 

•                  ***Implementation ofcost reduction initiatives to increase gross margins.***Through the implementation of costreduction initiatives, our management believes that the gross margins

 

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on our products will improve over time. We continue toreduce the cost of our component partsthrough the use of production facilities in China.

 

**TABLEGAME SUPPORT PRODUCTS**

** **

**Shuffler ProductLine**

** **

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

 

In 2005, we introduced our next generation shuffler,the RandomPlus Shuffler. This shuffler effectively replaced our previousgeneration shufflers, the Random Ejection Shuffler, and the Continuous RandomEjection Shuffler.

 

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

*** ***

***PokerOneShuffler***. Tocomplement our current shufflers, we developed the PokerOne shuffler, aspecialty game shuffler utilizing new and existing technology to provideshuffles of pre-dealt hands of cards for specialty poker games. Specialty gameshufflers are only used in single deck poker variation games such as CaribbeanStudTM, Let It RideTM, Pai Gow Poker and Three Card Poker. The PokerOne shuffleris designed to re-stack the deck and deliver the required number of cards (3, 5or 7 cards) into packets using a batch system method. We believe that thePokerOne shuffler will significantly raise the standard for specialty gameshufflers and will compete with the Ace® Shuffler, manufactured by ShuffleMaster, Inc. We have designed the PokerOne shuffler to:

*** ***

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

 

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

 

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

 

•            verify the actual cardsdealt to each player.

 

The PokerOne shuffler is designed for the activespecialty table game market where non-traditional card dealing is accepted. ThePokerOne shuffler shuffles and deals packets of cards to each player. As aresult of the characteristics of the PokerOne shuffler, we believe that we willbe able to provide substantially improved speed and security for our customersin the specialty table game market. As discussed elsewhere herein, our abilityto sell the PokerOne shuffler in the United States is currently the subject ofpending litigation. We began to install the PokerOne shuffler in foreignmarkets in 2004 and began installing in the US in the second quarter of 2005.

 

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***ShufflerMarket.***We estimatethat there are over 45,000 gaming tables worldwide and that the marketpenetration of installations of automatic shufflers is low. We estimate that ofthe automatic shufflers installed, most of these installations are on specialtygaming tables. Several companies have introduced automatic shufflers for thegeneral market, but for the most part, these efforts have been unsuccessful.

*** ***

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

 

•                  **Security.**We believe that our combination of patented computer and mechanicaltechnology safeguards against cheating schemes. The random ejection technologyused in all of our shuffler products produces a computer-generated, random anduntrackable shuffle, and the Continuous Random Ejection Shuffler technologyeliminates advantages achieved by knowledgeable players, as each card isavailable for the next round of play by producing “full” decks of continuouslyshuffled random cards. This has the added benefit of giving the casino a higherhold from the gaming table since the shuffler preserves the original odds ofeach game, which favor the casino.

 

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

 

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

 

***ShufflerInstallations***. As ofDecember 31, 2005, we had installed a net total of 683 units, representing thenumber of revenue generating shufflers installed at casinos through sale orrental agreements. Of the units installed as of December 31, 2005, 161 unitswere installed pursuant to rental agreements, and 522 units were sales. Interms of location, as of December 31, 2005, we have installed our shufflers in85 different gaming properties, including the MGM Grand in Detroit, Michigan;the Excalibur, the Luxor and the Venetian in Las Vegas, Nevada; the ViejasCasino in Alpine, California; the Great American Group, Washington; and theTreasure Island Resort & Casino in Red Wing, Minnesota.

*** ***

***Competition– Shufflers.***Competition inthe shuffler market is intense. The shuffler market is divided into twoseparate segments, traditional table game and specialty table games. ShuffleMaster, Inc. is the current market leader in both the traditional table gameand specialty table game markets. Our other competitors have a small collectivemarket share of the table game market. With respect to the traditional tablegame market segment, we compete with Shuffle Master, Inc., which markets theShuffle Master KingÔ, and the One2Six ShufflerÔ and Ten Stix, Inc., which markets the ProShuffler Shuffling System. Shuffle Master, Inc. also offers the ACE®, which iscurrently the only product in the specialty table game market.

*** ***

**The Deck Checker**

** **

The Deck Checker is a card security device thatspecifically scans playing cards to ensure an accurate count and verify thatall of the cards in a deck of cards are present. This innovative productconfirms the integrity of each card and will reject any non-conforming cards.The Deck Checker has multiple uses and can be used in the back of the house(casino support departments) to reduce labor costs by expediting theverification process of used cards, or it can be used in the front of the house(the casino

 

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floor) to ensure that all table games open withcomplete and accurate decks, reducing the amount of time it takes to open atable game, thereby increasing productivity. The Deck Checker allows the re-useof playing cards by providing a secure and reliable method of putting usedcards back into play, reducing card usage and the associated costs. Inaddition, the Deck Checker can scan from up to eight decks at a time, each deckin less than 15 seconds. The device is programmed for all standard playingcards, accommodates plastic, paper and plastic coated playing cards and isprogrammed with many standard card games.

 

The Deck Checker has an integrated management systemand an on-board storage/vault system. The integrated management system gives areport for every transaction to provide an audit trail. Further, the DeckChecker requires limited training time, as the machine prompts the userthroughout the entire checking process. Since the Deck Checker does not requireadditional staff, the Deck Checker is designed to increase efficiency andshorten the start-of-the-day and the end-of-the-day procedures.

 

We have been issued one patent each in the UnitedStates and South Africa and have five patent applications pending in the UnitedStates, Australia, Canada, China and Europe.

 

***Marketand Distribution of the DeckChecker.***We estimate that the potential market for the DeckChecker to be onemachine for every ten table games, or approximately 5,000 machines installedworldwide. In November 2002, we entered into a five-year agreement with TCSAces, an Australian subsidiary of Technical Casino Services, Ltd., a UnitedKingdom company that distributes gaming equipment worldwide, under which theDeckChecker will be distributed internationally. As of December 31, 2005, we had 96 units of the DeckChecker installed at 61 casinos, 86 of which were purchasedand 10 of which were rented.

*** ***

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

*** ***

**High frequencyRFID Casino Chip**

** **

Highfrequency 13.56 MHz RFID casino chips provide real-time data capability,enhanced chip security, player tracking and accounting management benefits forcasinos. The high frequency RFID chips enable casinos to read 1,000 chips in asecond and have a memory capacity of over 10,000 bits. In comparison to theexisting RFID casino chip technology (the 125KHz RFID chip), the 13.56 MHz chipis faster, has much greater memory capacity, is more economic to produce and,being more robust, it is more cost effective and easier to install. As anexample, if there are 100 chips in a particular player position - in the sametime that it takes the125 KHz technology to determine that there are 100 chipsin the field - the 13.56 MHz has not only determined the number of chips, ithas also interrogated 3 or 4 levels of security features within each chip,authenticated the unique identity of each individual chip, determined the valueof the bet and calculated the win or loss. The 13.56MHZ technology enables realtime monitoring of table games. The high frequency RFID chips providesignificant cost advantages over predecessor technology.

 

***Highfrequency RFID Market.***We estimate that the addressable chip market is at least 100 millioncasino chips worldwide. Initially the market will emerge from the build-out ofnew casinos in Macau. From 2006 through 2008 at least fifteen new casinos willbe built in Macau and it is expected that the new casinos will be migrating tothe new chip technology to thwart counterfeiters and to track casino chipmovement within the properties.

*** ***

***Competition- High frequency RFID Market***. There is limited competition in this market and a high barrier ofentry. There is currently one other provider of high frequency RFID casinochips.

*** ***

**ChipWasher**

** **

ChipWasher is a product thatwashes and sanitizes gaming chips. The build-up of oils and residue makes themsticky and difficult for dealers and players to handle, which makes for slowerplay. Casino surveillance and identification becomes increasingly difficult andplayers’ gaming experience is

 

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considerably lessened. Regular chip washingprevents this, but the traditional method of hand-washing is time-consuming andcostly. The ChipWasher is a practical and efficient means toward cleaner andmore hygienic casino chips. This product will be available by the second halfof 2006.

 

Benefits of this product include:

 

•                  Easeof operation inside the cage

 

•                  Cost-effectiveness

 

•                  Labor-savings

 

•                  Greaterspeed

 

•                  Environmentallyfriendly

 

•                  Enablesgreater surveillance identification

 

•                  Hygienic

 

•                  Ergonomicallydesigned

 

***ChipWasherMarket.***We estimatethat the addressable chip market is at least 100 million casino chipsworldwide. Currently, chips are either washed by hand or placed in commercialclothes washing machines. We estimate that interest in an easy to use, highspeed chip washer will be significant and will be furthered with theintroduction of high frequency RFID chips that will require better care andhandling than traditional chips.

*** ***

***Competition– ChipWasher.***There is noequipment specifically manufactured for the washing of casino chips in themarket today.

*** ***

**RESEARCH AND DEVELOPMENT**

** **

Some of our research and development operations weremoved to our China facilities at the end of 2004. The intention is to have ourChina facility as the mechanical and electronic engineering center and LasVegas as the architectural and software engineering center for research anddevelopment. We anticipate that the development and production of our productswill be more efficient as a result of this delineation. Our current researchand development emphasis is to improve our existing product lines, asdemonstrated by our completion of the PokerOne shuffler, and development of andfourth quarter 2005 sales of the RandomPlus Shuffler. We spent $1,394,006 in2005 and $1,423,096 in 2004 on research and development activities. We expectour research and development expenses to increase as we develop enhancements tothe current shuffler line, and develop new products for 2006 release includingthe ChipWasher.

 

**REGULATION AND LICENSING**

** **

**Overview**

** **

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

 

Wehave approvals that enable us to conduct our business in numerousjurisdictions, subject in each case to the conditions of the particularapprovals. These conditions may include limitations as to the type of productwe may sell or lease, as well as limitations on the type of facility (such asriverboats) and the territory within which we may operate (such as tribalnations). Jurisdictions in which we, and specific personnel where required)have authorizations with respect to some or all of our products and activitiesincluding Arizona, California, Colorado, Connecticut, Illinois, Indiana, Iowa,Kansas, Louisiana,

 

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Michigan, Missouri, Nevada, New Mexico, NewYork, North Dakota, Oregon, South Dakota, Washington, various Native Americantribes, as well as Argentina, Bahamas, Peru, Puerto Rico, Russia, Saskatchewan,Sweden and Vietnam.

 

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

 

During2005, we cooperated with certain state gaming authorities with respect to therequired re-licensing of our company in certain jurisdictions, as well as thelicensing of our new management team. We do not anticipate that this process willhave a material adverse effect on us. We continue to cooperate with all gamingregulatory agencies as necessary and applicable to maintain good standing inall jurisdictions in which we hold a license.

 

**AssociatedEquipment**

** **

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

 

**Gaming Devices andEquipment**

** **

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

 

**Regulation ofStockholders**

** **

Inmost jurisdictions, in which we are subject to regulatory oversight, beneficialowners of our voting securities or other securities may, at the discretion ofthe gaming regulatory authorities, be required to file an application for alicense, finding of suitability or other approval and in the process subjecthimself or herself to an investigation by those authorities. However, webelieve gaming regulatory authorities typically do not take such action unlessa beneficial owner owns more than 5% of our outstanding voting securities, atwhich time many jurisdictions require certain reports to be filed.

 

**Regulation andlicensing - Nevada**

** **

Themanufacture and distribution of associated equipment for use in Nevada aresubject to the Nevada Gaming Control Act and the regulations promulgated thereunder and various local ordinances and regulations.

 

Weare not required to register as a publicly traded corporation with the NevadaGaming Control Board because we do not fall within the definition of amanufacturer of a gaming device. The manufacture and distribution of associatedequipment for use in Nevada are subject to the Nevada Gaming Control Act andthe regulations promulgated there under and various local ordinances andregulations.

 

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Wedo not believe that we will be required by the Nevada Gaming Authorities toregister as a public company or obtain a finding of suitability in Nevada solong as we do not manufacture or sell “gaming devices” as defined by the NevadaGaming Control Act. Nevertheless, even though applications for the approval ofassociated equipment are subject to a less comprehensive approval process thatfocuses on approval of the equipment, the Nevada Gaming Control Board mayinvestigate us or any individual who has a material relationship to, ormaterial involvement with, us in order to determine whether such individual issuitable or should be licensed. Besides the company, our officers, directorsand certain key employees may be required to file applications and be licensedor found suitable by the Nevada Gaming Authorities. The Nevada GamingAuthorities may deny an application for licensing for any cause that they deemreasonable. A finding of suitability is comparable to licensing. Both requiresubmission of detailed personal and financial information, which is followed bya thorough investigation. The applicant for licensing or a finding ofsuitability must pay all costs of the investigation.

 

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

 

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

 

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

 

**OtherJurisdictions**

** **

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

 

*Mississippi*. Wehave applied to the Mississippi Gaming Commission for licensure as amanufacturer and distributor, and the investigation for our licensure ispending. Until this application is acted upon, we may not sell or service ourshuffler products in Mississippi. However, the Commission hasdetermined that our DeckCheckerTMproduct is a type of gaming associated equipment that may be sold inMississippi without our first receiving a license.

 

*New Jersey*. Upona satisfactory initial background investigation, in December 2005 we obtained asix-month transactional waiver approval from the New Jersey Commission toengage in specific transactions with certain New Jersey casinos pending theoutcome of the complete investigation of our

 

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license application. The transactional approvalprocess permits us to continue our business with New Jersey casinosuninterrupted upon the completion of the investigation. If licensure is notobtained before the expiration date of the transactional waiver approvals, wewill request transactional waiver approvals for an additional 6-month period.

 

*Louisiana*. In2005, the Louisiana State Police, Gaming Division, has given us a permit as agaming manufacturer, gaming supplier and non-gaming supplier with respect toall gaming except for Indian gaming. Louisiana investigated us with respect tocertain omissions in our gaming application relating to a certain formerofficer and directors. We received a Notice of Hearing Date before theLouisiana Gaming Control Board Administrative Hearing Office for January 24,2006. A settlement agreement and related motions executed by VendingData andthe Louisiana State Police, Gaming Division, and passed affirmatively upon bythe Administrative Law Judge retained by the Louisiana Gaming Control Board wasapproved, by the Louisiana Gaming Control Board at its February 21, 2006,meeting. The settlement allows VendingData to re-apply for a gaming license in30 months.

 

*Rincon Tribal Gaming Commission, California*. The Rincon Tribal Gaming Commission deniedour application in February 2005, primarily due to certain omissions containedin applications filed by a former senior executive officer. Our new managementteam is evaluating whether to file new applications with this jurisdiction.

 

**United States -Federal**

** **

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

 

**Application ofFuture or Additional Regulatory Requirements**

** **

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

 

**CUSTOMERSERVICE**

** **

In order tomaintain and expand the market presence of our products, we are committed toproviding a high level of customer service and support. We have centralizedmost of our service functions in Las Vegas, Nevada for the purposes of ensuringuniform repair of our products. As such, all major technical maintenance on our products is conducted by our localtechnicians. In this regard, we have provided our customers with additionalback-up products for use until we can return the serviced products to them.

 

With respect to routine maintenance, we employ threecustomer service representatives, ****four regional service managers and seven remote technicians (in additionto the technicians located in Las Vegas and Seattle Service Centers)****in various locations in the United States. Our service technicians regularlyvisit our customers to ensure our products are operating satisfactorily. In theevent that a customer service technician discovers a problem with one of ourproducts, the products are repaired in the

 

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field. Our service representatives also assist our customers intraining dealers and other casino employees how to use our products.

 

Our standard warranty period is 90 days for ourproducts. If a problem arises during the warranty period, we will fix theproduct at no cost. Certain components that we use to manufacture our productsare acquired from third parties, and may contain a longer warranty period. Forexample, the warranty period on all memory chips is ten years.

 

In addition, we maintain a training center in LasVegas to provide support and training to our distributors, who are responsiblefor servicing their own products.

 

****MARKETING AND DISTRIBUTION****

 

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

 

Currentsales tactic is to perform live demonstrations of our products to potentialcustomers. These demonstrations occur at both at the customer sites and at ourLas Vegas showroom. Our marketing department supports the sales effort throughdirect mail advertising and presentations at domestic and international tradeshows. Future marketing plans include more effective sales demonstration toolsthat take advantage of current computer, web, and video technologies.

 

Wesell and lease our products directly to gaming operators and indirectly throughdistributors. In general, except as described below, we depend on distributorsto sell our products internationally and on our sales team to sell our productsdomestically. Our distributors receive compensation through our volume discountpricing structure, which allows them to sell the products to their customers atmarket driven prices. In fiscal year 2005, our direct sales accounted for 79%of our revenue and distributor-based sales accounted for 21%.

 

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

 

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

 

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

 

On January 21, 2005, weentered into an exclusive five-year agreement with TCS JohnHuxley, or TCS, aU.K. based worldwide distributor of products to the gaming industry, to marketand distribute our shuffler products outside of the United States.

 

On February 28, 2006, weannounced that we had entered into a distribution agreement with a technologycompany based in Hong Kong and Macau. The distribution agreement has an initialthree year term, with rollover provisions, and provides exclusive distributionrights for our high frequency RFID casino chip for certain Southeast Asiacasino properties and non-exclusive distribution rights elsewhere in Asia.

 

****CUSTOMERS****

 

Our customers are domesticand international casino and gaming operators. Any adverse changes in thefinancial condition of our major customers, any loss of our major customers, orany meaningful reduction in the level of sales to any of these customers couldhave a materially adverse impact on the business.

 

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****COMPETITION****

 

**The gamingindustry is extremely competitive. Although we have assembled an experiencedmanagement team, which uses its knowledge of the gaming industry to tailor ourproducts and services to the needs of the gaming industry, we compete with manyestablished companies, which possess resources substantially greater than ours.Generally, we compete with other companies that are substantially larger, havemore substantial histories, backgrounds, experience and records of successfuloperations; greater financial, technical, marketing and other resources; moreemployees and more extensive facilities than we now have, or will have in theforeseeable future. The competitive pressures of the gaming industry willrequire us to invest in additional research and development. The constant needto update and innovate may result in increased costs for, and reduced marginson, our products and services**.

** **

**PRODUCTDEVELOPMENT, MANUFACTURING AND ASSEMBLY**

** **

Wemaintain a state-of-the-art facility for our product development and finalassembly divisions in Las Vegas as well as in XiaoLan, China. We have 12full-time engineers working in research and development of our shufflers, andenhancements to our DeckChecker product line. We acquired certain intellectual propertyfrom Dolphin Products Pty Ltd, in 2005, along with the patent on ChipWasherand the DeckSetter.

 

Wemanufacture all of our products except for the RFID chip, which is manufacturedon our behalf by Dolphin. With Dolphin’s assistance, we are now engaging in thecommercialization aspects of the RFID chip. In addition, we occasionally engageconsultants in research and development to complement our skill set in specificareas of engineering activities. We have 57 full-time personnel in finalassembly, installation and service. We hire contract personnel on a variedbasis depending upon production and installation volume.

