**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**


x
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934For
                  the fiscal year ended December 31, 2005o
              TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934For
                  the transition period from
                  __________to_________
 Commission
                    file number
                  000-25855**VendingData
                    Corporation**(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.)
 
 **6830
                    Spencer Street**
                  **Las
                    Vegas, Nevada****89119**(Address
                    of principal executive offices, including zip
                    code)
  Issuer’s
                      telephone number: (702) 733-7195Securities
                      registered under Section 12(b) of the Exchange
                      Act:
 
 Title
                      of each class
                  Name
                      of each exchange on which registered**Common
                      Stock, $.001 par value**
                  **American
                      Stock Exchange**
  Securities
                      registered under Section 12(g) of the Exchange
                      Act:
 **Common
                  Stock, $.001 par value**(Title
                  of each class)Check
                  whether the issuer is not required to file reports pursuant to
                  Section 13
                  or 15(d) of the Exchange Act. oCheck
                  whether the issuer (1) filed all reports required to be filed by
                  Section
                  13 or 15(d) of the Securities Exchange Act of 1934 during the past
                  12
                  months (or for such shorter period that the registrant was required
                  to
                  file such reports), and (2) has been subject to such filing requirements
                  for the past 90 days. YesNo
                  oCheck
                  if there is no disclosure of delinquent filers in response to Item
                  405 of
                  Regulation S-B contained in this form, and no disclosure will be
                  contained, to the best of the registrant’s knowledge, in definitive proxy
                  or information statements incorporated by reference in Part III
                  of this
                  Form 10-KSB or any amendment to this Form 10-KSB. xIndicate
                  by check mark whether the registrant is a shell company (as defined
                  in
                  Rule 12b-2 of the Exchange Act) Yes oNo
                  xState
                  issuer’s revenues for its most recent fiscal year:
                  $2,238,746State
                  the aggregate market value of voting stock held by non-affiliates
                  computed
                  by reference to the average bid and asked price of such common
                  equity, as
                  of a specified date within the past 60 days. $21,526,916 ($2.25
                  per share
                  as of March 15, 2006)State
                  the number of shares outstanding of each of the issuer’s classes of common
                  stock, as of the latest practicable date. 19,015,540 shares as
                  of March
                  15, 2006Transitional
                  Small Business Disclosure Format (check one): Yes oNo
                  x








**TABLE
      OF CONTENTS**




**Page****PART
                I**
            
            **3****Item
                1.**
            **Description
                of Business**
            **3****Item
                1A.**
            **Risk
                Factors**
            **14****Item
                2.**
            **Description
                of Property**
            **18****Item
                3.**
            **Legal
                Proceedings**
            **18****Item
                4.**
            **Submission
                of Matters to a Vote of Security Holders**
            **18****PART
                II**
            
            **19****Item
                5.**
            **Market
                for Common Equity and Related Stockholder Matters**
            **19****Item
                6.**
            **Management’s
                Discussion and Analysis or Plan of Operation**
            **20****Item
                7.**
            **Financial
                Statements**
            **26****Item
                8.**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure**
            **26****Item
                8A.**
            **Controls
                and Procedures**
            **26****Item
                8B.**
            **Other
                Information**
            **27****PART
                III**
            
            **28****Item
                9.**
            **Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                Section
                16(a) of the Exchange Act**
            **28****Item
                10.**
            **Executive
                Compensation**
            **31****Item
                11.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters**
            **35****Item
                12.**
            **Certain
                Relationships and Related Transactions**
            **37****Item
                13.**
            **Exhibits**
            **37****Item
                14.**
            **Principal
                Accountant Fees and Services**
            **39**




-2-





**PART
      I**




**ITEM
      1. DESCRIPTION OF BUSINESS**




**GENERAL**




We
      develop, manufacture and distribute products and services to the gaming industry
      that automate the current manual processes supporting the casino table games
      business. Our product line is intended to improve security, productivity and
      profitability of casino operations. Our principal products include:




·
            The
                Deck Checker, a card security device that scans decks of playing
                cards to
                ensure an accurate count and verifies that all of the cards are present.




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




·
            The
                PokerOne Shuffler, a high-speed card-shuffler designed for use with
                single
                deck poker variation games.




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




·
            The
                ChipWasher is a product that washes and sanitizes gaming chips. This
                product is expected be available by the second half of
                2006.




We
      have
      an active research and development program for our current products as well
      as a
      focus on product line expansion.




We
      are
      headquartered in Las Vegas, Nevada with manufacturing operations in Guangdong
      Province, China. We
      maintain 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 not constitute
      part of this report.




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





**RECENT
      DEVELOPMENTS**




On
      March
      29, 2006, we entered into an agreement to issue and sell our secured promissory
      notes for aggregate gross proceeds 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 the net offering proceeds in early April 2006. In connection
      with this debt financing, we also entered into a definitive agreement with
      the
      purchasers of our notes whereby we may, at our sole option, require them to
      purchase up to $5 million of our common stock. This agreement, sometimes
      referred to as equity 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 price of our shares on the day of a drawdown, subject to a ceiling
      price
      of $3.50 per share. In addition, we have reached an agreement in principal
      to
      issue and sell an additional $6 million of our common stock at price of $2.50
      per share for a total of 2.4 million shares.




-3-




The
      financings described in the preceding paragraph are conditioned upon the
      concurrent pay off or conversion into common stock of all of our outstanding
      senior secured convertible promissory notes. As of the date of this report,
      we
      had approximately $11.6 million principal amount of senior secured convertible
      promissory notes outstanding. Of this amount, the holders of these notes are
      expected to convert approximately $5.6 million in principal and interest into
      shares of our common stock and we expect to pay off the remaining $6.0 million
      outstanding balance with a portion of the proceeds from the financings described
      above.




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




On
      October 1, 2005, we entered into a patent purchase agreement with William
      Westmore Purton, an individual, Dolphin Products Pty Ltd, an Australian
      corporation (“DPP”), and Dolphin Advanced Technologies Pty Ltd, an Australian
      corporation (together with DPP, “Dolphin”), pursuant to which we agreed to
      purchase from Dolphin patents for certain microchip technology for use in the
      gaming industry (the “RFID Patents”). Pursuant to the purchase agreement, we
      agreed to purchase the RFID Patents in exchange for $750,000 in cash and the
      issuance to Mr. Purton of 1,000,000 shares of our common stock. The cash
      purchase price was payable in installments, starting with a non-refundable
      payment of $125,000 on the execution date of the purchase agreement. A second
      installment of $125,000 was payable seven days after the date on which we
      notified Dolphin that we are satisfied with the results of our due diligence
      investigation. The remaining balance of $500,000 is payable in six (6) equal
      monthly installments beginning on January 31, 2006. With the exception of the
      initial payment, payment of the cash purchase price was subject to (i) our
      satisfaction with our due diligence investigation, and (ii) the execution and
      delivery by Dolphin and us of a licensing and manufacturing agreement pursuant
      to which we would license the Patents to Dolphin for the manufacture of casino
      gaming chips. The 1,000,000 common shares were issuable at the time the second
      installment of the cash purchase price is paid.




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




**BUSINESS
      STRATEG** **Y**




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




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




·
            ***Expansion
                into additional domestic and international gaming markets for our
                products.***The
                worldwide expansion of gaming should provide new markets for our
                products,
                and we have targeted sales opportunities in these new markets in
                addition
                to our traditional established gaming markets. To help address these
                markets we continue to look at various distributional channels in
                the US
                and internationally.




·
            ***Implementation
                of cost reduction initiatives to increase gross margins.***Through
                the implementation of cost reduction initiatives, our management
                believes
                that the gross margins on our products will improve over time. We
                continue
                to reduce the cost of our component parts through the use of production
                facilities in China.




-4-




**TABLE
      GAME SUPPORT PRODUCTS** ****




**Shuffler
      Product Line**




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




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




***RandomPlus
      Shuffler.*** The
      RandomPlus utilizes state of the art electronics for improved reliability and
      longevity. It has been designed with reliability in mind. The RandomPlus has
      fewer moving parts than its predecessor and is designed with additional user
      accessible adjustments to accommodate a wider variety of card types and
      conditions. It will include additional features, such as the switch in power
      from alternating current, or AC, to direct current, or DC, conversion to an
      external power supply, redesign of the cabinet, and the addition of an external
      lever to adjust the shuffler for card thickness.




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




·
            shuffle
                and prepare the cards into the individual packets required for the
                specialty poker game;




·
            provide
                sufficient speed to maintain the pace of the game even if just a
                single
                player is playing;




·
            verify
                the overall quantity of the cards shuffled and the number of cards
                in each
                packet; and




·
            verify
                the actual cards dealt to each
                player.