 

**SUPPLIERS**

** **

Most components for theshufflers and our DeckChecker are sourced in China. Shuffler and DeckCheckerassembly is being done in China and final units are shipped to Las Vegas fordistribution to the North America and European markets. The manufacturing ofRFID casino chips is outsourced to Dolphin, who specializesin plastic injection molding and is located in Melbourne, Australia. Dolphinhas established a very strong working relationship with Magellan Technology PtyLtd in Sydney, Australia, who is the owner of the intellectual property forRFID technology. Dolphin is sourcing their RFID tags from Progressive GamingInternational Corp (“PGIC”).

 

**INTELLECTUALPROPERTY**

** **

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

 

Withrespect to our shufflers, the United States Patent and Trademark Office hasissued seven patents, Patent Nos. 5,584,483, 5,676,372, 6,019,368, 6,293,546,6,299,167, 6,698,756 and 6,719,288, in addition to two design patents, PatentNos. D488,193 and D490,481. These patents expire on dates betweenApril 2014 and April 2024. In addition, there are seven patentapplications on file with the United States Patent and Trademark Office. Ourshufflers have also been issued two patents in Australia and one patent inCanada. For additional information with respect to the ongoing litigationinvolving Shuffle Master, Inc., see “Item 3. Legal Proceedings.”

 

Withrespect to the Deck Checker, we acquired the rights to the Deck Checkerpursuant to a purchase and sale agreement dated December 23, 2002 in whichwe purchased all of the tangible and intangible assets related to the DeckChecker. The purchase price was $1,009,800, where $504,900 was

 

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payable upon the successful production of fivefully operational units of the Deck Checker and $500,000 was payable within sixmonths after the first payment is due. Thefirst payment in the amount of $504,900 was made on August 1, 2003 and thefinal $500,000 payment was made in February 2004. In addition to thepurchase of these assets, we purchased tooling, inventory and spare parts for$44,800. In exchange for the payments, the seller has agreed to transfer all ofthe tangible and intangible assets related to the DeckChecker and not tocompete with us for 60 months.

 

Withrespect to the ChipWasher and DeckSetter, we acquired the rights to thesepursuant to a patent and trade secret purchase agreement dated October 6, 2005in which we purchased all of the tangible and intangible assets related to theChipWasher and DeckSetter from Dolphin. The purchase price was $566,000, where$200,000 was payable upon execution of the contract and $366,000 was payableover twelve months after completion of due diligence. The first payment in the amount of $200,000 was completed on November 9,2005 and the first installment payment was initiated on February 9, 2006.In addition to the purchase of these assets, we agreed to pay Dolphin a 10%royalty fee on the gross profit of each unit.

 

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

 

Withrespect to the RFID chip technology, the United States Patent and TrademarkOffice have an application for Patent No. 6659875. The RFID chip technology hasbeen issued patents in Australia and the United Kingdom, and has a patentapplication in Canada.

 

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

 

**EMPLOYEES**

** **

As of December 31, 2005, we had approximately 43 full-timeemployees in the United States and 69 full-time employees in China. None of ouremployees are represented by a labor union, and we consider our relationshipswith our employees to be satisfactory. All U.S employees have signedconfidentiality agreements, which prohibit them from disclosing any of ourconfidential information at any time during or after their employment with us.We have also executed confidentiality and non-competition agreements with allkey China personnel.

 

**ITEM 1A.****                         ****RISKFACTORS**

 

Inthis report we make, and from time to time we otherwise make, written and oralstatements regarding our business and prospects, such as projections of futureperformance, statements of management’s plans and objectives, forecasts ofmarket trends, and other matters that are forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. Statements containing the words or phrases “willlikely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,”“projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,”“objective,” “should” or similar expressions identify

 

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forward-looking statements, which may appearin documents, reports, filings with the Securities and Exchange Commission,news releases, written or oral presentations made by officers or otherrepresentatives made by us to analysts, stockholders, investors, newsorganizations and others, and discussions with management and other of ourrepresentatives. For such statements, we claim the protection of the safeharbor for forward-looking statements contained in the Private SecuritiesLitigation Reform Act of 1995.

 

Ourfuture results, including results related to forward-looking statements,involve a number of risks and uncertainties. No assurance can be given that theresults reflected in any forward-looking statements will be achieved. Anyforward-looking statement speaks only as of the date on which such statement ismade. Our forward-looking statements are based upon assumptions that aresometimes based upon estimates, data, communications and other information fromsuppliers, government agencies and other sources that may be subject torevision. Except as required by law, we do not undertake any obligation toupdate or keep current either (i) any forward-looking statement to reflectevents or circumstances arising after the date of such statement, or (ii) theimportant factors that could cause our future results to differ materially fromhistorical results or trends, results anticipated or planned by us, or whichare reflected from time to time in any forward-looking statement.

 

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

 

***We may require additional funding in the future tocontinue to operate our business***.  As of December 31, 2005, we had a working capital deficitof ($1,637,021). We have enteredinto an agreement  to provide us with $18million additional debt and equity financing, and believe that this financing,in addition to our existing cash and cash equivalents together with cashgenerated by operations, will meet our working capital needs, capitalexpenditures, and commitments for at the next 12 months. In the event it is notsufficient, we will endeavor to raise additional required funds through variousfinancing sources, including the sale of our equity and debt securities and theprocurement of commercial debt financing. However, as result of our present level of debt and certain restrictions on ourability to incur additional indebtedness under our agreement, it is unlikely wewill be able to obtain additional debt-based capital, unless a significantportion of the proceeds are used to retire existing debt. There can beno guarantees that such funds will be available on commercially reasonable terms,if at all. If such financing is not available on satisfactory terms, we may beunable to expand or continue our business as desired and operating results maybe adversely affected. Any debt financing will increase expenses and must berepaid regardless of operating results and may involve restrictions limitingour operating flexibility. If we issue equity securities to raise additionalfunds, the following results may occur:

 

•                  the percentage ownership of our existingstockholders will be reduced;

 

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

 

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

 

***We have a history of significant operating losses andanticipate continued operating losses, and we may be unable to achieveprofitability.***We have ahistory of significant operating losses and anticipate continued operatinglosses for the foreseeable future. For the years ended December 31, 2004and 2005, we have incurred net losses of $9,538,200 and $23,401,529,respectively, and our operations have used $10,660,135 and $10,085,798 of cash,respectively. As of December 31, 2004 and 2005, we had accumulateddeficits of $54,120,549 and $78,352,071, respectively. Over the past severalyears, we have derived only limited revenues, which have been insufficient tosustain our operations. We may not generate sufficient revenue to sustain ouroperations. No independent organization has conducted market

 

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***research providing management withindependent assurance from which to estimate potential demand for our products.The overall market may not be receptive to our products, and we may notsuccessfully compete in the target market for our products.***

*** ***

***Our leased shufflers are moresusceptible to replacement by customers.***All of our leased shufflersare placed with customers under short-term lease arrangements, which, unlikelong-term leases or permanent sales of our products, can easily be terminatedby a customer. The manner in which such short-term leases are structured putsour shufflers at greater risk of replacement due to pressure from competitors,changes in economic conditions, obsolescence and declining popularity. Casinooperators may terminate the use of our products, and we may not be able tomaintain and expand the number of installed shufflers through enhancement ofexisting shufflers, introduction of new shufflers, customer service orotherwise.

 

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

 

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

 

•                  patents andpending patent applications;

 

•                  trade secret,copyright and trademark laws; and

 

•                  certainbuilt-in technical product features.

 

Patent, trade secret, copyright and trademark lawsprovide limited protection. The protections provided by laws governingintellectual property rights do not prevent our competitors from developing,independently, products similar or superior to our products and technologies.In addition, effective protection of copyrights, trade secrets, trademarks, andother proprietary rights may be unavailable or limited in certain foreigncountries. We may be unaware of certain non-publicly available patentapplications, which, if issued as patents, could relate to our services andproducts as currently designed or as we may modify them in the future. Legal orregulatory proceedings to enforce our patents, trademarks or copyrights couldbe costly, time consuming, and could divert the attention of management andtechnical personnel.

 

***Adverse results in current litigation could resultin substantial monetary damages and impacts on the manufacture and sale ofcertain of our shuffler products***. Shuffle Master, our principal competitor in the shuffler market,filed two lawsuits against us for patent infringement. The first suit has beensettled (see Part II - Item 1. Legal Proceedings).Concerning the secondlawsuit, we believe our position to be meritorious and we have reasonabledefenses to Shuffle Master’s claims. However, we cannot determine whether wewill ultimately prevail in the lawsuit, nor whether damages, if awarded, wouldsignificantly impact our ability to continue to manufacture and sell particularproducts within the United States and its territories. If we do not prevail, wewill be unable to sell the PokerOne shuffler products in the United Statesunless we change certain components used in the shuffler or obtain appropriatelicenses from Shuffle Master to use the playing card shuffler apparatus.

 

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

 

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

 

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

 

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

 

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

 

•                  resulting incostly litigation; and

 

•                  disruptingproduct sales and shipments.

 

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

 

***We rely on distributors in international markets, andour limited sales experience in foreign countries could cause us to lose sales.***Substantiallyall sales of our products outside the U.S. are achieved through distributorrelationships. We believe the distributors that we have engaged are experiencedand reputable; however, if we are unable to manage these relationships, ourability to generate revenue and profits in the non-U.S. market may be adverselyaffected. To the extent that we engage in direct sales outside the U.S., wehave limited sales experience and history in foreign markets.

*** ***

***Our management holds acontrolling interest in our common stock, giving our management the power tocontrol all matters submitted to our stockholders.***As of December31, 2006, our executive officers and members of our board beneficially ownapproximately 8,048,022 shares of common stock, or approximately 47% of theoutstanding shares of our common stock. Accordingly, these stockholders havethe power to control all matters requiring approval by our stockholders,including the election of directors and approval of mergers and othersignificant corporate transactions. This concentration of ownership may make itmore difficult for non-management stockholders to effect substantial changes inour company, and also has the effect of delaying, preventing or expediting, asthe case may be, a change in control of our company.

 

***Shares eligible for sale in the near future may cause the market pricefor our common stock to decline.***In addition to the number of shares registered onbehalf of investors who purchased the Senior Notes and excluding the sharesheld by our executive officers and directors, as of February 28, 2005, we haveapproximately 9,530,970 shares of common stock that are either freely tradablepursuant to Rule 144(k) of the Securities Act of 1933, or the Securities Act,or have previously been registered by us through a registration statement filedwith the SEC. As such, the future sale of a substantial number of shares of ourcommon stock in market transactions, or the perception that these sales couldoccur, may depress the market price for our common stock. These sales couldalso impair our ability to raise additional capital through the sale of ourequity securities in the future.

 

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

 

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## **ITEM2.**                             DESCRIPTIONOF PROPERTY

## ** **

Welease approximately 58,725 square feet for our headquarters at 6830 SpencerStreet, Las Vegas, Nevada 89119, which houses our corporate offices, includingsales and engineering departments, and warehouse space. The current leaserequires payments of approximately $55,254 per month and expires inJanuary 2007. We have an option for an additional term of five years.

 

Thelease for the Tukwila, Washington service center is for approximately 1,500square feet, requires monthly lease payments of $1,378 and expires inNovember 2006.

 

In August 2005, we leased office, manufacturing andwarehouse space within Xiaolan Town in Zhongshan City, Guangdong Province,China to accommodate our manufacturing requirements. The facilities consist ofover 47,000 square feet. The monthly lease payments are approximately $4,300per month, and the lease ends in August 2008.

 

## **ITEM3.**                             LEGALPROCEEDINGS

## ** **

OnJuly 12, 2005, we entered into a Settlement Agreement with Shuffle Master,Inc., with respect to a legal proceeding filed on March 27, 2002, by ShuffleMaster, Inc., against us in the United States District Court, District ofNevada (Case No. CV-S-02-0438-JCM-PAL). The complaint alleged, among otherthings, claims for patent infringement relating to two of Shuffle Master’spatents and requested treble damages and an injunction enjoining us frominfringing on such patents. The Shuffle Master patents at issue were UnitedStates patent numbers 6,325,373 and 6,068,258, regarding registering use of aplaying card shuffler apparatus and the displaying of “shuffler state”information. We denied the claims and asserted counterclaims against ShuffleMaster. Shortly before trial, the parties settled the matter. Pursuant to theSettlement Agreement, the parties agreed to dismiss their claims andcounter-claims in the particular action and Shuffle Master agreed not to bringany claims against us for the infringement of the above-referenced patents forpast or future use of the technology, with the exception of matters involvinginfringement of the following aspects of Patent No. 6,325,373: (i) a method ofrecovering from a card jam in an automatic card shuffler, as further describedin Claim 6 of Patent No. 6,325,373; and (ii) an automatic card shuffler with acard moving mechanism to clear card jams, as further described in Claim 7 ofPatent No. 6,325,373. In return, we paid Shuffle Master $400,000 on July 14,2005, and agree to pay an additional $400,000 on or before May 14, 2006.

 

OnOctober 5, 2004, Shuffle Master filed a separate patent infringement action inthe United States District Court, District of Nevada (Case No.CV-S-04-1373-JCM-LRL) claiming that the use, importation and offering for saleof our PokerOne shuffler infringed Shuffle Master’s United States Patent No.6,655,684. We responded by denying Shuffle Master’s claim of patentinfringement and requesting that the court enter a declaratory judgment ofnon-infringement. On November 30, 2004, however, the District Court grantedShuffle Master’s motion for preliminary injunction, prohibiting us from sellingour PokerOne shuffler in the United States pending resolution of the lawsuit.On March 4, 2005, the Federal Circuit Court of Appeals issued an order stayingthe injunction pending our appeal of the matter. On December 27, 2005, theFederal Circuit held that the District Court erred in failing to properlyconstrue Shuffle Master’s patent claims before preliminarily enjoining us andon this basis vacated the order. As a result, we may seek to recover fromShuffle Master any damages we suffered as a result of the wrongful injunction.With respect to the merits of Shuffle Master’s action, a Magistrate Judgeappointed by the District Court to conduct a Markman hearing to determine theproper construction of Shuffle Master’s patent claims recommended on September26, 2005 that the Court adopt the claim construction urged by us. TheMagistrate’s recommendation is not binding on the District Court and theDistrict Court’s ruling on interpretation of the claims is still pending.

 

## **ITEM4.**                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

## ** **

Not applicable.

 

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# **PART II**

# ** **

## **ITEM5.**                             MARKET FORCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS

## ** **

**Market Information**

** **

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

 

The following table setsforth the high and low closing sale price of our common stock, as reported bythe AMEX for each quarter during the past two fiscal years, except for thefirst quarter during 2004 during which our shares were traded on the OTCBulletin Board.. 

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

 
| **2004**         | ** ** | **Low** | ** ** | **High** | ** ** |
|------------------|------------|---------|------------|----------|------------|
| Fourth Quarter   |       | $       | 1.25       |     | $          | 3.60 |   |
| Third Quarter    |       | $       | 3.62       |     | $          | 4.75 |   |
| Second Quarter * |       | $       | 3.45       |     | $          | 4.50 |   |
| First Quarter*   |       | $       | 3.50       |     | $          | 4.00 |   |

 

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* Prices shown in the tableabove for the second quarter of 2004 are high and low closing sale prices asreported by AMEX after May 4, 2004 when our shares began trading on the AMEX.Prior to May 4, 2004, the high and low closing bid prices of our common stockon the OTC Bulletin Board during the second quarter of 2004 were $4.60 and$3.67, respectively. Prices shown for the first quarter of 2004 represent thehigh and low closing bid prices of our common stock on the OTC Bulletin Board.

 

**Shareholders**

 

As of March 15, 2006, we had outstanding 19,015,540shares of common stock, heldby approximately 289 stockholders of record.

 

**Dividend Policy**

** **

We have never declared or paid cash dividends on ourcommon stock. We presently intend to retain earnings to finance the operationand expansion of our business and do not anticipate declaring cash dividends inthe foreseeable future. Also, under the private placements of the Senior Notes,so long as any purchaser beneficially owns any of the Senior Notes, we willnot, without first obtaining the written approval of such purchasers,repurchase, redeem, or declare or pay any cash dividend or distribution on, anyshares of our capital stock.

 

**Recent Sales of Unregistered Securities**

 

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

 

20

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## ** **

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

## ** **

**OVERVIEW**

** **

Our strategy is to develop and delivercost-effective, customer-focused, niche products and services that increase thesecurity, productivity and profitability for the global gaming industry.. Our strategy involves marketing certainof our products for sale or lease, depending on the product, the geographiclocation of the customer and other factors. We rely on our internal sales staffand distributor relationships for the sale and rental of our products.

 

**RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2005 AND 2004**

** **

Forthe year ended December 31, 2005, we generated gross revenues of $3,100,738, or 10% less than the year ended December 31, 2004. Gross revenues wereoffset by sales returns and allowances of $739,263. Specific product line results for the yearended December 31, 2005 compared to the year ended December 31, 2004 areprovided below. Sales declined as a result of the discontinuation of theSecureDrop procduct line, disrupted sales of the PokerOne product line as aresult of a patent lawsuit, and delays in getting the RandomPlus throughjurisdictional reviews**.**

 

Forthe year ended December 31, 2005, our cost of sales was $7,754,066, or 117% more than the year ended December 31, 2004. This includes the impact of the inventorywrite down of $3,068,846. Cost of sales, not including in the write down, forthe year ended December 31, 2005, was $4,667,220, or 31% more than the year ended December 31, 2004. The cost of salesincrease can be attributed to the additional costs in deploying new versions ofthe PokerOne and the rollout of the RandomPlus. The manufacturing of productsin China is expected to continue to reduce cost of sales on a per unit basisthrough the first half of 2006 as we identify more efficiency and optimizevendors in China. These efforts should result in further improvements in grossmargin.