The
      PokerOne shuffler is designed for the active specialty table game market where
      non-traditional card dealing is accepted. The PokerOne shuffler shuffles and
      deals packets of cards to each player. As a result of the characteristics of
      the
      PokerOne shuffler, we believe that we will be able to provide substantially
      improved speed and security for our customers in the specialty table game
      market. As discussed elsewhere herein, our ability to sell the PokerOne shuffler
      in the United States is currently the subject of pending litigation. We began
      to
      install the PokerOne shuffler in foreign markets in 2004 and began installing
      in
      the US in the second quarter of 2005.




-5-




***Shuffler
      Market.*** We
      estimate that there are over 45,000 gaming tables worldwide and that the market
      penetration of installations of automatic shufflers is low. We estimate that
      of
      the automatic shufflers installed, most of these installations are on specialty
      gaming tables. Several companies have introduced automatic shufflers for the
      general market, but for the most part, these efforts have been unsuccessful.




There
      are
      several factors that have resulted in low acceptance of automatic shufflers
      for
      the general market, including security issues, reliability/productivity and
      player confidence. We believe that our technology and ergonomic design will
      allow our products to overcome these industry concerns:




·
            **Security.******We
                believe that our combination of patented computer and mechanical
                technology safeguards against cheating schemes. The random ejection
                technology used in all of our shuffler products produces a
                computer-generated, random and untrackable shuffle, and the Continuous
                Random Ejection Shuffler technology eliminates advantages achieved
                by
                knowledgeable players, as each card is available for the next round
                of
                play by producing “full” decks of continuously shuffled random cards. This
                has the added benefit of giving the casino a higher hold from the
                gaming
                table since the shuffler preserves the original odds of each game,
                which
                favor the casino.




·
            **Reliability/Productivity.**Given the paper handling demands placed on card shufflers, shufflers
                are
                prone to jamming and breakdown. We have designed our shufflers to
                be
                easily accessed by dealers so they can hand-deal cards until the
                unit can
                be put back in****serviceand
                prevent a table from shutting down. In addition, the dealer, with
                little
                interruption, can easily put the unit back into play in most
                cases.




·
            **Player
                Confidence.**To
                reduce cheating schemes, many existing shufflers completely cover
                or
                shield from players the deck(s) being shuffled, thereby reducing
                player
                confidence in a fair game. The design of our shufflers allows players
                to
                see the cards being ejected and re-stacked through a frosted cover
                without
                compromising security, which we believe will gain better player
                acceptance.




***Shuffler
      Installations*** .
      As of
      December 31, 2005, we had installed a net total of 683 units, representing
      the
      number of revenue generating shufflers installed at casinos through sale or
      rental agreements. Of the units installed as of December 31, 2005, 161 units
      were installed pursuant to rental agreements, and 522 units were sales. In
      terms
      of location, as of December 31, 2005, we have installed our shufflers in 85
      different gaming properties, including the MGM Grand in Detroit, Michigan;
      the
      Excalibur, the Luxor and the Venetian in Las Vegas, Nevada; the Viejas Casino
      in
      Alpine, California; the Great American Group, Washington; and the Treasure
      Island Resort & Casino in Red Wing, Minnesota.




**Competition
      - Shufflers.** Competition
      in the shuffler market is intense. The shuffler market is divided into two
      separate segments, traditional table game and specialty table games. Shuffle
      Master, Inc. is the current market leader in both the traditional table game
      and
      specialty table game markets. Our other competitors have a small collective
      market share of the table game market. With respect to the traditional table
      game market segment, we compete with Shuffle Master, Inc., which markets the
      Shuffle Master King Ô ,
      and the
      One2Six Shuffler Ô and Ten
      Stix, Inc., which markets the Pro Shuffler Shuffling System. Shuffle
      Master, Inc. also offers the ACE®, which is currently the only product in the
      specialty table game market. ****




**The
      Deck Checker**




The
      Deck
      Checker is a card security device that specifically scans playing cards to
      ensure an accurate count and verify that all of the cards in a deck of cards
      are
      present. This innovative product confirms 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 the verification process of used cards, or it can be used in
      the
      front of the house (the casino floor) to ensure that all table games open with
      complete and accurate decks, reducing the amount of time it takes to open a
      table game, thereby increasing productivity. The Deck Checker allows the re-use
      of playing cards by providing a secure and reliable method of putting used
      cards
      back into play, reducing card usage and the associated costs. In addition,
      the
      Deck Checker can scan from up to eight decks at a time, each deck in less than
      15 seconds. The device is programmed for all standard playing cards,
      accommodates plastic, paper and plastic coated playing cards and is programmed
      with many standard card games.




-6-




The
      Deck
      Checker has an integrated management system and an on-board storage/vault
      system. The integrated management system gives a report for every transaction
      to
      provide an audit trail. Further, the Deck Checker requires limited training
      time, as the machine prompts the user throughout the entire checking process.
      Since the Deck Checker does not require additional staff, the Deck Checker
      is
      designed to increase efficiency and shorten the start-of-the-day and the
      end-of-the-day procedures.




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




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




**Competition
      - DeckChecker.** We
      believe Shuffle Master’s MD2 product provides limited competition for the Deck
      Checker.




**High
      frequency RFID Casino Chip**




High
      frequency 13.56 MHz RFID casino chips provide real-time data capability,
      enhanced chip security, player tracking and accounting management benefits
      for
      casinos. The high frequency RFID chips enable casinos to read 1,000 chips in
      a
      second and have a memory capacity of over 10,000 bits. In comparison to the
      existing RFID casino chip technology (the 125KHz RFID chip), the 13.56 MHz
      chip
      is 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 an
      example, if there are 100 chips in a particular player position - in the same
      time that it takes the125 KHz technology to determine that there are 100 chips
      in the field - the 13.56 MHz has not only determined the number of chips, it
      has
      also interrogated 3 or 4 levels of security features within each chip,
      authenticated the unique identity of each individual chip, determined the value
      of the bet and calculated the win or loss. The 13.56MHZ technology enables
      real
      time monitoring of table games. The high frequency RFID chips provide
      significant cost advantages over predecessor technology.




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




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




**ChipWasher**




ChipWasher
      is a product that washes and sanitizes gaming chips. The build-up of oils and
      residue makes them sticky and difficult for dealers and players to handle,
      which
      makes for slower play. Casino surveillance and identification becomes
      increasingly difficult and players’ gaming experience is considerably lessened.
      Regular chip washing prevents this, but the traditional method of hand-washing
      is time-consuming and costly. The ChipWasher is a practical and efficient means
      toward cleaner and more hygienic casino chips. This product will be available
      by
      the second half of 2006.




-7-




Benefits
      of this product include:




·
            Ease
                of operation inside the cage




·
            Cost-effectiveness




·
            Labor-savings




·
            Greater
                speed




·
            Environmentally
                friendly




·
            Enables
                greater surveillance identification




·
            Hygienic




·
            Ergonomically
                designed




***ChipWasher
      Market.*** We
      estimate that the addressable chip market is at least 100 million casino chips
      worldwide. Currently, chips are either washed by hand or placed in commercial
      clothes washing machines. We estimate that interest in an easy to use, high
      speed chip washer will be significant and will be furthered with the
      introduction of high frequency RFID chips that will require better care and
      handling than traditional chips. ****




**Competition
      - ChipWasher.** There
      is
      no equipment specifically manufactured for the washing of casino chips in the
      market today.




**RESEARCH
      AND DEVELOPMENT**




Some
      of
      our research and development operations were moved to our China facilities
      at
      the end of 2004. The intention is to have our China facility as the mechanical
      and electronic engineering center and Las Vegas as the architectural and
      software engineering center for research and development. We anticipate that
      the
      development and production of our products will be more efficient as a result
      of
      this delineation. Our current research and development emphasis is to improve
      our existing product lines, as demonstrated by our completion of the PokerOne
      shuffler, and development of and fourth quarter 2005 sales of the RandomPlus
      Shuffler. We spent $1,394,006 in 2005 and $1,423,096 in 2004 on research and
      development activities. We expect our research and development expenses to
      increase as we develop enhancements to the current shuffler line, and develop
      new products for 2006 release including the ChipWasher.