 

Thegross margin on revenue for the year ended December 31, 2005 was $(2,305,745), excluding the impact of the inventory writedown of $3,068,846, compared to the gross margin on revenue for the year endedDecember 31, 2004 of $(133,510)a decrease in gross margin of 1,627%.

 
| ** **            | ** ** | **Year Ended December 31,** | ** ** | **Percentage** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|----------------|------------|
| ** **            | ** ** | **2005**                                   | ** ** | **2004**       | ** ** | **change** | ** ** |
| **Secure  Drop**      |       |                                       |       |           |       |   |   |
| Revenue               |       | 130,335                                    |       | 144,999        |       | (10 | )% |
| Cost of Sales (1)     |       | 10,159                                     |       | 219,132        |       | (95 | )% |
| Gross Margin          |       | 120,177                                    |       | (74,133        | )          | (262 | )% |
|                  |       |                                       |       |           |       |   |   |
| **Shuffler Sales**    |       |                                       |       |           |       |   |   |
| Revenue               |       | 1,311,302                                  |       | 1,141,321      |       | 15 | % |
| Cost of Sales         |       | 902,707                                    |       | 230,874        |       | 291 | % |
| Gross Margin          |       | 408,596                                    |       | 910,447        |       | (55 | )% |
|                  |       |                                       |       |           |       |   |   |
| **Shuffler Rentals**  |       |                                       |       |           |       |   |   |
| Revenue               |       | 278,630                                    |       | 384,679        |       | (28 | )% |
| Cost of Sales         |       | 467,983                                    |       | 277,208        |       | 69 | % |
| Gross Margin          |       | (189,353                                   | )          | 107,471        |       | (276 | )% |
|                  |       |                                       |       |           |       |   |   |
| **DeckChecker Sales** |       |                                       |       |           |       |   |   |
| Revenue               |       | 860,847                                    |       | 1,362,364      |       | (37 | )% |
| Cost of Sales         |       | 193,088                                    |       | 193,170        |       | (0 | )% |
| Gross Margin          |       | 667,759                                    |       | 1,169,194      |       | (43 | )% |

 

21

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| ** **              | ** ** | **Year Ended December 31,** | ** ** | **Percentage** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|----------------|------------|
| ** **              | ** ** | **2005**                                   | ** ** | **2004**       | ** ** | **change** | ** ** |
| **DeckChecker Rentals** |       |                                       |       |           |       |   |   |
| Revenue                 |       | 241,005                                    |       | 232,035        |       | 4 | % |
| Cost of Sales           |       | 77,476                                     |       | 32,325         |       | 140 | % |
| Gross Margin            |       | 163,529                                    |       | 199,710        |       | (18 | )% |
| **Other**               |       |                                       |       |           |       |   |   |
| Revenue                 |       | (460,644                                   | )          | 171,162        |       | 63 | % |
| Cost of Sales(2)        |       | 3,015,807                                  |       | 2,617,361      |       | (15 | )% |
| Gross Margin            |       | (3,476,452                                 | )          | (2,446,199     | )          | (12 | )% |

 

(1)          Cost of Sales includes manufacturing costsincluding labor and overhead and does not include the $3,068,846 of inventorywrite down.

 

(2)   Includes cost to service and install machines,warranty costs and miscellaneous other costs. New shuffler installations incura higher cost of sales during the first year of introduction.

 

**SecureDrop Sales.**As a result of ourdecision to discontinue new installations for this product line****there were no system sales generated in the year ended December 31,2005. Our SecureDrop sales consisted of supply items for systems already inplace. The decrease in cost of sales to $10,159 reflects the reduced sales fromthe prior period.

 

**ShufflerSales.**Theincrease in sales was due, in part, to increased sales efforts related to ourshufflers and the addition of PokerOne to the product line during the yearended December 31,2005.****The increase in the cost ofshuffler****sales revenue was due primarily to theadditional placement of shufflers during the year ended December 31, 2005 versus the year ended December 31, 2004 and included shuffler servicecosts of $1,537,967 compared to $1,184,102 in shuffler service costs during theyear ended December 31, 2004. The cost of sales increase can be attributed to the additional costs indeploying new versions of the PokerOne and the rollout of the RandomPlus.

 

**ShufflerRentals.**Thedecrease in shuffler rental revenue reflects the reduced number of shufflersplaced on a rental basis as a result of the conversion of rental units topurchased units in 2004 and the failure to place additional shuffler units on arental basis. This failure was due, in part, to the production delays relatedto the introduction of new shuffler products, such as the RandomPlus shuffler.Cost of sales include shuffler rental depreciation of $467,983 during the yearended December 31,2005 compared to $277,208 during the prior year period. The cost ofsales increase can be attributed to the additional costs in deploying newversions of the PokerOne and the rollout of the RandomPlus.

 

**DeckChecker Sales.**Thedecrease in Deck Checker sales resulted primarily from reduced internationalsales.

 

**DeckChecker Rentals**. Thesmall increase in Deck Checker rental revenue resulted primarily from the placementof additional units. Cost of sales included rental depreciation of $77,476during the year ended December 31, 2005 compared to $32,325 during the prior yearperiod.

 

***Other Income***. The decrease in otherrevenues is due to product returns offset by the sale ofproducts that are not produced by us and sold only on a limited basis. We also hadsales returns and allowances of $739,263 for the year ended December31, 2005,compared to $0 during the prior year period.

*** ***

***Selling, General and Administrative Expenses***

 

For the year ended December31, 2005, our general and administrative expenses were $9,220,637 or 31% more than the year endedDecember 31, 2004. The increase in general and administrative expenses relatedprimarily to a $1,875,000 increase inlegal and regulatory costs due to defense of the patent lawsuits andlegal/regulatory issues pertaining to former senior management, a $638,000increase in payroll primarily related to the expensing of stock options, a$530,000 increase in consulting expenses related to the management change inMarch 2005, a $355,000 increase in depreciation related to the write

 

22

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off of leasehold improvements on the oldChina manufacturing facility, a $133,000 increase in advisory costs,a $64,000 increase in insurance expense, a $52,000 increase in trade shows, a$28,000increase in advertising, and a $1,416,000 decrease in other expenses(including a $25,000 increase inbad debt expense, a decrease of $1,153,160 in non-cost of salesservice related expenses, and $92,510 increase in  shipping), offset by a $52,000 decrease in  travel and entertainment, a $16,000 decreasein supplies, and a $14,500 decreasein  rent expenses.

 

***Research andDevelopment Expenses***

 

For the year ended December 31, 2005, research anddevelopment expenses were $1,394,006, or 2% less than the year ended December31, 2004.

 

***Interest Expense***

 

For the year ended December 31, 2005, we incurredinterest expenses of $1,577,996 or 69% more than the year ended December 31,2004. This increase was primarily attributable to the debt service related toour previously outstanding 9% senior secured notes, the currently outstanding10% senior secured convertible notes and the $5 million line of credit. Thedebt service on our 10% senior secured convertible notes will continue untilFebruary and March 2008 at which time the principal amount is due..

 

***Finance Fees***

 

For the year ended December 31, 2005, we incurredfinance fees of $5,834,299, or 100% more than the year ended December 31, 2004.This increase (after restatements effected in this Amendment) is due to theexpensing of warrants.

 

**FINANCIAL CONDITION**

 

As of December 31, 2005, we had a working capitaldeficit of $(1,637,021). Webelieve that we will need an at least $12 million of additional capital, inaddition to our existing cash and cash equivalents together with cash generatedby operations, in order to meet our working capital needs, capitalexpenditures, and commitments for at the next 12 months. We will endeavor toraise additional required funds through various financing sources, includingthe sale of our equity and debt securities and the procurement of commercialdebt financing. However, as result of our present level of debt and certainrestrictions on our ability to incur additional indebtedness under our SeniorNotes, 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 commerciallyreasonable terms, if at all. If such financing is not available on satisfactoryterms, we may be unable to expand or continue our business as desired andoperating results may be adversely affected.

 

***Liquidityand Capital Resources***

** **

As a result of our operatingloss and our use of cash, our net working capital has decreased from $4,511,094at December 31, 2004 to $(1,637,021) atDecember 31, 2005, as shown in the table below:

 

23

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| ** **                                                                                                   | ** **          | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|---------------------|-----------------------|------------|
| ** **                                                                                                   | ** **          | **2005**              | ** ** | **2004** | ** ** |
| **Current Assets**                                                                                           | ** **          | ** **            | ** ** | ** ** | ** ** |
|                                                                                                         |                |                  |       |   |   |
| Cash and cash equivalents                                                                                    |                | $                     | 935,243    |   | $ | 924,802 |   |
| Current portion of accounts receivable, trade, net  of allowance for uncollectibles of $276,420 and $125,530 |                | 1,550,559             |       | 1,596,017 |   |
| Due from affiliate                                                                                           |                | 4,098                 |       | 25,000 |   |
| Other receivables                                                                                            |                | 113,557               |       | 121,969 |   |
| Inventories                                                                                                  |                | 3,045,334             |       | 6,124,171 |   |
| Total current assets                                                                                         |                | 5,648,791             |       | 8,791,959 |   |
|                                                                                                         |                |                  |       |   |   |
| Current portion of leases payable                                                                            |                | 471,269               |       | 1,941,445 |   |
| Accounts payable                                                                                             |                | 1,836,234             |       | 1,240,676 |   |
| Accrued expenses                                                                                             |                | 794,203               |       | 427,199 |   |
| Deferred revenues, current portion                                                                           |                | 52,248                |       | 239,680 |   |
| Short-term debt                                                                                              |                | 4,050,000             |       | 238,250 |   |
| Customer deposits                                                                                            |                | 81,858                |       | 193,615 |   |
| Total current liabilities                                                                                    |                | 7,285,812             |       | 4,280,865 |   |
|                                                                                                         |                |                  |       |   |   |
|                                                                                                         | Net working capital |                  | $          | (1,637,021 | ) | $ | 4,511,094 |   |
|                                                                                                              |                     |                       |            |  |  |  |  |  |

 

***Sources of Capital***

*** ***

During the years ended December 31, 2005 and 2004, oursources of capital included a placement of our common stock; equipmentfinancing from a third party, short-term notes from stockholders, convertibledebentures and other private sources of capital.

 

Since 2003, we have entered into lease financingagreements with Central Leasing on a $3,000,000 revolving facility. In 2004, wesold and leased back most of our furniture, equipment, tooling and shufflersheld for rent. In connection with the sale and leaseback, we received saleproceeds of $723,839 and paid $2,042,946 of lease payments for the year endedDecember 31, 2004 related to 2004 and prior year leases, and receivedproceeds of $0 and paid $2,129,658 of lease payments for the year endedDecember 31, 2005, related to 2005 and prior year leases. As ofDecember 31, 2005, we had outstanding equipment financing of $893,244.These equipment leases have terms of 36 to 39 months and were not recorded assales because each of the leases included a mandatory buy-back provision.

 

With respect to our short-term debt, we repaid $32,493for the year ended December 31, 2004. As of December 31, 2005, we hadoutstanding short-term loans in the aggregate amount of $4,050,000. Neither ourprincipal stockholder nor our directors are obligated to provide additionalfinancing to us and our principal stockholder and directors are free to declineto fund additional financings to us at any time. In such event and in theabsence of third party financing sources, we may have substantial difficultiesin raising additional financings.

 

In 2005, to fund our continuing operating cash flowdeficits, in addition to using the remaining cash we had on hand at the beginningof the year, we raised additional capital through private placements of our 10%senior secured convertible notes in February 2005 (the “February Senior Notes”)and our 10% senior secured convertible notes in March 2005 (the “March SeniorNotes” and together with the February Senior Notes, the “Senior Notes”).

 

•                                          On February 15, 2005, we completed aprivate placement of our February Senior Notes, which mature on February 15,2008. The February Senior Notes are secured by a first priority security interestin our assets. The February Senior Notes require semi-annual payments ofinterest only on August 1 and February 1 of each year, with the principal andany unpaid interest due at February 15, 2008. Any prepayments of the FebruarySenior Notes made prior to February 2007 require the payments of premiums thatdecline each year. Holders of the February Senior Notes have a one-time rightto convert up to 50% of

 

24

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the thenoutstanding principal of the February Senior Notes into shares of our commonstock, $.001 par value, at a rate $1.65 per share. Through the privateplacement we issued an aggregate of $10,000,000 in February Senior Notes, inreturn for exchanged notes in the aggregate principal amount of $3,250,000 andgross cash proceeds of $6,750,000.

 

•                                          On March 14, 2005, we completed anadditional $2 million private placement of our March Senior Notes, which matureon March 14, 2008. The March Senior Notes were issued on a *pari passu*basis with the February Senior Notes and, as a result, are secured by a firstpriority security interest in our assets. The March Senior Notes requiresemi-annual payments of interest only on September 1 and March 1 of each year,with the principal and any unpaid interest due at March 15, 2008. Anyprepayments of the March Senior Notes made prior to March 2007 require thepayments of premiums that decline each year. Holders of the March Senior Noteshave a one-time right to convert up to 50% of the then outstanding principal ofthe March Senior Notes into shares of our common stock, $.001 par value, at aconversion price of $1.65 per share.

 

•                                          On October 6, 2005, we negotiated a oneyear revolving credit facility in the amount of $5,000,000 and carrying aninterest rate of 9.0%. As of December 31, 2005, we had borrowed $4,000,000under the credit line.

 

To fund our continuing operating cash flow deficits, on March 29, 2006, we entered into anagreement to issue and sell our secured promissory notes for aggregate grossproceeds of $7 million. These notes will bear interest at an annual rate of 7%and mature on March 31, 2011. We expect to issue these notes and receive thenet offering proceeds in early April 2006. In connection with this debtfinancing, we also entered into a definitive agreement with the purchasers ofour notes whereby we may, at our sole option, require them to purchase up to$5 million of our common stock. This agreement, sometimes referred to asequity line of credit, 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 priceof our shares on the day of a drawdown, subject to a ceiling price of $3.50 pershare. In addition, we have reached an agreement in principal to issue and sellan additional $6 million of our common stock at price of $2.50 per share for atotal of 2.4 million shares.

 

Thefinancings described in the preceding paragraph are conditioned upon theconcurrent pay off or conversion into common stock of all of our outstandingsenior secured convertible promissory notes. As of the date of this report, wehad approximately $11.6 million principal amount of senior secured convertiblepromissory notes outstanding. Of this amount, the holders of these notes areexpected to convert approximately $5.6 million in principal and interest intoshares of our common stock and we expect to pay off the remaining $6.0 millionoutstanding balance with a portion of the proceeds from the financingsdescribed above.

 

Inaddition to retiring our preexisting notes, we expect to use approximately $5million of the proceeds from the financings described above to pay down ourexisting line of credit. The balance of $7 million of proceeds would beavailable to us for general working capital purposes. We believe that we willhave sufficient funds to meet our working capital needs for the next 12 months.

 

***Net Cash Used In Investing Activities****.*

 

The net cash used in investing activities reported for the year endedDecember 31, 2005 consisted primarily of $1,291,069 from the acquisition ofplant and equipment.

 

***Net Cash Provided By Financing Activities****.*

 

Net cash provided by financing activities reported for 2005, (afterrestatements effected in this Amendment) consisted of  $8,750,000 provided by the issuance of 10%senior secured convertible notes of $12,000,000 offset by the repayment of$3,250,000 of the 9% notes), proceeds from the sale of stock of $1,128,374,

 

25

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offset by the repayment ofequipment leases of $1,941,445, and acquisition of treasury stock of $846,820;and the one year revolving credit facility in the amount of $5,000,000, whichwe drew down to $4,000,000

 

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

 

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

 
| ** **                   | ** ** | **PAYMENTS DUE BY PERIOD** | ** **       |
|------------------------------|------------|-------------------------------------------|------------------|
| **CONTRACTUAL  OBLIGATIONS** | ** ** | **TOTAL**                                 | ** **       | **1 YEAR** | ** ** | **2-3 YEARS** | ** ** | **4-5 YEARS** | ** ** | **AFTER 5 YEARS** | ** ** |
| Debt Agreements         |       | $                                         |  15,704,500 |   | $ |  4,050,000 |   | $ |  11,654,500 |   | $ |  0 |   | $ |  0 |   |
| Capital Leases               |       | 893,244                                   |             | 471,269 |   | 421,975 |   | 0 |   | 0 |   |
| Operating Leases(1)          |       | —                                    |             | — |   | — |   | 0 |   | 0 |   |
|                         |       |                                      |             |   |   |   |   |   |   |   |   |
| **TOTAL**                    | ** ** | **$**                                     | **16,597,744**   | ** ** | **$** | **4,521,269** | ** ** | **$** | **12,076,475** | ** ** | **$** | **0** | ** ** | **$** | **0** | ** ** |

 

----

(1) Our only “off balance sheet arrangements”at December 31, 2005 were immaterial office equipment leases.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

** **

Following is a summary of what our management believesare the critical accounting policies related to our operations. The applicationof these policies, in some cases, requires management to make subjectivejudgments and estimates regarding the effect of matters that are inherentlyuncertain. See Note 1, “Description of Business and Significant AccountingPolicies,” to financial statements included in this annual report for a moredetailed discussion of our accounting policies. Except as described below, wedo not employ any critical accounting policies selected from among availablealternatives or that require the exercise of significant management judgment toapply, and we believe none of our estimates are so highly uncertain orsusceptible to change as to present a significant risk of a material impact onour financial condition or operating performance.

 

***Allowance for Doubtful Accounts.***

 

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

 

***Revenue Recognition.***

 

Werecognize revenue from the sale of our shuffler and Deck CheckerTM products uponshipment against valid customer contracts or purchase orders. Sales arerecognized immediately when shufflers that are rented are converted topurchases depending on the creditworthiness and payment history of the casinocompany since payment terms are from 20 to 48 months. We recognize revenue fromour sales to independent distributors at the time that the distributor takespossession of our product and title transfers to the buyer. The extendedwarranty and maintenance components that are part of long term sales contractsare unbundled and recognized as deferred revenue amortized over the remaininglife of the sales agreement after the initial 90–day warranty as required bythe Emerging Issues Task Force Issue No. 00–21, *RevenueArrangements with Multiple Deliverables*. The useful life of ourshufflers and Deck CheckersTM is five years with proper maintenance; the lifecan be extended with the replacement of component parts. If the customer doesnot possess the required creditworthiness or an established payment historywith us, we would then book the revenue as an installment sale and recognize itover time as payments are received. Revenue from shuffler rentals is recordedat the first of each month in accordance with rental contract terms. All rentalcontracts are cancelable upon 30–day written notice by

 

26

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thecustomer. Maintenance expense for rental units is recorded in the period it isincurred. Although sales are made with a right to return, returns are subjectto a claim of unacceptable performance. Sales returns and allowances arerecorded after returned goods are received and inspected. We provide currentlyfor estimated warranty repair costs associated with sales contracts. Althoughthere are no extended warranties offered for our products, we do provide formaintenance contracts that are billed and recognized on a monthly basis.

 

***Intangible Assets.***

 

Weamortize our intangible assets (patent and technology rights) on astraight-line basis over currently estimated useful lives of 10 years. Based onits assessment of the potential for product obsolescence and other impairmentfactors, we believe that the useful life of our patents and technology rightsequals the full term of the patent.

 

***Legal defense costs***

 

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

 

**RecentAccounting Pronouncements**

 

InDecember, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (Revised 2004), *Share BasedPayment* (“SFAS 123R”). SFAS 123R requires certain changes in the waycompensation cost related to share based employee compensation transactions isrecognized in the financial statements as compared to SFAS No. 123, *Accounting for Stock-Based Compensation*. The provisions ofSFAS 123R are effective for us as of January 1, 2006.