**REGULATION
      AND LICENSING**




**Overview**




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




We
      have
      approvals that enable us to conduct our business in numerous jurisdictions,
      subject in each case to the conditions of the particular approvals. These
      conditions may include limitations as to the type of product we may sell or
      lease, as well as limitations on the type of facility (such as riverboats)
      and
      the territory within which we may operate (such as tribal nations).
      Jurisdictions in which we, and specific personnel where required) have
      authorizations with respect to some or all of our products and activities
      including Arizona, California, Colorado, Connecticut, Illinois, Indiana, Iowa,
      Kansas, Louisiana, Michigan, Missouri, Nevada, New Mexico, New York, North
      Dakota, Oregon, South Dakota, Washington, various Native American tribes, as
      well as Argentina, Bahamas, Peru, Puerto Rico, Russia, Saskatchewan, Sweden
      and
      Vietnam.




-8-




Certain
      Indian tribes throughout the United States that have compacts with the states
      in
      which their tribal dominions are located operate or propose to operate casinos,
      and these tribes may require suppliers of gaming and gaming-related equipment
      to
      obtain authorizations. We have worked and will continue to work with these
      tribes to obtain the necessary authorizations.




During
      2005, we cooperated with certain state gaming authorities with respect to the
      required re-licensing of our company in certain jurisdictions, as well as the
      licensing of our new management team. We do not anticipate that this process
      will have a material adverse effect on us. We continue to cooperate with all
      gaming regulatory agencies as necessary and applicable to maintain good standing
      in all jurisdictions in which we hold a license.




**Associated
      Equipment**




In
      most
      jurisdictions, our products fall within the general classification of
“associated equipment.” “Associated Equipment” is equipment that is not
      classified as a “gaming device,” but which has an integral relationship to the
      conduct of licensed gaming. Regulatory authorities in some jurisdictions have
      discretion to require manufacturers and distributors to meet licensing or
      suitability requirements prior to or concurrently with the use of associated
      equipment. In other jurisdictions, the regulatory authorities must approve
      associated equipment in advance of its use at licensed locations. Except as
      described below in “Other Jurisdictions,” we have obtained approval for our
      associated equipment in each jurisdiction that requires such approval and in
      which our products that are classified as associated equipment are sold or
      used.




**Gaming
      Devices and Equipment**




Certain
      jurisdictions classify our products as “gaming devices” and/or “gaming
      equipment”. Although regulations vary among jurisdictions, each jurisdiction
      requires various licenses, findings of suitability, registrations, approvals
      or
      permits to be held by companies and their key personnel in connection with
      the
      manufacture and distribution of gaming devices and equipment.




**Regulation
      of Stockholders**




In
      most
      jurisdictions, in which we are subject to regulatory oversight, beneficial
      owners of our voting securities or other securities may, at the discretion
      of
      the gaming regulatory authorities, be required to file an application for a
      license, finding of suitability or other approval and in the process subject
      himself or herself to an investigation by those authorities. However, we believe
      gaming regulatory authorities typically do not take such action unless a
      beneficial owner owns more than 5% of our outstanding voting securities, at
      which time many jurisdictions require certain reports to be filed.




**Regulation
      and licensing - Nevada**




The
      manufacture and distribution of associated equipment for use in Nevada are
      subject to the Nevada Gaming Control Act and the regulations promulgated there
      under and various local ordinances and regulations.




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




-9-




We
      do not
      believe that we will be required by the Nevada Gaming Authorities to register
      as
      a public company or obtain a finding of suitability in Nevada so long as we
      do
      not manufacture or sell “gaming devices” as defined by the Nevada Gaming Control
      Act. Nevertheless, even though applications for the approval of associated
      equipment are subject to a less comprehensive approval process that focuses
      on
      approval of the equipment, the Nevada Gaming Control Board may investigate
      us or
      any individual who has a material relationship to, or material involvement
      with,
      us in order to determine whether such individual is suitable or should be
      licensed. Besides the company, our officers, directors and certain key employees
      may be required to file applications and be licensed or found suitable by the
      Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application
      for licensing for any cause that they deem reasonable. A finding of suitability
      is comparable to licensing. Both require submission of detailed personal and
      financial information, which is followed by a thorough investigation. The
      applicant for licensing or a finding of suitability must pay all costs of the
      investigation.




In
      the
      event that the Nevada Gaming Authorities were to find an officer, director
      or
      key employee unsuitable for licensing or unsuitable to continue having a
      relationship with us, we would have to sever all relationships with that
      individual. In addition, the Nevada Gaming Commission may require us to
      terminate the employment of any person who refuses to file appropriate
      applications. Determinations of suitability or of questions pertaining to
      licensing are not subject to judicial review in Nevada.




In
      the
      event that we are found to have violated the Nevada Gaming Control Act, the
      licenses and/or approvals we hold could be limited, conditioned, suspended
      or
      revoked. In addition, we and the persons involved could be required to pay
      substantial fines, at the discretion of the Nevada Gaming Control Board, for
      each separate violation of the Nevada Gaming Control Act. The limitation,
      conditioning or suspension of any license or approval held by us could (and
      revocation of any license or approval would) materially adversely affect our
      operations.




Any
      beneficial holder of our voting securities, regardless of the number of shares
      owned, may be required to file an application, be investigated, and have the
      holder’s suitability as a beneficial holder of our voting securities determined
      if the Nevada Gaming Control Board finds reason to believe that such ownership
      would otherwise be inconsistent with the declared policies of the State of
      Nevada. The applicant must pay all costs of investigation incurred by the Nevada
      Gaming Authorities in conducting any such investigation. Any person who fails
      or
      refuses to apply for a finding of suitability or a license within thirty days
      after being ordered to do so by the Nevada Gaming Commission or the Chairman
      of
      the Nevada Gaming Control Board may be found unsuitable. The same restrictions
      apply to a record owner if the record owner, after request, fails to identify
      the beneficial owner. In the event that an individual is found to be unsuitable,
      that individual would be required to transfer or otherwise dispose of all of
      our
      stock on such terms as may be required by the applicable Nevada Gaming
      Authority.




**Other
      Jurisdictions**




All
      other
      jurisdictions that have legalized gaming require various licenses,
      registrations, findings of suitability, permits and approvals for manufacturers
      and distributors of gaming devices and equipment as well as licensure provisions
      related to changes in control. In general, such requirements involve
      restrictions similar to those of Nevada. During the past year, certain events
      in
      connection with our regulatory approvals have taken place as
      follows:




*Mississippi* . We
      have
      applied to the Mississippi Gaming Commission for licensure as a manufacturer
      and
      distributor, and the investigation for our licensure is pending. Until this
      application is acted upon, we may not sell or service our shuffler products
      in
      Mississippi. However, the Commission has determined that our
      DeckChecker TM product is a type of gaming associated equipment that may be sold
      in
      Mississippi without our first receiving a license.




*New
      Jersey* .
      Upon a
      satisfactory initial background investigation, in December 2005 we obtained
      a
      six-month transactional waiver approval from the New Jersey Commission to engage
      in specific transactions with certain New Jersey casinos pending the outcome
      of
      the complete investigation of our license application. The transactional
      approval process permits us to continue our business with New Jersey casinos
      uninterrupted upon the completion of the investigation. If
      licensure is not obtained before the expiration date of the transactional waiver
      approvals, we will request transactional waiver approvals for an additional
      6-month period.




-10-




*Louisiana* .
      In
      2005, the Louisiana State Police, Gaming Division, has given us a permit as
      a
      gaming manufacturer, gaming supplier and non-gaming supplier with respect to
      all
      gaming except for Indian gaming. Louisiana investigated us with respect to
      certain omissions in our gaming application relating to a certain former officer
      and directors. We received a Notice of Hearing Date before the Louisiana Gaming
      Control Board Administrative Hearing Office for January 24, 2006. A settlement
      agreement and related motions executed by VendingData and the Louisiana State
      Police, Gaming Division, and passed affirmatively upon by the Administrative
      Law
      Judge retained by the Louisiana Gaming Control Board was approved, by the
      Louisiana Gaming Control Board at its February 21, 2006, meeting. The settlement
      allows VendingData to re-apply for a gaming license in 30 months.




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




**United
      States - Federal**




The
      Federal Gambling Devices Act of 1962 makes it unlawful for a person to
      manufacture, transport, deliver or receive gaming machines, gaming machine
      type
      devices and components thereof across interstate lines unless that person has
      first registered with the Attorney General of the Department of Justice of
      the
      United States. We register annually with the Department of Justice in accordance
      with the Federal Gambling Devices Act of 1962.




**Application
      of Future or Additional Regulatory Requirements**




In
      the
      future, we intend to seek the necessary licenses, approvals and findings of
      suitability for us, our products and our personnel in other jurisdictions
      throughout the United States and the world where significant sales are
      anticipated. However, there can be no assurance that such licenses, approvals
      or
      findings of suitability will be obtained, and if obtained that they will not
      be
      revoked, suspended or conditioned or that we will be able to obtain the
      necessary approvals in a timely manner, or at all, for our future products
      as
      they are developed. If a license, approval or finding of suitability is required
      by a regulatory authority and we fail to seek or do not receive the necessary
      license, approval or finding of suitability, we may be prohibited from selling
      our products for use in the respective jurisdiction or may be required to sell
      our products through other licensed entities at a reduced profit.