 

InMay 2005, the FASB issued SFAS No. 154*, Accounting Changes andError Corrections, a Replacement of**APB OpinionNo. 20 and SFAS No. 3*. SFAS No. 154 replaces APB Opinion No. 20, *Accounting**Changes* and SFAS No 3, *Reporting Accounting Changes in Interim Financial Statements*and changes the requirement for the accounting for and reporting of a change inaccounting principles. SFAS No. 154 applies to all voluntary changes inaccounting principles. It also applies to changes required by an accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions. When a pronouncement includes specifictransition provisions, those provisions should be followed. The provisions ofSFAS No. 154 will be effective for accounting changes made in fiscal yearbeginning after December 15, 2005. We have no present expectation to make anyaccounting changes in the foreseeable future that would be subject to SFAS No.154.

 

## **ITEM7.**                             FINANCIALSTATEMENTS

## ** **

Ourfinancial statements and related notes are contained on pages F-1 to F-15of this report.

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

## ** **

None.

 

## **ITEM8A.**                    CONTROLSAND PROCEDURES

## ** **

(a)                                  *Evaluation of DisclosureControls.*Inconnection with the preparation of this Amendment No. 1, our management, withthe participation of our chief executive officer and chief financial officer,conducted, as of September 2007, a re-evaluation of the effectiveness of ourdisclosure controls and procedures as of December 31, 2005. Disclosure controlsand procedures are controls and other procedures that are designed to ensurethat information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded,

 

27

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processed, summarized and reported within the time periods specified inthe SEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, as appropriate to allowtimely decisions regarding required disclosure. Based on their currentre-evaluation, our chief executive officer and chief financial officer haveconcluded that our disclosure controls and procedures were not effective as ofDecember 31, 2005, for the reasons described below.

 

In August 2007, we became aware of certain errors in reporting of ourfinancial statements for the year ended December 31, 2005, including errors inthe recording of warrant expenses and financing fees, along with an improperclassification in our statement of cash flows. For further discussion regardingthe errors, see Note 2 to the consolidated financial statements included inItem 8 of this Amendment No. 1.

 

In connection with the restatement of our financial statements as ofand for the year ended December 31, 2005, our September 2007 re-evaluation ofthe effectiveness of the design and operation of our disclosure controls andprocedures as of December 31, 2005, was performed under the supervision andwith the participation of our management, including our chief executive officerand chief financial officer. Based on that evaluation, our management hasconcluded that our disclosure controls and procedures were not effective as ofDecember 31, 2005, as a result of the improper accounting for warrants andfinancing fees and the misclassification in our 2005 cash flow statement, asdescribed above.

 

(b)*                                **Changes in InternalControl over Financial Reporting.*In the fourth quarter of 2005, we implementedimprovements to our internal controls and procedures to address weaknesses anddeficiencies identified by the then senior management. Specifically, wemodified our procedures for reconciling intercompany accounts, posting accountsreceivable in our accounting system, communicating between sales and accountingpersonnel, reviewing journal entries, authorizing purchase orders andintegrating our financial reporting databases.

 

Prior to the discovery inAugust 2007 of the misstatements referred to above, we had taken steps toremediate the deficiencies underlying these reporting errors, including thehiring of an additional member to our management team, with extensiveexperience in SEC reporting and US generally accepted accounting principles(GAAP), who will be responsible for providing added training and financialdiscipline to the financial reporting process. In addition, we subscribed to acomprehensive online accounting reference library and adopted use of itsdisclosure and other financial reporting checklists. We also added to ouraccounting staff, a certified public accountant formerly with a “Big Four”auditing firm and with significant experience in SEC reporting and GAAP. We arecontinuing to assess and strengthen our financial organization by seekingadditional qualified staff. Additionally, we are training other appropriatepersonnel in the required approach and documentation standard for each keyaccount analysis.

 

Other than the foregoinginitiatives, no change in our internal control over financial reportingoccurred during or with respect to the fourth quarter of 2005, that hasmaterially affected, or is reasonably likely to affect, our internal controlover financial reporting.

 

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

 

# **ITEM  8B. OTHER INFORMATION**

# ** **

# **Not applicable.**

 

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# **PART III**

# ** **

**ITEM 9.**     **DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT**

 

Thefollowing information is furnished with respect to each member of our board ofdirectors, including our principal executive officer who is also a director.Each member of our board of directors serves a one year term until hissuccessor is duly elected and appointed at our next annual meeting ofstockholders. There are no family relationships between or among any of ourdirectors.

 

**Executive Officers and Directors**

 
| **Name**                  | ** ** | **Age** | ** ** | **Position**                                      |
|---------------------------|------------|---------|------------|---------------------------------------------------|
| Mark  R. Newburg          |       | 51      |       | President  and CEO                                |
| Arnaldo F. Galassi        |       | 49      |       | Vice President and  Chief Financial

Officer      |
| Peter Zee                 |       | 59      |       | Vice President of  Engineering and

Manufacturing |
| Simon  Herbert            |       | 42      |       | Vice President of Sales                           |
| James  E. Crabbe          |       | 60      |       | Chairman  of the Board of Directors               |
| Ronald  O. Keil           |       | 73      |       | Director                                          |
| Bob  L. Smith             |       | 68      |       | Vice-Chairman  of the Board of Directors          |
| Maj.  Gen. Paul A. Harvey |       | 68      |       | Director                                          |
| Vincent  L. DiVito        |       | 46      |       | Director                                          |
| Robert  L. Miodonski      |       | 55      |       | Director                                          |

*** ***

***Mark R. Newburg***joined our board of directors as ExecutiveDirector in March 2005, was appointed Treasurer in April, 2005, and was namedPresident and CEO in October 2005. Mr. Newburg previously served as thepresident and chief executive officer and as a member of the board of directorsof VirtGame Corp. since August 2004. From March 2004 to November 2004,Mr. Newburg served as chief operating officer to Left Right MarketingTechnologies, an internet retailing start-up in Las Vegas. From March 2003 toMarch 2004, Mr. Newburg was president and chief executive officer ofC2Consulting Inc., a firm specializing in areas such as strategic planning,change management, organizational integration, international operations, andorganizational alignment. From July 2001 to March 2003, Mr. Newburg served aspresident of Aristocrat Technologies Inc, an Australia based designer, builderand marketer of proprietary software and hardware to the international gamingmarket. Previously, Mr. Newburg had a 20 year career at NCR, a $5.9billion provider of store automation, self-service, payment, anddata-warehousing solution. Mr. Newburg earned his MBA from the University ofDayton in June 1985, and dual undergraduate majors with a BS in both Accounting& Business Administration from the University of Findlay in June 1976.

 

***Arnaldo F. Galassi***is our Vice President and Chief Financial Officer. Mr. Galassi startedworking as a consultant with VendingData in March 2005 and joined the companyas an employee in October 2005. Mr. Galassi has over 20 years of high levelinternational finance and corporate treasury experience. He joined AT&T in1983 and rose to treasury director for Asia Pacific located in Hong Kong. In1996 he joined Lucent Technologies and established its treasury operations inAsia Pacific region. He then joined NCR Corporation and was promoted to NCR’sdirector of corporate finance after spending the previous five years living andworking in Singapore managing NCR’s Finance and Treasury Center (Singapore) andNCR’s treasury operations in Amsterdam and London. Most recently, Mr. Galassiwas the CFO of VirtGame Corp.

 

***Peter Zee*******is our Vice President of Engineering and Manufacturing. Mr. Zee startedworking as a consultant with VendingData in March 2005 and joined the companyas an employee in October 2005. Mr. Zee has extensive internationalmanufacturing, engineering, sales management, marketing, strategy

 

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and planning experience with NCR. Mr. Zee is credited with negotiatingthe 1997 manufacturing joint venture for NCR with the Chinese government andbuilt and operated NCR’s Greater China organization that achieved tremendousgrowth in sales and manufacturing volume. Mr. Zee retired from NCR in 2004after 34 years of service. After retirement, Mr. Zee joined Tech Elite Group asits CEO. Mr. Zee started working as a consultant with VendingData in March 2005and joined the company as an employee in October 2005.

 

***Simon Herbert*** is our Vice President of Sales and oversees international distributionpartnerships. Mr. Herbert started working for VendingData in July 2005. Mr.Herbert is a 25 year senior gaming industry executive who is credited withbuilding several multi-million dollar operations. Most notably, Mr. Herbertserved as CEO of TCS Group. During his 8-year tenure with TCS, Mr. Herbertconsolidated operations and forged a number of strategic relationships therebycreating one of the largest private global gaming supply companies.Subsequently, over a 9-month period, Mr. Herbert established VIP GamingSolutions where he was instrumental in creating a new global gaming supplycompany with 4 offices. Mr. Herbert has also served as director of BusinessDevelopment for Bell Fruit Services, Regional Director of MAM Leisure Ltd. andDivisional Director of Brent Walker Leisure.

 

***James E. Crabbe***became a member and Vice-Chairman of ourboard in May 2000 and was elected Chairman of our board in August 2001. Mr.Crabbe is currently engaged in the active management of his personal investmentportfolio. He spent 34 years in the money management business. In 1980, heco-founded the Crabbe-Huson Group, Inc., an investment management company, ofwhich he served as president, portfolio manager and analyst until hisretirement in 2000. Mr. Crabbe earned his bachelor’s degree from theUniversity of Oregon in 1967. He also serves on the board of directors ofViewpoint Corporation, a publicly traded software company.

 

***Ronald O. Keil***has been a member of our board since April1999 and is a member of our Audit Committee. Since March 1995, Mr. Keilhas served as Managing Partner of RJL Properties, Inc., which owned andoperated four hotels and a mini-storage facility all of which were sold between1995 and 1997. In addition, from October 1993 to January 1998, Mr. Keilowned a 142-room Holiday Inn in Idaho Falls and since 1999 has owned andoperated Keil’s, Inc., a chain of supermarkets in California. Mr. Keil isa founder and director of the Bank of Clark County, Oregon. He earned abachelor’s degree in Business Administration from Lewis and Clark College andhas completed graduate work towards a Master of Business Administration fromthe University of Oregon.

 

***Bob L. Smith***joined our board in May 1998 and served asChairman of our board from April 1999 until August 2001, when he becameVice-Chairman of our board and is also a member of our Audit Committee.Mr. Smith also serves as Chairman and Chief Executive Officer of VIP’sIndustries, Inc., a company co-founded by Mr. Smith in 1968 that overseesrestaurant, hotel and real estate development in five Western states.Mr. Smith serves on the Boards of Directors of Flying J., Inc., anintegrated oil company, and Regency of Oregon (formerly Blue Cross and BlueShield of Oregon), and previously served on the Boards of Directors of theCrabbe-Huson Funds, Inc., an investment management company, and Centennial Bank(now Umpqua Bank). Mr. Smith received a bachelor’s degree in BusinessAdministration from the University of Oregon in 1962.

 

***Major General Paul A. Harvey*** joined our board in October 2005 and hechairs our Compliance Committee. General Harvey spent 32 years on activeduty in the United States Air Force where he held numerous command positionsthroughout the United States, Europe, Africa and the Middle East. Following retirement,he was the Executive Director of the Mississippi Gaming Commission from 1993through 1998. General Harvey serves on the Board of Directors of the NationalCenter for Responsible Gaming and as an Outside Director on the Board ofRiviera Holdings Company, Inc., Las Vegas, NV, and as an Outside Director onthe Board of Progressive Gaming International Corp, Las Vegas, NV. GeneralHarvey was previously Chairman of the Board of VirtGame Corp.

 

***Vincent L. DiVito*******joined our board in October 2005 and hechairs our Audit Committee. Mr. DiVito is Vice President, Chief FinancialOfficer and Treasurer of Lonza, a Swiss-based life sciences

 

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chemical company headquartered in Allendale,New Jersey. Previously, Mr. DiVito was the Vice President and Chief FinancialOfficer of Algroup Wheaton, a global pharmaceutical and cosmetics packagingcompany. Mr. DiVito spent two years on the audit team of Ernst & Whinney(now Ernst & Young). Mr. DiVito is a certified public accountant andcertified management accountant. He is a member of the Board of Directors ofthe Riviera Hotel in Las Vegas, NV and was a member of the Board of Directorsof VirtGame Corporation.

 

***Robert L. Miodunski*******joined our board in October 2005 and he is amember of our Compliance Committee and the Audit Committee. Previously, Mr.Miodunski was president and CEO of Alliance Gaming Corporation from 1999through 2004. During his tenure he dramatically increased the value of theCompany, positioning it as the number two player in the gaming supply industryand one of only two providers of games, systems, and wide area progressives inboth Class I and II markets. Through a series of global acquisitions anddivestitures, Mr. Miodunski restructured and transformed Alliance Gaming from agaming conglomerate into a technology provider, successfully increased thecompany’s market capitalization from $15 million to a high of $1.7 billion, andachieved NYSE listing for the company in 2003. From 1994 until 2002, Mr.Miodunski served as president of United Coin Machine Company (UCMC), asubsidiary of Alliance Gaming, operating 7300 gaming devices in 600 locationsthroughout Nevada. During his tenure, UCMC increased revenues by 76 percent andEBITDA by 66 percent, achieving top operator position with 50 percent moregames under contract than the next largest competitor. Mr. Miodunski continuesto consult to Alliance Gaming’s Board of Directors and CEO through 2008.

 

**Board of Directors and Committees of the Board**

 

Ourbusiness affairs are conducted under the direction of our board of directors.The role of our board of directors is to effectively govern our affairs for thebenefit of our stockholders and, to the extent appropriate under governing law,of other constituencies, which include our employees, customers, suppliers andcreditors. Our board strives to ensure the success and continuity of ourbusiness through the selection of a qualified management team. It is alsoresponsible for ensuring that our activities are conducted in a responsibleethical manner. Our board of directors has three standing committees, an auditcommittee and a nominating committee and has recently formed a compensationcommittee that will replace the executive committee.

 

Ourboard of directors met 11 times in 2005. All of the incumbent directorsattended the meetings during the period for which they have been a director andthe meetings held by committees of the board of directors on which they serve,except Bob Smith who missed the September 21, 2005, Board of Directors meeting

 

***Audit Committee*****.**The audit committee is comprised ofMessrs. DiVito, Keil, Smith, and Miodonski. Mr. DiVito serves as theaudit committee chair. Our audit committee generally meets quarterly, and in2005, our audit committee held two meetings. As stated in the audit committeecharter, our audit committee has the responsibility of selecting the firm thatwill serve as our independent and registered public accounting firm, approvingand reviewing the scope and results of the audit and any non-audit servicesprovided by the independent and registered public accounting firm, and meetingwith our financial staff to review internal control, procedures and policies.

 

Wehave identified Mr DiVito as the audit committee financial expert. Mr DiVito isthe CFO of Lonza, a Swiss life sciences chemical company, and he is also acertified public accountant and a certified management accountant.

 

Themembers of our audit committee are independent, as independence for auditcommittee members is defined in Section 121A of the American Stock ExchangeCompany Guide. In addition, Messrs Keil, Smith and Miodonski meet thedefinition of “financially sophisticated” as defined in Section 121B of theAmerican Stock Exchange Company Guide.

 

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***Compliance Committee*****.**The compliance committee is comprised ofMessrs. Harvey, Miodonski, and Newburg. Mr. Harvey serves as thecompliance committee chair. Formed in late 2005, the compliance committee willmeet quarterly. As stated in the compliance plan, our compliance committee hasthe responsibility of identifying and evaluating situations or material eventsthat may impact public faith or the reputation and integrity of the Companywithin the gaming industry.

 

***Nominating Committee.*******In January 2004, our board of directorscreated a nominating committee and appointed Messrs. Keil and Smith toserve on the nominating committee. Mr. Smith serves as the nominatingcommittee chair. The nominating committee is responsible for assisting ourboard of directors with respect to the appropriate size and composition of ourboard and monitoring and making recommendations regarding the performance ofour board. In this regard, our nominating committee evaluates thequalifications of all proposed candidates for election to our board ofdirectors, including capability, availability to serve, conflicts of interestand other relevant factors.

 

In2005, our nominating committee held one meeting. The members of our nominatingcommittee are independent, as independence for directors is defined in Section121A of the American Stock Exchange Company Guide.

 

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

 

Rulesadopted by the SEC under Section 16(a) of the Securities Exchange Act of 1934,or the Exchange Act, require our officers and directors, and persons who ownmore than 10% of the issued and outstanding shares of our equity securities, tofile reports of their ownership, and changes in ownership, of such securitieswith the Securities and Exchange Commission on Forms 3, 4 or 5, as appropriate.Such persons are required by the regulations of the Securities and ExchangeCommission to furnish us with copies of all forms they file pursuant toSection 16(a).

 

Basedsolely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to usduring our most recent fiscal year, and any written representations provided tous, we believe that all of the officers, directors, and owners of more than tenpercent of the outstanding shares of our common stock complied with Section16(a) of the Exchange Act for the year ended December 31, 2005.

 

**Code of Ethics**

 

Wehave adopted a Code of Ethics that applies to our board of directors, chiefexecutive officer, chief financial officer, controller and any other individualserving in similar capacities. The Code of Ethics is designed to serve as thefoundation of our standards of behavior and to promote honest and ethicalconduct, proper disclosure of financial information in our periodic reports,and compliance with applicable laws, rules, and regulations by our directorsand senior officers who have operating and financial responsibilities. On April28, 2005, our board amended and restated our Code of Ethics so that it nowapplies to all directors, officers and employees. Our Code of Ethics is postedon the “Investors” section of our Internet web site athttp://www.vendingdata.com/investors/ethics.

 

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

 

**Summary Compensation Table**

 

Thefollowing table sets forth the compensation awarded to, earned by or paid to,our chief executive officer and our other executive officers earning in excessof $100,000 for services rendered in all capacities during fiscal years endedDecember 31, 2005, 2004 and 2003. We provide certain perquisites and otherpersonal benefits to some or all of our executives. The unreimbursedincremental cost to us of providing perquisites and other personal benefits didnot exceed, as to any of the executives for any year, the lesser of $50,000 or10% of the total salary and bonus paid to such executive for such year.

 

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| ** **                                 | ** ** | **Annual Compensation** | ** ** | **Long -Term  Compensation** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|----------------|------------|
| **Name and Principal  Position** | ** ** | **Year**                     | ** ** | **Salary  ($)**                   | ** ** | **Bonus  ($)** | ** ** | **Securities  Underlying  Options/SARs   (#)** | ** ** | **All Other  Compensation  ($)** | ** ** |
| Mark R. Newburg                            |       | 2005                         |       | 64,423                            |       | 75,000         |       | — |   | 150,000 |   |
| President and CEO                          |       | 2004                         |       | —                            |       | —         |       | — |   | — |   |
|                                       |       | 2003                         |       | —                            |       | —         |       | — |   | — |   |
|                                       |       |                         |       |                              |       |           |       |   |   |   |   |
| Steven J. Blad                             |       | 2005                         |       | 106,022                           |       | —         |       | — |   | 116,667 |   |
| Former President and CEO                   |       | 2004                         |       | 340,400                           |       | —         |       | — |   | — |   |
|                                       |       | 2003                         |       | 282,000                           |       | 7,800          |       | 500,000 |   | — |   |

 

OnMarch 25, 2005, Mr. Blad resigned as our Chief Executive Officer, President andas a member of our board of directors. Mr. Newburg was appointed to our boardof directors as Executive Director in March 2005 and was named President andChief Executive Officer in October 2005.

 

**Option Grants In Last Fiscal Year**

 

The following tablesummarizes option grants during the fiscal year ended December 31, 2005 to eachof the executive officers named in the Summary Compensation Table above.
| ** **                                | ** ** | **Individual Grants**                                  | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                | ** ** | ** **                                                  | ** ** |
| ** **                                | ** ** | **Number of Securities  Underlying Options** | ** ** | **Percent of Total  Options Granted  to Employees in** | ** ** | **Exercise or  Base Price** | ** ** | **Expiration** | ** ** |
| **Name**                                  | ** ** | **Granted (#)**                                             | ** ** | **Fiscal Year** | ** ** | **$(/Sh)** | ** ** | **Date** | ** ** |
| Mark R. Newburg,   President and CEO      |       | 300,000                                                     |       | 8.1 | % | $ | 1.49 |   | 1/31/2015 |   |
|                                      |       | 200,000                                                     |       | 5.4 | % | $ | 1.85 |   | (1 | ) |
|                                      |       | 750,000                                                     |       | 20.4 | % | $ | 1.34 |   | (2 | ) |
| Steven J. Blad   Former President and CEO |       | —                                                      |       | — |   |   | — |   | — |   |
|                                           |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |

 

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(1)          This option expires with respect to one-thirdof the 200,000 shares on each of April 28, 2008, April 28, 2009 April 28, 2010.

 

(2)          This option vests only upon a change incontrol and expires 10 years following such change in control.

 

**Aggregated Option/SAR Exercises In Last Fiscal Year andFY-End Option/SAR Values**

 

Thefollowing table sets forth information regarding exercises of stock options andstock appreciation rights, or SARs, during the fiscal year endedDecember 31, 2005 made to the named executive officers.

 
| ** **      | ** ** | **Shares  Acquired on  Exercise (#)** | ** ** | **Value  Realized  ($)** | ** ** | **Number of Securities  Underlying Unexercised  Options/SARs as of  December 31, 2005 (#)** | ** ** | **Value of Unexercised In-  the-Money Options as of  December 31, 2005 ($)** | ** ** |
|-----------------|------------|--------------------------------------------|------------|--------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| **Name**        | ** ** | ** **                                 | ** ** | **Exercisable**          | ** ** | **Unexercisable**                                                                                                                   | ** ** | **Exercisable**                                                                                                           | ** ** | **Unexercisable** | ** ** |
| Steven J. Blad  |       | —                                     |       | —                   |       | 0                                                                                                                                   |       | 0                                                                                                                         |       | 0 |   | $ | 0 |   |
| Mark R. Newburg |       | —                                     |       | —                   |       | 0                                                                                                                                   |       | 1,250,000 (1                                                                                                              | )          | 0 |   | $ | 1,822,000 |   |

 

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(1)750,000 of whichare contingent upon a change of control of the Company.

 

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** **

**Compensationof Directors**

 

Ournon-employee members of our board of directors receive an initial grant of1,000 options and an annual grant of 10,000 options on the date of the annualor special meeting of stockholders at which directors are elected. The exerciseprice shall be the then-current market price of our common stock. Our directorsare reimbursed for their out-of-pocket expenses related to their services asdirectors or meeting attendance. Members of our board of directors that areemployees do not receive compensation for their services as directors. Inaddition, upon joining the board, Directors DiVito, Harvey and Miodonski eachreceived options to purchase 100,000 shares of common stock at $1.34 per shareover a 3-year term pursuant to the Company’s 1999 Stock Option and Grant Plan;and subject to shareholder approval, each will receive a grant of 50,000 sharesof common stock to be accrued in increments of 10,000 shares over the next 5quarters and issued upon receipt of shareholder approval.

 

**Employment Agreements**

 

OnMarch 25, 2005, we entered into a resignation agreement with Steven J. Blad inwhich we permitted Mr. Blad to resign as our Chief Executive Officer, Presidentand as a member of our board of directors. In addition to the resignationagreement, we entered into a six-month consulting agreement with Mr. Blad forthe purposes of, among other things, transitioning the administration of ourmanufacturing facilities in China and assisting with certain internationalsales matters. The consulting agreement provided for six equal payments of$16,666.66 and additional payments of up to $100,000 upon the satisfaction ofcertain milestones related to our manufacturing facilities in China. Theconsulting agreement also provided for a commission of up to 2.5% of therevenue received from sales by Technical Casino Supplies Ltd., an affiliate ofTCSJohnHuxley, pursuant to the Distribution Agreement dated January 21, 2005.The consulting agreement was terminated in advance of the six-month term inJuly 2005.

 

OnFebruary 4, 2005, we entered into a consulting agreement with Mark Newburgthrough which Mr. Newburg provided us with detailed independent analysis of ouroperational matters. Pursuant to the consulting agreement, we agreed to providean initial payment of $20,000, provide monthly compensation of $10,000beginning on March 1, 2005, $20,000 monthly effective April 1, 2005, and issuedoptions to purchase 300,000 shares of common stock at an exercise price of$1.49 per share. Although Mr. Newburg was appointed to our board of directorsas Executive Director on March 25, 2005 to oversee all aspects of ouroperations, Mr. Newburg continued to be compensated pursuant to the terms ofthis consulting agreement until he entered into a formal employment agreementin September 2005. On April 28, 2005, our Board of Directors, without Mr.Newburg participating, granted to Mr. Newburg an additional option to purchase200,000 shares of our common stock at an exercise price of $1.85 per share. On September 29, 2005 we entered into a twoyear employment agreement with Mr Newburg. Terms of the agreement provide foran annual salary of $250,000, a signing bonus of $75,000 split in two equalpayments to be made on the signing of the employment agreement and on December15, 2005, and 750,000 stock options priced at $1.34 to be issued on any changeof control. Mr Newburg is also eligible for annual bonuses of up to 50% of hissalary provided certain performance milestones are met.

 

OnMarch 1, 2005, we entered into a consulting agreement with Arnaldo F. Galassithrough which Mr. Galassi provided us with financial analysis of ouroperational matters. Pursuant to the consulting agreement, we agreed to providemonthly compensation of $5,000 beginning on March 1, 2005 and issued options topurchase 100,000 shares of common stock at an exercise price of $1.92 pershare. On September 29, 2005 we entered into a two year employmentagreement with Mr. Galassi to be the Company’s vice president and chieffinancial officer. Terms of the agreement provide for an annual salary of$150,000, and 150,000 stock options priced at $1.34 to be issued on any changeof control. Mr. Galassi is also eligible for an annual bonus of up to 50% ofhis salary provided certain performance milestones are met.

 

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

 

**Security Ownership of Certain Beneficial Owners andManagement**

 

Thetable below sets forth the beneficial ownership of our common stock, as ofMarch_30, 2006, by:

 

•                  All of our directors and executive officers,individually;

 

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

 

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

 

Thebeneficial ownership of each person was calculated based on 17,035,216 sharesof our common stock outstanding as of December 31, 2005, according to therecord ownership listings as of that date and the verifications we solicitedand received from each director and executive officer. The SEC has defined “beneficialownership” to mean more than ownership in the usual sense. For example, aperson has beneficial ownership of a share not only if he owns it in the usualsense, but also if he has the power to vote, sell or otherwise dispose of theshare. Beneficial ownership also includes the number of shares that a personhas the right to acquire within 60 days of December 31, 2005 pursuant to theexercise of options or warrants or the conversion of notes, debentures or otherindebtedness, but excludes stock appreciation rights. Two or more persons mightcount as beneficial owners of the same share. Unless otherwise noted, theaddress of the following persons listed below is c/o VendingData Corporation,6830 Spencer Street, Las Vegas, Nevada 89119.

 
| **Name of Director or Executive Officer**                                                | ** ** | **Shares(1)** | ** ** | **Percentage** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| James E. Crabbe                                                                                                   |       | 7,105,073     | (2)        | 41.71          | %          |
| Bob L. Smith                                                                                                      |       | 545,962       | (3)        | 3.20           | %          |
| Ronald O. Keil                                                                                                    |       | 253,654       | (4)        | 1.49           | %          |
| Paul A. Harvey                                                                                                    |       | 0             |       | —         |       |
| Vincent L. DiVito                                                                                                 |       | 0             |       | —         |       |
| Robert L. Miodonski                                                                                               |       | 0             |       | —         |       |
| Mark R. Newburg                                                                                                   |       | 108,333       | (5)        | 0.64           | %          |
| Arnaldo F. Galassi                                                                                                |       | 35,000        | (6)        | 0.21           | %          |
| Peter Zee                                                                                                         |       | 34,000        | (5)        | 0.21           | %          |
| Simon  Herbert                                                                                                    |       | 0             |       | —         |       |
| All directors and executive officers as a  group (10 persons)                                                |       | 8,048,022     | (7)        | 47.24          | %          |
|                                                                                                              |       |          |       |           |       |
| **Name and Address of 5% Holder**                                                                                 |       |          |       |           |       |
| Leonid  Frenkel   c/o Triage Capital LF Group, LLC   401 City Avenue, Suite 800   Bala Cynwyd, Pennsylvania 19004 |       | 3,736,186     | (8)        | 21.93          | %          |
| LC Capital  Master Fund LP   c/o Lampe Conway & Co., LLC   680 5th Avenue, Suite 1201   New York, NY 10019    |       | 3,057,169     | (9)        | 17.95          | %          |

 

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* Denotes less than 1%.

 

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

 

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(2) Includes 4,574,066 shares held directlyby Mr. Crabbe, 70,600 shares issuable upon the exercise of stock optionsand 2,460,407 shares held by Mr. Crabbe, as Trustee of the James E. CrabbeRevocable Trust. Mr. Crabbe disclaims any ownership of any shares of commonstock beneficially owned by Phileo Foundation, a charitable foundation of whichMr. Crabbe is a trustee and president, or by Yvonne M. Huson, or herrelated trusts, for which Mr. Crabbe formerly held voting power.

 

(3) Includes 164,012 shares held directly byMr. Smith, 232,162 shares held by VIP’s Industries, Inc., 67,288 sharesheld by I.C.D. and 82,000 shares issuable upon the exercise of stock options.

 

(4) Includes 182,654 shares held directly by Mr. Keil, 71,000shares issuable upon the exercise of stock options.

 

(5) Includes 108,333 shares issuable upon the exercise of stockoptions.

 

(6)Includes 1,000 shares held directly by Mr. Galassi and34,000 shares issuable upon the exercise of stock options.

 

(7)Includes 7,682,089 shares issued directly, 365,933shares issuable upon the exercise of stock options.

 

(8) Based on a Form 3 filed on February8, 2006 and information provided, includes shares beneficially owned by TriageOffshore Fund, Ltd. issuable upon the conversion of notes into 1,061,363 sharesand the exercise of warrants into 697,021 shares; shares beneficially owned byTriage Capital Management B LP issuable upon the conversion of notes into128,029 shares and the exercise of warrants into 964,688 shares; sharesbeneficially owned by Triage Capital Management LP issuable upon the conversionof notes into 98,484 shares and the exercise of warrants into 700,844 shares;and shares beneficially owned by Periscope Partners LP issuable upon theconversion of notes into 75,757 shares and the exercise of warrants into 10,000shares.

 

(9) Based on information provided, includes212,321 shares issued directly, 1,860,000 shares issuable upon the exercise ofwarrants and 984,848 shares issuable upon the conversion of convertible notes.

 

**Equity Compensation Plan Information**

 

Wehave two stock options plans, the Amended and Restated 1999 Stock Option Planand the Amended and Restated 1999 Directors’ Stock Option Plan, through which5,000,000 shares and 300,000 shares are authorized, respectively. Pursuant toour stock options plans, as of December 31, 2005, there were options outstandingto purchase 4,116,972 shares of our common stock with a weighted averageexercise price per share of $2.12 and options remaining to purchase 1,183,028shares of our common stock.

 

Thefollowing table sets forth certain information as of December 31, 2005about our equity compensation plans under which our equity securities areauthorized for issuance.

 
| ** **                                                  | ** ** | **(a)**                                                                                                                                              | ** ** | **(b)**                                                                                                           | ** ** | **(c)**                                                                                                                                                                                                          | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | **Number of securities  to be issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighed-average  exercise price of  outstanding  options, warrants  and notes rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
| Equity compensation plans approved by  security holders     |       | 12,936,995                                                                                                                                           |       | $                                                                                                                 | 1.85       |                                                                                                                                                                                                             | 1,183,028  |   |
|                                                        |       |                                                                                                                                                 |       |                                                                                                              |       |                                                                                                                                                                                                             |       |   |
| Equity compensation plans not approved by  security holders |       | —                                                                                                                                               |       | —                                                                                                            |       | —                                                                                                                                                                                                           |       |
| **Total**                                                   |       | 12,936,995                                                                                                                                           |       | $                                                                                                                 | 1.85       |                                                                                                                                                                                                             | 1,183,028  |   |

 

Thefirst column reflects outstanding stock options to purchase 3,751,772 sharesand 365,200 shares of common stock pursuant to our Amended and Restated 1999Stock Option Plan and our Amended and Restated 1999 Directors’ Stock OptionPlan, respectively, which have been approved by our stockholders.

 

Thethird column reflects 1,248,228 shares remaining for issuance under our Amendedand Restated 1999 Stock Option Plan and a deficit of 65,200 shares availableunder our Amended and Restated 1999 Directors’ Stock Option Plan.

 

36

----

 

**ITEM 12.****CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

 

**Transaction Review**

 

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

 

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

 

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

 

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

 

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

 

**Private Placement**

 

Throughour private placement of 10% senior secured convertible notes in February 2005and March 2005 in the aggregate principal amount of $12,000,000, we receivedsubscriptions from and issued notes to LC Capital Master Fund LP and affiliatesof Leonid Frenkel. Each note provides for the one-time right to convert up toone-half of the outstanding principal owed on the note into shares of commonstock at a rate of $1.65 per share. The following table identifies the notesissued to LC Capital Master Fund LP and affiliates of Leonid Frenkel and themaximum number of shares issuable under such notes.

 
| **Name**                        | ** ** | **Amount of Note  ($)** | ** ** | **Conversion  Shares  (Maximum)** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| LC Capital Master Fund LP       |       | 1,500,000                         |       | 454,545                           |       |
| LC Capital Master Fund LP       |       | 1,750,000                         |       | 530,303                           |       |
| Triage Capital Management B, LP |       | 422,500                           |       | 128,029                           |       |
| Triage Capital Management LP    |       | 325,000                           |       | 98,484                            |       |
| Triage Offshore Fund Ltd        |       | 3,502,500                         |       | 1,061,363                         |       |
| Periscope Partners LP           |       | 250,000                           |       | 75,757                            |       |

 

 

Therights and obligations of the subscribers of our 10% senior secured convertiblenotes in February 2005 and March 2005 are governed by a collateral agentagreement, security agreement and intercreditor agreement. For additional information,see our Current Reports on Form 8-K filed on February 15, 2005 and March 16,2005.

 

37

----

 

**Transactions Involving Leonid Frenkel and his Affiliates**

 

Throughthe filing of a Schedule 13G on October 1, 2004, Triage Management L.P. andLeonid Frenkel first reported their beneficial ownership of more than 5% ouroutstanding shares of common stock. In addition to the subscription of 10%senior secured convertible notes described above, we entered into a repurchaseagreement with Leonid Frenkel, Triage Capital Management B, LP, Triage CapitalManagement LP, Triage Offshore Fund Ltd and Periscope Partners LP whereby werepurchased an aggregate of 448,053 shares of common stock in exchange forwarrants to purchase an aggregate of 448,053 shares of common stock with anexercise price of $.01 per share. The repurchased shares have been classifiedas treasury shares. For additional information, see our Current Report on Form8-K filed on April 14, 2005.

 

**Securities and Exchange Commission Position on CertainIndemnification**

 

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

 

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

 

**Indemnification Agreements**

 

InJune 2003, July 2003, July 2005, and November 2005 we entered intoindemnification agreements with members of our board of directors and certainof significant and other employees in which we agreed to hold harmless andindemnify such directors, officers and employees to the fullest extentauthorized under Nevada law, and to pay any and all related expenses reasonablyincurred by the indemnitee. The relevant members of our board of directors areJames E. Crabbe, Ronald O. Keil, Mark R. Newburg Bob L. Smith, Vincent L.DiVito, Paul A. Harvey and Robert L. Miodonski. The relevant significant andother employees are:  D. DeanBarnett, Vice President of Sales; Joseph D. Corradino, Director of Sales/Table Games; Kenneth R.Dickinson, Vice President of Engineering; and Robert G. Pietrosanto, VicePresident of Sales. In addition, Indemnification Agreements are being processedfor Arnaldo F. Galassi, Secretary and Chief Financial Officer; Simon B.Herbert, Vice President of  InternationalSales; and Peter Zee, Senior Vice President of Engineering and Production.

 

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

 

The exhibits to this amended Annual Report on Form 10-KSB/A are listedin the Exhibit Index contained at the end of this report. The Exhibit Indexindicates each management contract or compensatory plan or arrangement requiredto be filed as an exhibit to this amended Annual Report on Form 10-KSB/A.

 

38

----

 

**ITEM 14.****PRINCIPAL ACCOUNTANTS’ FEES AND SERVICES**

 

Piercy Bowler Taylor & Kern, Certified Public Accountants, LasVegas, Nevada, or PBTK, served as our independent public accounting firm forfiscal years ended December 31, 2005 and 2004.

 

The audit committee of our board is responsible for pre-approving allaudit and permissible non-audit services provided by our independent auditor,PBTK, with certain limited exceptions. Our audit committee has concluded thatthe non-audit services provided by PBTK are compatible with maintaining auditorindependence. In 2005 and 2004, no fees were paid to PBTK pursuant to the “deminimus” exception to the pre-approval policy permitted under the SecuritiesExchange Act of 1934, as amended.

 

For the fiscal years ended December 31, 2005 and 2004, the fees forservices billed and estimated unbilled by PBTK were as follows:
| ** **                                    | ** ** | **2005** | ** **  | **2004** | ** ** |
|-----------------------------------------------|------------|----------|-------------|----------|------------|
| Audit fees (relating to the Original  Filing) |       | $        | 111,504     |     | $          | 108,731 |   |
| Audit fees (relating to the restatements)     |       | 20,000   |        |     |       |
| Audit-related fees                            |       | 5,280    |        | 2,018    |       |
| Tax fees                                      |       | 13,970   |        | 21,000   |       |
| All other fees                                |       |     |        | 620      |       |
| ** **                                    | ** ** | **$**    | **150,754** |     | **$**      | **131,369** |   |

 

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

 

Auditrelated fees generally included fees for assurance and related services thatare reasonably related to the performance of the audit or review of our financialstatements, such as accounting consultations concerning financial accountingand reporting standards, internal control reviews and other non-statutoryattestation services.

 

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

 

Allother fees generally included fees related to miscellaneous, non-recurringengagements In 2004 other fees billed by PBTK represented research relatedto Generally Accepted Accounting Principles. In 2005 other fees billed by PBTKrepresented research related to Generally Accepted Accounting Principles andfees associated with restatement of financials related to the 10QSB for March31, 2004, June 30, 2004, September 30, 2004, March 31, 2005, June 30, 2005 andthe December 31, 2004 10KSB..

 

39

----

 

**SIGNATURES**

** **

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

 
| ** **            | **ELIXIR GAMING TECHNOLOGIES, INC.,**           |
|-----------------------|-------------------------------------------------|
| ** **            | ** **                                      |
| ** **            | **(Formerly Known As VENDINGDATA CORPORATION)** |
| ** **            | ** **                                      |
| ** **            | ** **                                      |
| Date: October 4, 2007 | By:                                             | /s/ Gordon Yuen |
|                  |                                            | Gordon Yuen,  Chief Executive Officer,  Principal Executive Officer |

 

40

----

 

**INDEX TO FINANCIAL STATEMENT**

 
| Report of Independent Registered Public  Accounting Firm                                                |   |
|---------------------------------------------------------------------------------------------------------|--------|
|                                                                                                    |   |
| Balance Sheets at December 31, 2005 and  2004                                                           |   |
|                                                                                                    |   |
| Statements of Operations for the Years  Ended December 31, 2005 and 2004                                |   |
|                                                                                                    |   |
| Statements of Changes in Stockholders’  Equity for the Years Ended December 31, 2005 and 2004 |   |
|                                                                                                    |   |
| Statements of Cash Flows for the Years Ended December 31, 2005 and  2004                                |   |
|                                                                                                    |   |
| Notes to Financial Statements                                                                           |   |

 

F-1

----

 

REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Boardof Directors and Stockholders

 

VendingDataCorporation

 

We have audited the balance sheets of VendingDataCorporation as of December 31, 2005 and 2004, and the related statements ofoperations, changes in stockholders’ equity, and cash flows for the years thenended. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Companyis not required to have, nor were we engaged to perform, audits of its internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit alsoincludes examining on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove, present fairly, in all material respects, the financial position of VendingDataCorporation as of December 31, 2005 and 2004, and the results of its operationsand cash flows for the years then ended, in conformity with accountingprinciples generally accepted in the United States of America.

 

As discussed in Note 2 to the financial statements,the Company’s 2005 financial statements have been restated.

 

 
|   |   /S/ PIERCY  BOWLER TAYLOR & KERN    |
|--------|-----------------------------------------------------|
|   | Piercy Bowler Taylor & Kern                     |
|   | Certified Public Accountants and Business  Advisors |

 

Las Vegas, Nevada

February 28, 2006, except the matters discussed in Note 2

Which are as of September 25, 2007

 

F-2

----

 

**VENDINGDATA CORPORATION**

** **

**Balance Sheets**

**December 31, 2005 and 2004**

 
| ** **                                                                                                          | ** ** | **2005**               | ** ** | **2004**    | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------|------------|
| ** **                                                                                                          | ** ** | **(As restated)** | ** ** | ** **  | ** ** |
| **ASSETS**                                                                                                          |       |                   |       |        |       |
| Current assets:                                                                                                     |       |                   |       |        |       |
| Cash and cash equivalents                                                                                           |       | $                      | 935,243    |        | $          | 924,802 |   |
| Current portion of accounts receivable,  trade net of allowance for uncollectibles of $276,420 and $125,530         |       | 1,550,559              |       | 1,596,017   |       |
| Due from affiliate                                                                                                  |       | 4,098                  |       | 25,000      |       |
| Prepaid expenses and other receivables                                                                              |       | 113,557                |       | 121,969     |       |
| Inventories                                                                                                         |       | 3,045,334              |       | 6,124,171   |       |
|                                                                                                                |       | 5,648,791              |       | 8,791,959   |       |
| Accounts receivable, trade, net of current  portion, less unamortized discount                                      |       | 600,430                |       | 1,264,914   |       |
| Equipment rented to customers, net of accumulated  depreciation of $228,032 and $316,245                            |       | 146,527                |       | 400,594     |       |
| Property and equipment, at cost, net of accumulated  depreciation of $2,408,234 and $1,859,206                      |       | 585,431                |       | 923,459     |       |
| Intangible assets, at cost, net of accumulated  amortization of $836,281 and $288,203                               |       | 1,862,268              |       | 1,129,644   |       |
| Due from affiliate                                                                                                  |       | —                 |       | 118,800     |       |
| Deferred costs                                                                                                      |       | 748,171                |       | 753,030     |       |
| Deposits                                                                                                            |       | 759,653                |       | 980,216     |       |
|                                                                                                                |       | $                      | 10,351,271 |        | $          | 14,362,616 |   |
|                                                                                                                |       |                   |       |        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                      |       |                   |       |        |       |
| Current liabilities:                                                                                                |       |                   |       |        |       |
| Capital leases payable, current portion                                                                             |       | $                      | 471,269    |        | $          | 1,941,445 |   |
| Accounts payable                                                                                                    |       | 1,836,234              |       | 1,240,676   |       |
| Accrued expenses                                                                                                    |       | 794,203                |       | 427,199     |       |
| Deferred revenues, current portion                                                                                  |       | 52,248                 |       | 239,680     |       |
| Short-term debt                                                                                                     |       | 4,050,000              |       | 238,250     |       |
| Customer deposits                                                                                                   |       | 81,858                 |       | 193,615     |       |
|                                                                                                                |       | 7,285,812              |       | 4,280,865   |       |
|                                                                                                                |       |                   |       |        |       |
| Deferred revenues, net of current portion                                                                           |       | 161,335                |       | 198,585     |       |
| Notes payable, net of current portion                                                                               |       | 11,654,500             |       | 3,250,000   |       |
| Capital leases payable, net of current  portion                                                                     |       | 421,975                |       | 893,244     |       |
|                                                                                                                |       | 19,523,622             |       | 8,622,694   |       |
|                                                                                                                |       |                   |       |        |       |
| Stockholders’ equity:                                                                                          |       |                   |       |        |       |
| Preferred stock, $.001 par value,  10,000,000 shares authorized                                                     |       | —                 |       | —      |       |
| Common stock, $.001 par value, 50,000,000  shares authorized 17,741,511 and 17,312,058 share issued and outstanding |       | 18,142                 |       | 17,200      |       |
| Additional paid-in capital                                                                                          |       | 73,427,486             |       | 59,843,270  |       |
| Treasury stock 448,053 shares at cost                                                                               |       | (846,820               | )          | —      |       |
| Deferred compensation expense                                                                                       |       | (3,419,088             | )          | —      |       |
| Deficit                                                                                                             |       | (78,352,071            | )          | (54,120,547 | )          |
| Total stockholder’s equity (deficiency)                                                                        |       | (9,172,351             | )          | 5,739,923   |       |
| Total liabilities and stockholders’ equity  (deficiency)                                                       |       | $                      | 10,351,271 |        | $          | 14,362,617 |   |

** **

**Seeaccompanying notes to financial statement**

 

F-3

----

** **

**VENDINGDATACORPORATION**

** **

**Statementsof Operations**

**Years EndedDecember 31, 2005 and 2004**

** **
| ** **                                                          | ** ** | **Year Ended December 31,** | ** **  |
|---------------------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                                          | ** ** | **2005**                    | ** **  | **2004** | ** ** |
| ** **                                                          | ** ** | **(As restated)**           | ** **  | ** ** | ** ** |
|                                                                |       |                        |        |   |   |
| Sales                                                               |       | $                           | 2,302,484   |   | $ | 2,648,684 |   |
| Rental                                                              |       | 519,635                     |        | 616,714 |   |
| Other                                                               |       | 278,619                     |        | 171,162 |   |
|                                                                |       | 3,100,738                   |        | 3,436,560 |   |
| Less sales  returns and allowances                                  |       | (739,263                    | )           | 0 |   |
| Net sales                                                           |       | 2,361,475                   |        | 3,436,560 |   |
|                                                                |       |                        |        |   |   |
| Operating  costs and expenses:                                      |       |                        |        |   |   |
| Cost of sales                                                       |       | 7,736,066                   |        | 3,570,070 |   |
| Selling,  general and administrative                                |       | 9,220,636                   |        | 7,046,005 |   |
| Research and  development                                           |       | 1,394,006                   |        | 1,423,096 |   |
|                                                                |       | 18,350,708                  |        | 12,039,171 |   |
|                                                                |       |                        |        |   |   |
| Loss from  operations                                               |       | (15,989,233                 | )           | (8,602,611 | ) |
|                                                                |       |                        |        |   |   |
| Interest  expense, including $15,063 and $31,974 to related parties |       | 1,577,996                   |        | 935,589 |   |
| Finance fees                                                        |       | 5,834,299                   |        | 0 |   |
| Other expense                                                       |       | 7,412,295                   |        | 935,589 |   |
|                                                                |       |                        |        |   |   |
| Net loss                                                            |       | $                           | (23,401,529 | ) | $ | (9,538,200 | ) |
|                                                                |       |                        |        |   |   |
| Basic loss  per share                                               |       | $                           | (1.37       | ) | $ | (0.55 | ) |
|                                                                |       |                        |        |   |   |
| Weighted  average shares outstanding                                |       | 17,050,398                  |        | 17,187,664 |   |

** **

**Seeaccompanying notes to financial statements.**

** **

**F-5**

----

** **

**VENDINGDATACORPORATION**

** **

**Statementsof Changes in Stockholders’ Equity**

**Years EndedDecember 31,**2005 (asrestated) and 2004

** **
| ** **                                | ** ** | ** **             | ** ** | **Additional** | ** ** | ** **              | ** ** | **Deferred**     | ** ** | ** **              | ** ** | ** **  | ** ** |
|-------------------------------------------|------------|------------------------|------------|----------------|------------|-------------------------|------------|------------------|------------|-------------------------|------------|-------------|------------|
| ** **                                | ** ** | **Common Shares** | ** ** | **Paid-in**    | ** ** | **Treasury**            | ** ** | **Compensation** | ** ** | ** **              | ** ** | ** **  | ** ** |
| **Activity**                              | ** ** | **Stock**              | ** ** | **Dollars**    | ** ** | **  Capital** | ** ** | ** Stock**  | ** ** | **  Expense** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| ** **                                |       |                   |       |           |       |                    | ** ** | ** **       | ** ** | ** **              |       |        |       |   |   |
| Balances, January 1, 2004                 |       | 16,765,580             |       | $              | 16,766     |                    | $          | 58,810,806       | ** ** | ** **              | ** ** | ** **  |       | $ | (44,582,347 | ) | $ | 14,245,225 |   |
| Exercise of employee options              |       | 1,360                  |       | 2              |       | 2,380                   | ** ** | ** **       | ** ** | ** **              | ** ** | ** **  |       | 2,382 |   |
| Stock issued for conversion of debt       | ** ** | 362,218                |       | 362            |       | 814,563                 |       |             |       |                    |       |        |       | 814,925 |   |
| Exercise of warrants                      |       | 70,400                 |       | 70             | ** ** | ** **              | ** ** | ** **       | ** ** | ** **              |       |        |       | 70 |   |
| Repayment for stock issue expenses        |       |                   |       |           |       | 36,731                  |       |             |       |                    |       |        |       | 36,731 |   |
| Employee  options issued                  |       |                   | ** ** | ** **     | ** ** | 178,790                 | ** ** | ** **       |       |                    | ** ** | ** **  | ** ** | 178,790 | ** ** |
| Net loss for 2004                         |       |                   |       |           |       |                    |       |             |       |                    |       | (9,538,200  | )          | (9,538,200 | ) |
| Balances, December 31, 2004               |       | 17,199,558             |       | 17,200         |       | 59,843,270              | ** ** | ** **       | ** ** | ** **              |       | (54,120,547 | )          | 5,739,923 |   |
| Beginning balance adjustment              |       |                   |       |           |       | 829,995                 |       |             |       |                    |       | (829,995    | )          | 0 |   |
| Balances, January 1, 2005 (As restated)   | ** ** | 17,199,558             |       | 17,200         |       | 60,673,265              |       |             | ** ** | ** **              | ** ** | (54,950,542 | )          | 5,739,923 |   |
| Exercise of employee options              |       | 70,000                 |       | 70             |       | 130,080                 |       |             |       |                    |       |        |       | 130,150 |   |
| Stock issued for conversion of debt       | ** ** | 209,393                |       | 209            |       | 345,291                 |       |             | ** ** | ** **              | ** ** | ** **  | ** ** | 345,500 |   |
| Shares issued for deferred compensation   | ** ** | ** **             |       |           | ** ** | 4,447,169               | (1)        |             | ** ** | (3,419,088              | )          |        |       | 1,028,081 |   |
| Acquisition of stock for warrants         | ** ** | ** **             | ** ** | ** **     | ** ** | 846,820                 |       | (846,820         | )          |                    | ** ** | ** **  | ** ** | 0 |   |
| Exercise of warrants                      |       | 162,500                |       | 163            |       | 401,662                 | ** ** | ** **       | ** ** | ** **              | ** ** | ** **  |       | 401,825 |   |
| Stock issued for services                 |       | 100,000                |       | 100            |       | 152,900                 | ** ** | ** **       | ** ** | ** **              | ** ** | ** **  |       | 153,000 |   |
| Warrants  issued                          |       |                   | ** ** | ** **     | ** ** | 5,834,299               | ** ** | ** **       |       |                    |       |        |       | 5,834,299 |   |
| Sale of  shares                           |       |                   |       | 400            | (2)        | 596,000                 | ** ** | ** **       | ** ** | ** **              |       |        |       | 596,400 |   |
| Net loss for 2005                         | ** ** | ** **             | ** ** | ** **     | ** ** | ** **              | ** ** | ** **       | ** ** | ** **              |       | (23,401,529 | )          | (23,401,529 | ) |
| Balances, December 31, 2005 (As restated) | ** ** | 17,741,451             |       | $              | 18,142     |                    | $          | 73,427,486       |       | $                       | (846,820   | )           | $          | (3,419,088 | ) | $ | (78,352,071 | ) | $ | (9,172,351 | ) |
|                                           |            |                        |            |                |            |                         |            |                  |            |                         |            |             |            |  |  |  |  |  |  |  |  |

** **

----

(1) Includes75,000 stock options at $126,000 that were issued and subsequently cancelledwithin the year 2005. A total of 1,419,590 stock options were cancelled during2005.

 

(2)400,000 shares were issued inthe first quarter of 2006, proceeds were received in 2005.

 

**See accompanying notes tofinancial statements.**

 

F-6

----

** **

**VENDINGDATA CORPORATION**

 

**Statementsof Cash Flows**

**Years EndedDecember 31, 2005 and 2004**

** **
| ** **                                         | ** ** | **December 31,**  | ** **    |
|----------------------------------------------------|------------|------------------------|---------------|
| ** **                                         | ** ** | **2005**               | ** **    | **2004** | ** ** |
| ** **                                         | ** ** | **(As restated)** | ** **    | ** ** | ** ** |
|                                               |       |                   |          |   |   |
| Net cash used  in operating activities             |       | $                      | (10,085,798   | ) | $ | (10,660,135 | ) |
|                                               |       |                   |          |   |   |
| Cash flows  from investing activities:             |       |                   |          |   |   |
|                                               |       |                   |          |   |   |
| Acquisition  of property and equipment             |       | (187,269               | )             | (271,261 | ) |
| Proceeds from  sale of plant and equipment         |       | 21,200                 |          |   |   |
| Acquisition  of intangible assets                  |       | (1,125,000             | )             | (4,900 | ) |
|                                               |       |                   |          |   |   |
| Net cash used  in investing activities             |       | (1,291,069             | )             | (276,161 | ) |
|                                               |       |                   |          |   |   |
| Cash flows  from financing activities:             |       |                   |          |   |   |
| Reimbursement  of offering expense                 |       | —                 |          | 36,731 |   |
| Proceeds from  sale of stock, warrants and options |       | 1,128,374              |          | 2,380 |   |
| Proceeds from  capital leases financing            |       | —                 |          | 723,839 |   |
| Repayment of  capital leases                       |       | (1,941,445             | )             | (2,042,946 | ) |
| Cash paid for deferred financing fees              |       | (361,371               | )             |   |   |
| Proceeds from  issuance of convertible debt        |       | 12,800,000             |          | 3,250,000 |   |
| Repayment of  convertible and other debt           |       | (238,250               | )             | (1,635,570 | ) |
| Net cash  provided by financing activities         |       | 11,387,308             |          | 334,434 |   |
|                                               |       |                   |          |   |   |
| Increase  (decrease) in cash and cash equivalents  |       | 10,441                 |          | (10,601,862 | ) |
| Cash and cash  equivalents, beginning of year      |       | 924,802                |          | 11,526,664 |   |
| Cash and cash  equivalents, end of year            |       | $                      |  935,243 |   | $ |  924,802 |   |

** **

**See accompanyingnotes to financial statements.**

** **

**F-7**

----

** **

**VENDINGDATACORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS**

** **

**Note 1.   Descriptionof Business and Significant Accounting Policies**

** **

The Company is in the businessof developing and distributing products related to the gaming industry. TheCompany’s principal products are electronic card shuffling devices and RFIDcasino chips. The Company operates principally in the United States of America,however, a portion of its revenues are derived from sales to customers inforeign countries.

 

The Company manages its credit risk by evaluating the creditworthinessof customers before credit is extended and monitoring it thereafter. Themaximum losses that the Company would incur if a customer failed to pay amountsowed would be limited to the recorded receivables after any allowancesprovided.

 

***Cash equivalents***

*** ***

All highly liquid debtinstruments with an original maturity of three months or less are consideredcash equivalents.

 

***Estimates***

*** ***

The preparation of the Company’sfinancial statements requires management to make estimates that affect theamounts reported in the financial statements and accompanying notes whichestimates may require revision in future financial statements.

 

***Inventory***

*** ***

Inventory is stated at thelower of cost, determined using the first in, first out method, or market.

 

***Property and equipment***

*** ***

Property and equipment (Note 4), and equipment rented to customers are carried at cost.Depreciation and amortization are computed using the straight-line method overthe estimated useful lives of the assets of 3-5 years, which, in the case ofleasehold improvements is limited to the life of the lease and renewal period,so long as renewal is intended.

 

***Intangible assets***

*** ***

Patent and trademark costs (Note 5) are amortizedusing the straight-line method over an appropriate estimated useful lifepursuant to SFAS No. 142, *Goodwill and OtherIntangible Assets*. The Company amortizes these intangible assets ona straight-line basis over currently estimated useful lives of 10 years**.**

 

***Fair value of financial instruments***

*** ***

The Company’s financial instruments consist of cash andcash equivalents, accounts and loans receivable, and accounts payable andaccruals. Management believes the carrying amounts of these financialinstruments approximate fair value because of their short-term maturities orinterest yields that approximate market rates.

 

***Revenue recognition***

*** ***

We recognize revenue from the sale of our shuffler andDeck CheckerTM products upon shipment against valid customer contracts orpurchase orders. Sales are recognized immediately when shufflers that arerented are converted to purchases depending on the creditworthiness and paymenthistory of the

 

F-8

----

 

casino company since paymentterms are from 20 to 48 months. We recognize revenue from our sales toindependent distributors at the time that the distributor takes possession ofour product and title transfers to the buyer. The extended warranty andmaintenance components that are part of long term sales contracts are unbundledand recognized as deferred revenue amortized over the remaining life of thesales agreement after the initial 90-day warranty as required by EmergingIssues Task Force Issue No. 00-21, *Revenue Arrangements withMultiple Deliverables*. The estimated useful life of our shufflers andDeck CheckersTM is five years with proper maintenance; the life can be extendedwith the replacement of certain component parts. If the customer does notpossess the required creditworthiness, the revenue is recorded as aninstallment sale and recognized over time as payments are received. Revenuefrom shuffler rentals is recorded monthly in accordance with rental contractterms. All rental contracts are cancelable upon 30-day written notice bythe customer. Maintenance expense for rental units is recorded in the period itis incurred. Although sales are generally made with a right of return, suchreturns are usually associated with unacceptable performance, therefore, salesreturns and allowances are not provided for based on estimates but rather recordedafter returned goods are received and inspected. The Company provides currentlyfor estimated warranty repair costs associated with sales contracts. Althoughthere are no extended warranties offered for our products, we do provide formaintenance contracts that are billed and recognized on a monthly basis overthe life of the contract.

 

***Advertising***

*** ***

Advertising costs are chargedto selling, general and administrative expenses when incurred and were $61,460and $33,837 for 2005 and 2004, respectively.

 

***Stock-based compensation***

*** ***

The Company presently uses the fair value recognitionprovisions of SFAS No. 123, *Accounting for Stock-BasedCompensation.*

 

In December, 2004, the SFAS No. 123 (Revised 2004), *Share Based Payment* (“SFAS 123R”) requires certain changesin the way compensation cost related to share based employee compensationtransactions is recognized in the financial statements as compared to SFAS No.123 effective for the Company as of January 1, 2006.

 

***Legal defense costs***

 

The Company does not accrue for future litigation defense costs, ifany, to be incurred by the Company in connection with outstanding litigationand other disputed matters but, instead, records such costs as the relatedlegal and other services are rendered.

 

***Loss per share***

*** ***

Basic loss per share iscomputed by dividing net loss by the weighted average number of shares ofcommon stock outstanding during the year. No diluted loss per share ispresented since the assumed exercise of common stock equivalents would have ananti-dilutive effect due to the losses.

 

***Warranties***

 

As part of the normal sale ofits products, the Company has provided its customers with product warranties.Management determines the warranty accrual on each sale based on known productfailure rates of key components, historical experience, service staff costs andother variables that affect the liability.

 

**Note2.****          Restatements to the Consolidated Financial Statements**

 

The Company is restating itspreviously issued consolidated financial statements to correct errors whichresulted from its failure to record expenses of certain warrants issued inconnection with debt financings completed

 

F-9

----

 

during the year ended December31, 2005. The errors relate to the accounting treatment that the Company failedto apply with respect to warrants issued by us in connection with certain debtfinancings the majority of which were issued during the fourth quarter.

 

During fiscal year 2003, priorto our initial public offering in October 2003, the Company issued 900,000warrants with an estimated fair value of $0.8 million in conjunction with a$7.5 million financing. The notes were due December 15, 2005. At that time, theCompany failed to record the estimated fair value of these warrant as “deferreddebt issuance costs” and therefore failed to appropriately amortize the cost ofthese warrants subsequently over the life of the debt. In January 2004, thedebt was paid off and the full value of the warrants should have been writtenoff as financing fees. The Company believes that restatement of the December31, 2004 financial statements to correct the accounting for these warrants, andamendment of our Annual Report on Form 10-KSB for that year, would beimmaterial at this time but rather will reflect the entry as an adjustment toretained earnings as of January 1, 2005.

 

Also, during the quarter endedDecember 31, 2005, we issued 3,000,000 warrants with a calculated the estimatedfair value of $5.8 million in connection with a short-term financing of $5.0million. On August 11, 2007, after further review of the relevant accountingliterature we now believe that the discount of $5.8 million should have beenentirely expensed at the inception of the $5.0 million short-term financing. Followingis a reconciliation of income (loss) from continuing operations as originallyreported to the restated amounts reported in the consolidated financialstatements included as Item 7 of this Amendment.

 
| ** **                                    | ** ** | **Year Ended December 31,** | ** **  |
|-----------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                    | ** ** | **2005**                                   | ** **  | **2004** | ** ** |
| Loss from operations,  as originally reported |       | $                                          | (17,567,230 | ) | $ | (9,538,200 | ) |
| Finance Fee  adjustments                      |       | (5,834,299                                 | )           | 0 |   |
| Loss from  operations, as restated            |       | $                                          | (23,401,529 | ) | $ | (9,538,200 | ) |

 

In addition, the Companydetermined that certain financing activities, namely cash outflows for deferredfinancing costs, were improperly classified as operating activities and alsothat there were some minor mathematical errors in the statement of cash flowsfor the year ended December 31, 2005. The following table reflects the effectsof these corrections after giving effect to the restatements as noted above: 

 
| ** **                                 | ** ** | **December 31, 2005** | ** **  | ** **           | ** ** |
|--------------------------------------------|------------|---------------------------------|-------------|----------------------|------------|
| ** **                                 | ** ** | **As reported**            | ** **  | **As restated** | ** ** | **Difference** | ** ** |
| Net cash used  in operating activities:    |       | $                               | (14,816,322 | )                    | $          | (10,085,798 | ) | $ | 4,730,524 |   |
| Net cash  provided by financing activities |       | $                               | 16,160,638  |                 | $          | 11,387,308 |   | $ | (4,773,330 | ) |

 

**Note 3.**                      Segments

** **

The segments identified forgeographic region-based enterprise-wide data are as follows:

** **
| ** **    | ** ** | **Year Ended  December 31, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|---------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **Revenue**                                      | ** ** | **Long-lived  Assets**                           | ** ** | **Revenue** | ** ** | **Long-lived  Assets** | ** ** |
|          |       |                                             |       |                                             |       |   |   |   |   |
| North America |       | $                                                | 2,590,904  |                                             | $          | 4,035,933 |   | $ | 1,997,832 |   | $ | 2,643,866 |   |
| Asia          |       | —                                           |       | 550,198                                          |       | 962,775 |   | 530,025 |   |
| Europe        |       | 501,584                                          |       | —                                           |       | 187,666 |   | — |   |
| South America |       | 8,250                                            |       | —                                           |       | — |   | — |   |
| Australia     |       | —                                           |       | —                                           |       | 288,287 |   | — |   |
|               |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |  |

 

F-10

----

 

The Company’s revenues distributed by product are as follows:

** **
| **Year Ended   December 31, 2005** | ** ** | **Year Ended   December 31, 2004** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **Shufflers**                                          | ** ** | **Deck   CheckersTM**                         | ** ** | **SecureDrop®** | ** ** | **Shufflers** | ** ** | **Deck   CheckersTM** | ** ** | **SecureDrop®** | ** ** |
|                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| $                                                      | 1,589,932  |                                                   | $          | 1,101,852 |   | $ | 130,335 |   | $ | 1,526,000 |   | $ | 1,594,399 |   | $ | 144,999 |   |
|                                                        |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 4.**                      Inventory

** **

Inventory consisted of thefollowing at December 31, 2005 and 2004.

 
| ** **        | ** ** | **December 31, 2005** | ** **    | **December 31, 2004** | ** ** |
|-------------------|------------|---------------------------------|---------------|---------------------------------|------------|
|              |       |                            |          |                            |       |
| Raw material      |       | $                               | 824,759       |                            | $          | 2,616,731 |   |
| Work in  progress |       | 66,024                          |          | 1,391,467                       |       |
| Finished  goods   |       | 2,154,551                       |          | 2,115,973                       |       |
| ** **        | ** ** | **$**                           | **3,045,334** | ** **                      | **$**      | **6,124,171** |   |

** **

**Note 5.**                      Property and Equipment

** **

Property and equipment,excluding equipment rented to customers, consists of the following atDecember 31, 2005 and 2004:

** **
| ** **                                      | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
|                                            |       |                            |       |                            |       |
| Equipment and  vehicles, furniture and fixtures |       | $                               | 1,990,463  |                            | $          | 1,983,744 |   |
| Tooling                                         |       | 858,720                         |       | 768,280                         |       |
| Leasehold  improvements                         |       | 500,093                         |       | 421,867                         |       |
|                                            |       | 3,349,276                       |       | 3,173,891                       |       |
| Less  accumulated depreciation and amortization |       | 2,763,845                       |       | 2,250,432                       |       |
|                                            |       | $                               | 585,431    |                            | $          | 923,459 |   |

 

A substantial portion of the Company’s furniture andequipment are held under capital leases (Note 8).

 

**Note 6.**                      Intangible assets

** **

The Company acquired the patent rights for the DeckCheckerTM for $1,004,900 in 2003. The following table sets forth the estimatedaggregate amortization of these and other intangibleasset costs for the next five years:

 
| 2006 |   | $ | 156,813 |   |
|------|--------|---|---------|--------|
| 2007 |   | $ | 141,286 |   |
| 2008 |   | $ | 138,829 |   |
| 2009 |   | $ | 134,985 |   |
| 2010 |   | $ | 125,623 |   |

 

The Company acquired the patent rights for theChipWasher and DeckSetterTM for $566,000 in 2005. The following table sets forththe estimated aggregate amortization ofthese and other intangible asset costs for the next five years:

 

F-11

----

 
| 2006 |   | $ | 56,600 |   |
|------|--------|---|--------|--------|
| 2007 |   | $ | 56,600 |   |
| 2008 |   | $ | 56,600 |   |
| 2009 |   | $ | 56,600 |   |
| 2010 |   | $ | 56,600 |   |

 

The Company acquired the patent rights from Dolphin forthe high frequency RFID casino chip for $750,000 in 2005. The following tablesets forth the estimated aggregate amortization ofthese and other intangible asset costs for the next five years:

 
| 2006 |   | $ | 75,000 |   |
|------|--------|---|--------|--------|
| 2007 |   | $ | 75,000 |   |
| 2008 |   | $ | 75,000 |   |
| 2009 |   | $ | 75,000 |   |
| 2010 |   | $ | 75,000 |   |

 

**Note 7.**                   Short Term Debt

** **

On October 6, 2005, we negotiated a one year revolvingcredit facility in the amount of $5,000,000 and carrying an interest rate of9.0%. The facility is secured by receivables. As of December 31, 2005, we hadborrowed $4,000,000 under the credit line.

 

**Note 8.**                      Convertible Debt with Warrantsand Leases Payable

** **

As of December 31, 2005and 2004, our long-term obligations consist of convertible notes and capitallease obligations as follows:  

 
| ** **                                                               | ** **                                                                                                                                                                                                                                                                                             | **December 31,   2005** | ** ** | **December 31,   2004** | ** ** |
|--------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------|------------|-----------------------------------|------------|
| 10.                                                                      | 0% notes, of which 50% are convertible due  August 15, 2008, secured by trade receivables and inventory. The notes are  convertible at $1.65 per share of common stock for 50% of the note principal  amount                                                                                           |                              | $          | 11,654,500                        |       |   |   |
| .9.                                                                      | 0% unsecured notes originally due August  15, 2007 with non-detachable warrants to purchase 1,500 shares of common  stock at $5.00 per share for each $25,000 of principal exchanged in 2005 for  10.0% secured, convertible notes as part of an aggregate $12,000,000  convertible note offerings (1) |                              |       |                              | $          | 3,250,000 |   |
|                                                                     |                                                                                                                                                                                                                                                                                                   | 11,654,500                        |       | 3,250,000                         |       |
| Capitalized  lease obligations for furniture, tooling and equipment (2). |                                                                                                                                                                                                                                                                                                   | 893,244                           |       | 2,834,689                         |       |
|                                                                     |                                                                                                                                                                                                                                                                                                   | 12,547,744                        |       | 6,084,689                         |       |
| Less current  portion                                                    |                                                                                                                                                                                                                                                                                                   | (471,269                          | )          | (1,941,445                        | )          |
| Long-term  portion .                                                     |                                                                                                                                                                                                                                                                                                   | $                                 | 12,076,475 |                              | $          | 4,143,244 |   |

** **

----

(1)          Interest of $61,705 was payable on the originalnotes through the conversion date of February 15, 2005.

 

(2)          In a prior year, the Company entered intocertain sale-leaseback transactions primarily for assets rented to, or intendedto be rented to, customers, under operating leases. Since the leases containedeffective mandatory buyback provisions resulting in the Company retainingrights to use these assets in its business for their remaining useful lives, nogain or loss was recognized on the sale-leaseback transactions pursuant toparagraph 17 of SFAS No. 28 Accounting for Sales with Leasebacks. Theamortization of the assets recorded as capital leases is included withdepreciation. The effective annual interest rates implicit in the capitalleases range from 25% to 28%. The terms of the leases range from 36 months to39 months.

 

F-12

----

 

Scheduled maturities of thelease obligations as of December 31, 2005, are summarized as follows:

** **
| Due during  the year ending December 31: |   |    |    |
|------------------------------------------|--------|---------|---------|
| 2006                                     |   | $       | 523,079 |   |
| 2007                                     |   | 363,089 |    |
| 2008                                     |   | 76,500  |    |
| 2009                                     |   | —  |    |
| 2010                                     |   | —  |    |
| Minimum  future lease payments           |   | 962,668 |    |
| Less interest  component                 |   | 69,424  |    |
|                                     |   | 893,244 |    |
| Less current  portion                    |   | 471,269 |    |
| Long-term  portion                       |   | $       | 421,975 |   |

 

**Note 9.**                      Warranties

** **

The following summarizes the accrual of productwarranties that is recorded as accrued expenses in the accompanying balancesheets at December 31, 2005 and 2004.

 
| ** **              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Opening balance         |       | $                                | 8,792      |   | $ | 12,566 |   |
| Accruals                |       | 2,600                            |       | 5,068 |   |
| Payments                |       | (5,525                           | )          | (8,842 | ) |
| Balance at  end of year |       | $                                | 5,867      |   | $ | 8,792 |   |

 

**Note 10.**               Stockholders’ Equity

** **

**Stock Options.**

 
| **Range of   Exercise Price** | ** ** | **Number of   Options   Outstanding** | ** ** | **Weighted average   exercisable price** | ** ** | **Weighted average   remaining contractual   life of shares outstanding   (years)** | ** ** | **Number of   exercisable** | ** ** | **Weighted   average   exercisable** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------------------|------------|
| $1.34 - $1.50                                |       | 500,000                                              | (1)        | $                                                       | 1.43       |                                                                                                                        | 7.7        |                                  | —     |                                           | —     |   |
| $1.51 - $1.75                                |       | 270,352                                              |       | $                                                       | 1.67       |                                                                                                                        | 3.6        |                                  | 14,452     |                                           | $          | 1.64 |   |
| $1.75 - $2.00                                |       | 1,174,533                                            |       | $                                                       | 1.86       |                                                                                                                        | 3.6        |                                  | 216,533    |                                           | $          | 1.78 |   |
| $2.00 - $13.00                               |       | 808,587                                              |       | $                                                       | 3.81       |                                                                                                                        | 4.5        |                                  | 303,967    |                                           | $          | 2.50 |   |
|                                         |       | 2,753,472                                            |       |                                                    |       |                                                                                                                        |       |                                  |       |                                           |       |

 

----

(1) 1,200,000 options areexercisable at $1.34 in the event of a change of control.

 

The following is a summary oftransactions involving stock options:

 
| ** ** | ** ** | ** ** | ** ** | **Shares** | ** ** | **Range of Exercise   Prices** | ** ** | **Average Price** | ** ** |
|------------|------------|------------|------------|------------|------------|-----------------------------------------------|------------|------------------------|------------|
| Balance    |       | 12/31/00   |       | 253,320    |       | $5.00 - $15.00                                |       | $                      | 10.00      |   |
|       |       |       |       |       |       |                                          |       |                   |       |
| Granted    |       |       |       | 652,150    |       | $1.75-$13.00                                  |       | $                      | 4.20       |   |
| Cancelled  |       |       |       | 70,800     |       | $5.00-$15.00                                  |       | $                      | 5.75       |   |
| Balance    |       | 12/31/01   |       | 834,670    |       | $5.00-$15.00                                  |       | $                      | 5.40       |   |
|       |       |       |       |       |       |                                          |       |                   |       |
| Granted    |       |       |       | 117,550    |       | $1.75-$13.00                                  |       | $                      | 3.80       |   |
| Cancelled  |       |       |       | 25,450     |       | $7.50-$13.00                                  |       | $                      | 9.68       |   |

 

F-13

----

 
| ** ** | ** ** | ** ** | ** ** | **Shares** | ** ** | **Range of Exercise   Prices** | ** ** | **Average Price** | ** ** |
|------------|------------|------------|------------|------------|------------|-----------------------------------------------|------------|------------------------|------------|
| Balance    |       | 12/31/02   |       | 926,770    |       | $1.75-$15.00                                  |       | $                      | 5.09       |   |
|       |       |       |       |       |       |                                          |       |                   |       |
| Granted    |       |       |       | 1,246,850  |       | $1.75-$3.90                                   |       | $                      | 2.60       |   |
| Cancelled  |       |       |       | 66,490     |       | $1.75-$13.00                                  |       | $                      | 8.47       |   |
| Balance    |       | 12/31/03   |       | 2,107,130  |       | $1.75-$15.00                                  |       | $                      | 3.51       |   |
|       |       |       |       |       |       |                                          |       |                   |       |
| Granted    |       |       |       | 319,836    |       | $1.66-$3.98                                   |       | $                      | 2.63       |   |
| Cancelled  |       |       |       | 238,540    |       | $1.75-$13.00                                  |       | $                      | 5.77       |   |
| Balance    |       | 12/31/04   |       | 2,188,426  |       | $1.69-$15.00                                  |       | $                      | 4.97       |   |
|       |       |       |       |       |       |                                          |       |                   |       |
| Granted    |       |       |       | 3,279,686  |       | $1.34-$3.01                                   |       | $                      | 1.89       |   |
| Cancelled  |       |       |       | 1,444,640  |       | $1.66-$15.00                                  |       | $                      | 5.73       |   |
| Exercised  |       |       |       | 70,000     |       | $1.75-$2.50                                   |       | $                      | 2.13       |   |
| Balance    |       | 12/31/05   |       | 3,953,472  |       | $1.34-$15.00                                  |       | $                      | 3.55       |   |

 

The weighted average fair valueat the date of grant for options granted during 2005 and 2004 as describedabove were $1.24 in 2005 and $0.77 per share in 2004. The fair value of theoptions at the date of grant was estimated using the Black-Scholes model withassumptions as follows:  
| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Market value            |       | $        | 1.34-$3.01 |     | $          | 1.69-$3.98 |   |
| Expected life  in years |       | 3 to 6   |       | 3 to 6   |       |
| Interest rate           |       | 1.95%    |       | 1.95%    |       |
| Volatility              |       | 10%-70%  |       | 10%-70%  |       |
| Dividend  yield         |       | 0.00%    |       | 0.00%    |       |
|                         |            |          |            |          |            |  |  |

 

Theimpact of the adoption of the fair value method of accounting for stock-basedcompensation was an increase to stock-based compensation expense included inselling, general and administrative expenses of approximately $1,243,031 forthe twelve-month period ended December 31, 2005. As a result of adopting SFASNo. 123 under the prospective transition method of SFAS No. 148,prior periods have not been restated to reflect the impact of the fair valuemethod.

 

**Warrants.**The Company hasoutstanding an aggregate of 3,000,000 warrants to purchase common stock at$1.25 per share, 900,000 warrants to purchase common stock at $1.50 per share,1,000,000 warrants to purchase common stock at $2.25 per share, 45,000 warrantsto purchase common stock at $50.00 per share, and 448,053 warrants to purchasecommon stock at $0.01 per share outstanding at December 31, 2005. As of December 31, 2005, there wereoptions and warrants outstanding to purchase a total of 9,346,525 shares ofcommon stock with a weighted average exercise price of $2.55 per share.

 

**Receivable from Exercise ofWarrants.**In December 2005, 150,000 warrants were exercised toacquire 150,000 shares of stock priced at $2.50 per share. The payment of$375,000 was received on January 3, 2006.

 

**Note 11.**                Income Taxes

** **

At December 31, 2005, theCompany had net operating loss carry-forwards for federal income tax purposesof approximately $71,518,000 that may be offset against future taxable income.These operating loss carry-forwards expire in the years 2010 through 2024. Notax benefit has been reported in the financial statements because the potentialtax benefits of the net operating loss carry-forwards are effectively offset bya 100% valuation allowance as a result of significant uncertainties as toability to realize them in the future.

 

F-14

----

 

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

 
| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|------------------|------------|
| ** **                                  | ** ** | **2005**         | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **Amount**       | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Income tax benefit at statutory rate of 34% |       | $                | 5,972,858  |   | 34 | % | $ | 3,242,988 |   | 34 | % |
| Effect of permanent differences             |       | (24,254          | )          |   |   | (26,640 | ) |   |   |
| Valuation allowance                         |       | (5,948,604       | )          | 34 | % | (3,216,348 | ) | 34 | % |
|                                        |       |             |       |   |   |   |   |   |   |
| Net deferred tax assets                     |       | —           |       | 0 | % | — |   | 0 | % |
|                                        |       | $                | —     |   |   |   | $ | — |   |   |   |

 

Deferred tax assets (liabilities) are comprised of thefollowing at December 31, 2005 and 2004:

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------|------------|
| ** **                    | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Operating loss carry forwards |       | $                | 24,328,000 |   | $ | 19,793,000 |   |
| Accrued vacation              |       | 26,000           |       | 45,000 |   |
| Deferred rent.                |       | 12,000           |       | 22,000 |   |
| Allowance for uncollectibles. |       | 99,000           |       | 76,000 |   |
| Depreciation                  |       | (312,000         | )          | (57,000 | ) |
| Less valuation allowance      |       | (24,153,000      | )          | (19,879,000 | ) |
|                          |       | $                | —     |   | $ | — |   |

 

**Note 12.**               Commitments and Contingencies

** **

**BuildingLease.**TheCompany is obligated under a building lease agreement for our Las Vegas officeat 6830 Spencer Street, Las Vegas until January 2007, with an option to renewfor five years. The lease provides for scheduled increases based, in part, onthe annual Consumer Price Index. However, we do not intend to renew the leaseand will move to a new location at the termination of the lease. The Companyalso leases office space in other locations including China and certain officeequipment under operating leases.

 

Futureminimum rentals, including escalation provisions as of December 31, 2005,under the leases are as follows:

 
| 2006 |   | $ | 586,960 |   |
|------|--------|---|---------|--------|

 

Rent expense was $597,404 and $601,754 for 2005 and2004, respectively.

 

**Legal Matters.**The Company is a defendant in a patentinfringement action against it. The complaint alleges, among other things,claims for patent infringement and requests treble damages, and an injunctionenjoining the Company from infringing on the plaintiff’s patents. The outcome ofthis matter cannot be estimated at this time and, accordingly, no provision hasbeen made in the accompanying financial statements for any losses the Companymight incur in its connection.

 

F-15

----

 

**Tax Audit.** In early February 2004, the Stateof Nevada initiated a sales/use tax audit of Central and Madison Leasing. TheCompany has sold and leased back shufflers and Deck Checkers over the last fiveyears. The auditor for the State of Nevada is trying to determine at what levela sale tax needs to be collected. The Company now collects from our customersin Nevada and remits to the State of Nevada. There is a possibility that if theState of Nevada determines that the sales of the products to the leasingcompany is the level at which sales/use tax should have been collected therewould be a liability that would be passed to the Company from the leasing companies.The amount of this potential liability could range from a refund of $144,000 tothe payment of sales/use tax with interest and penalties up to $500,000. Ahearing was scheduled for May 2005 with the State of Nevada Department ofTaxation was delayed due to the resignation of the Department’s director. Weare awaiting the appointment of a new or interim director in order tore-schedule the hearing. The Company is defending its position in this matter.

** **

**Liquidity Issues**. The Company’s ability to maintain adequate liquiditymay be dependent upon the success of management’s plans to address and overcomeprior operating losses. Management has developed and refined its 2006 operatingplan to increase its sales by the rollout of new shuffler products, introductionof a high frequency RFID casino chip product, and improving its sales effortsdomestically and internationally. Management continues in its efforts to reduceoperating costs through the transfer of manufacturing operations to China.Management has focused on financial condition and liquidity improvementsthrough its capital raising efforts in 2005 and in the first quarter of 2006,resulting in an improved cash position. As a result of anticipated salesimprovements and operating cost initiatives, management believes that theCompany will begin to generate positive operating cash flow during 2006. TheCompany also received a one-year extension to a commitment for a $3.0 millionlease line of credit from April 1, 2005 to March 31, 2006. (See Note 5.)

 

**Note 13.**               Subsequent Event

 

OnMarch 29, 2006, we entered into an agreement to issue and sell our securedpromissory notes for aggregate gross proceeds of $7 million. These notes willbear interest at an annual rate of 7% and mature on March 31, 2011. We expectto issue these notes and receive the net offering proceeds in early April 2006.In connection with this debt financing, we also entered into a definitiveagreement 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. Thisagreement has a term of five years and grants us a binding “put” right to sellour shares at a 20% discount to the volume weighted average price of our shareson the day of a drawdown, subject to a ceiling price of $3.50 per share. Inaddition, we have reached an agreement in principal to issue and sell anadditional $6 million of our common stock at price of $2.50 per share for atotal of 2.4 million shares.

 

F-16

----

 

**Note 14.**               Additional cash flow information 

 
| ** **                                                                       | ** ** | **December 31,**   | ** **  |
|----------------------------------------------------------------------------------|------------|--------------------|-------------|
| ** **                                                                       | ** ** | **2005**           | ** **  | **2004** | ** ** |
| ** **                                                                       | ** ** | **(As  restated)** | ** **  | ** ** | ** ** |
|                                                                             |       |               |        |   |   |
| Net loss                                                                         |       | $                  | (23,401,529 | ) | $ | (9,538,200 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |               |        |   |   |
| Depreciation and amortization                                                    |       | 1,188,476          |        | 816,535 |   |
| Amortization of deferred interest                                                |       | 188,213            |        | 269,174 |   |
| Stock based compensation                                                         |       | 1,206,097          |        |   |   |
| Write down on inventory                                                          |       | 3,068,876          |        |   |   |
| Other non-cash cost                                                              |       | 5,883,038          |        | 153,316 |   |
| Changes in assets and liabilities:                                               |       |               |        |   |   |
| Decrease in accounts receivable                                                  |       | 885,038            |        | 634,107 |   |
| Decrease (increase) in prepaid expenses and other assets                         |       | 193,581            |        | (33,305 | ) |
| Increase in inventory                                                            |       | (76,679            | )           | (1,973,758 | ) |
| Decrease in other assets                                                         |       | —             |        | 266,143 |   |
| Decrease in deposits                                                             |       | —             |        | 14,810 |   |
| Increase in deferred expenses                                                    |       | —             |        | (786,178 | ) |
| Increase (decrease) in accounts payable                                          |       | 748,558            |        | (486,783 | ) |
| Increase (decrease) in accrued expenses                                          |       | 255,245            |        | (347,107 | ) |
| Decrease (increase) in deferred revenues                                         |       | (224,682           | )           | 46,500 |   |
| Increase in customer deposits                                                    |       | —             |        | 304,611 |   |
|                                                                             |       |               |        |   |   |
| Net cash used in operating activities                                            |       | $                  | (10,085,798 | ) | $ | (10,660,135 | ) |
|                                                                             |       |               |        |   |   |
| Supplemental cash flow information:                                              |       |               |        |   |   |
| Cash paid for interest                                                           |       | $                  | 664,342     |   | $ | 611,629 |   |
| Non-cash investing and financing activities:                                     |       |               |        |   |   |
| Loans converted into common stock                                                |       | $                  | 345,500     |   | $ | 765,000 |   |
| Loan refinanced                                                                  |       | $                  | 2,904,500   |   |   |   |
| Stock acquired with options                                                      |       | $                  | 846,820     |   |   |   |

 

F-17

----

 

**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                        |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                           |
| 3.1                 |       | Amended and Restated Articles of Incorporation dated  July 24, 2000, incorporated by reference from the registrant’s Current Report  on Form 8-K filed on July 28, 2000.                                                                  |
|                |       |                                                                                                                                                                                                                                           |
| 3.2                 |       | Amended and Restated Bylaws of the registrant dated  November 13, 2002, incorporated by reference from the registrant’s Current  Report on Form 8-K filed on January 8, 2003.                                                             |
|                |       |                                                                                                                                                                                                                                           |
| 3.3                 |       | Certificate of Change in Number of Authorized Shares  filed on December 23, 2002 and effective January 3, 2003, incorporated by  reference from the registrant’s Current Report on Form 8-K filed on January  8, 2003.                    |
|                |       |                                                                                                                                                                                                                                           |
| 4.1                 |       | Specimen certificate for Common Stock, incorporated  by reference from the registrant’s Registration Statement on Form SB-2 filed  on July 16, 1997.                                                                                      |
|                |       |                                                                                                                                                                                                                                           |
| 10.1                |       | Shareholder Agreement dated December 14, 1998, by  and between VendingData Corporation and Richard Huson, Bob Smith and Ron  Keil, incorporated by reference from the registrant’s Annual Report on Form  10-KSB filed on March 26, 1999. |
|                |       |                                                                                                                                                                                                                                           |
| 10.2                |       | Form of Warrant Associated with 9.5% Convertible  Note Due 2004, incorporated by reference from the registrant’s Quarterly  Report on Form 10-QSB filed on May 17, 1999.                                                                  |
|                |       |                                                                                                                                                                                                                                           |
| 10.3                |       | First Security Bank of Nevada Master Equipment Lease  Agreement, incorporated by reference from the registrant’s Quarterly Report  on Form 10-QSB filed on August 13, 1999.                                                               |
|                |       |                                                                                                                                                                                                                                           |
| 10.4                |       | Lease Agreement dated August 19, 1999, by and  between the registrant and Spencer Airport Center, LLC for 6830 Spencer  incorporated by reference from the registrant’s Quarterly Report on Form  10-QSB filed on November 15, 1999.      |
|                |       |                                                                                                                                                                                                                                           |
| 10.5                |       | Durable Power of Attorney Granting Voting Rights of  the registrant’s Common Stock, incorporated by reference from the  registrant’s Quarterly Report on Form 10-QSB filed on November 15, 1999.                                     |
|                |       |                                                                                                                                                                                                                                           |
| 10.6                |       | Form of Indemnification Agreement, incorporated by  reference from the registrant’s quarterly report on 10-QSB/A filed on August  19, 2003.                                                                                               |
|                |       |                                                                                                                                                                                                                                           |
| 10.7                |       | Amended and Restated 1999 Stock Option Plan,  incorporated by reference from the registrant’s quarterly report on 10-QSB/A  filed on August 19, 2003.                                                                                     |
|                |       |                                                                                                                                                                                                                                           |
| 10.8                |       | Philadelphia Brokerage Corporation Warrant to  Purchase 25,000 Shares of Common Stock, incorporated by reference from the  registrant’s quarterly report on 10-QSB/A filed on August 19, 2003.                                            |
|                |       |                                                                                                                                                                                                                                           |
| 10.9                |       | Triage Capital Management LP Warrant to Purchase  50,000 Shares of Common Stock, incorporated by reference from the  registrant’s quarterly report on 10-QSB/A filed on August 19, 2003.                                                  |
|                |       |                                                                                                                                                                                                                                           |
| 10.10               |       | Mellon HBV SBV, LLC Warrant to Purchase Shares of  Common Stock, incorporated by reference from the registrant’s quarterly  report on 10-QSB/A filed on August 19, 2003.                                                                  |
|                |       |                                                                                                                                                                                                                                           |

 

 

----

 
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                  |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.11               |       | Amended and Restated 1999 Directors’ Stock Option  Plan, incorporated by reference from the registrant’s registration statement  on Form S-8 filed on September 10, 2003.                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.12               |       | Consulting Agreement dated December 31, 2002, by and  between the registrant and John J. Gerard, incorporated by reference from the  registrant’s registration statement on Form SB-2 filed on September 25, 2003.                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.13               |       | First Amendment to Consulting Agreement dated March  31, 2003 by and between registrant and John J. Gerard, incorporated by  reference from the registrant’s registration statement on Form SB-2 filed on  September 25, 2003.                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.14               |       | Philadelphia Brokerage Corporation warrant to  Purchase 75,000 Shares of Common Stock, incorporated by reference from the  registrant’s registration statement on Form SB-2 filed on September 25, 2003.                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.15               |       | Distribution Agreement by and between the registrant  and TCS Aces Pty Limited, incorporated by reference from the registrant’s  registration statement on Form SB-2/A filed on December 10, 2003.                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.16               |       | Form of Placement Agent Agreement with Philadelphia  Brokerage Corporation, incorporated by reference from the registrant’s  Current Report on Form 8-K filed on February 15, 2005.                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.17               |       | Form of Subscription Agreement for 15% Senior  Secured Notes due February 2008, incorporated by reference from the  registrant’s Current Report on Form 8-K filed on February 15, 2005.                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.18               |       | Form of Promissory Note for 15% Senior Secured Notes  due February 2008, incorporated by reference from the registrant’s Current  Report on Form 8-K filed on February 15, 2005.                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.19               |       | Distribution Agreement by and between the registrant  and Technical Casino Supplies Ltd, incorporated by reference from the  registrant’s Current Report on Form 8-K filed on February 15, 2005.                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.20               |       | Form of Subscription Agreement for 15% Senior  Secured Notes due March 2008, incorporated by reference from the registrant’s  Current Report on Form 8-K filed on March 16, 2005.                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.21               |       | Form of Promissory Note for 15% Senior Secured Notes  due March 2008, incorporated by reference from the registrant’s Current  Report on Form 8-K filed on March 16, 2005.                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.22               |       | Form of Intercreditor Agreement, incorporated by  reference from the registrant’s Current Report on Form 8-K filed on March 16,  2005.                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.23               |       | Form of Amended and Restated Security Agreement,  incorporated by reference from the registrant’s Current Report on Form 8-K  filed on March 16, 2005.                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.24               |       | Form of Amended and Restated Collateral Agent  Agreement, incorporated by reference from the registrant’s Current Report on  Form 8-K filed on March 16, 2005.                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.25               |       | Settlement Agreement dated July 12, 2005 between  VendingData Corporation and Shuffle Master, Inc., incorporated by reference  from the registrant’s Annual Report on Form 10-KSB filed on March 31, 2006.                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.26               |       | License and Manufacturing  Agreement dated February 27, 2006, between VendingData Corporation and  Dolphin Products Pty Limited, incorporated by reference from the  registrant’s Annual Report on Form 10-KSB filed on March 31, 2006.                                                             |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.27               |       | Patent Purchase Agreement dated October 1, 2005  among VendingData Corporation, William Westmore Purton, Dolphin Products Pty  Ltd. and Dolphin Advanced Technologies Pty Ltd., incorporated by reference  from the registrant’s Annual Report on Form 10-KSB filed on March 31, 2006.              |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.28               |       | Patent and Trade Secret Purchase Agreement dated  October 10 among VendingData Corporation, William Westmore Purton, Dolphin  Products Pty ltd. and Dolphin Advanced Technologies Pty ltd., incorporated by  reference from the registrant’s Annual Report on Form 10-KSB filed on March  31, 2006. |
|                |       |                                                                                                                                                                                                                                                                                                     |
| 10.29               |       | Credit Agreement dated October 5, 2005 among  VendingData Corporation, Lampe Conway & Co., LLC and Triage Capital  Management L.P. (incorporated by reference to Exhibit 10.1 to the  registrant’s Quarterly Report on Form 10-QSB filed on November 14, 2005).                                 |

 

 

----

 
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                            |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                               |
| 10.30               |       | Amendment dated October 6, 2005 to the Security  Agreement dated as of March, 2005 by and among VendingData Corporation and  Premier Trust, Inc. (incorporated by reference to Exhibit 10.2 to the  registrant’s Quarterly Report on Form 10-QSB filed on November 14, 2005). |
|                |       |                                                                                                                                                                                                                                                                               |
| 10.31               |       | Form of Warrant (incorporated by reference to  Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-QSB filed on  November 14, 2005).                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                               |
| 10.32               |       | Employment Agreement dated September 29, 2005  between VendingData Corporation and Mark Newburg (incorporated by reference  to Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-QSB filed on  November 14, 2005).                                                 |
|                |       |                                                                                                                                                                                                                                                                               |
| 10.33               |       | Employment Agreement dated September 29, 2005  between VendingData Corporation and Arnaldo Galassi (incorporated by  reference to Exhibit 10.5 to the registrant’s Quarterly Report on Form 10-QSB  filed on November 14, 2005).                                              |
|                |       |                                                                                                                                                                                                                                                                               |
| 14.1                |       | Code of Ethics, incorporated by reference from the  registrant’s annual report on 10KSB filed March 30, 2004.                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                               |
| 23.1                |       | Consent of Piercy Bowler Taylor and Kern                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                               |
| 31.1                |       | Certification of Gordon Yuen under Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                               |
| 31.2                |       | Certification of David Reberger under Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                               |
| 32.1                |       | Certifications Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                          |

 

----