**CUSTOMER
      SERVICE**




In
      order
      to maintain and expand the market presence of our products, we are committed
      to
      providing a high level of customer service and support. We have centralized
      most
      of our service functions in Las Vegas, Nevada for the purposes of ensuring
      uniform repair of our products. As such, all major technical maintenance on
      our
      products is conducted by our local technicians. In this regard, we have provided
      our customers with additional back-up products for use until we can return
      the
      serviced products to them.




With
      respect to routine maintenance, we employ three customer service
      representatives, four
      regional service managers and seven remote technicians (in addition to the
      technicians located in Las Vegas and Seattle Service Centers) in
      various locations in the United States. Our service technicians regularly visit
      our customers to ensure our products are operating satisfactorily. In the event
      that a customer service technician discovers a problem with one of our products,
      the products are repaired in the field. Our service representatives also assist
      our customers in training dealers and other casino employees how to use our
      products.




-11-




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




In
      addition, we maintain a training center in Las Vegas to provide support and
      training to our distributors, who are responsible for servicing their own
      products.




**MARKETING
      AND DISTRIBUTION**




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




Current
      sales tactic is to perform live demonstrations of our products to potential
      customers. These demonstrations occur at both at the customer sites and at
      our
      Las Vegas showroom. Our marketing department supports the sales effort through
      direct mail advertising and presentations at domestic and international trade
      shows. Future marketing plans include more effective sales demonstration tools
      that take advantage of current computer, web, and video
      technologies.




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




We
      use
      distributors to gain exposure of our products in certain foreign geographic
      areas where we believe distributors with a local presence would be more
      effective than our own sales force. Management believes that utilizing
      distributors to sell our products internationally has two main
      advantages:




·
            Distributors
                have the authority to operate in the respective market and are able
                to
                address and resolve regulatory compliance issues that may arise in
                a
                timely manner; and




·
            Distributors
                have the internal infrastructure and superior contacts necessary
                to
                effectively sell and service our products in certain
                markets.




On
      January 21, 2005, we entered into an exclusive five-year agreement with TCS
      JohnHuxley, or TCS, a U.K. based worldwide distributor of products to the gaming
      industry, to market and distribute our shuffler products outside of the United
      States.




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




**CUSTOMERS**




Our
      customers are domestic and international casino and gaming operators. Any
      adverse changes in the financial condition of our major customers, any loss
      of
      our major customers, or any meaningful reduction in the level of sales to any
      of
      these customers could have a materially adverse impact on the business.




-12-




**COMPETITION**




The
      gaming industry is extremely competitive. Although we have assembled an
      experienced management team, which uses its knowledge of the gaming industry
      to
      tailor our products and services to the needs of the gaming industry, we compete
      with many established companies, which possess resources substantially greater
      than ours. Generally, we compete with other companies that are substantially
      larger, have more substantial histories, backgrounds, experience and records
      of
      successful operations; greater financial, technical, marketing and other
      resources; more employees and more extensive facilities than we now have, or
      will have in the foreseeable future. The competitive pressures of the gaming
      industry will require us to invest in additional research and development.
      The
      constant need to update and innovate may result in increased costs
      for ,
      and
      reduced margins on, our products and services **.**




**PRODUCT
      DEVELOPMENT, MANUFACTURING AND ASSEMBLY**




We
      maintain a state-of-the-art facility for our product development and final
      assembly divisions in Las Vegas as well as in XiaoLan, China. We have 12
      full-time engineers working in research and development of our shufflers, and
      enhancements to our DeckChecker product line. We acquired certain intellectual
      property from Dolphin Products Pty Ltd, in 2005, along with the patent on
      ChipWasher and the DeckSetter.




We
      manufacture all of our products except for the RFID chip, which is manufactured
      on our behalf by Dolphin. With Dolphin’s assistance, we are now engaging in the
      commercialization aspects of the RFID chip. In addition, we occasionally engage
      consultants in research and development to complement our skill set in specific
      areas of engineering activities. We have 57 full-time personnel in final
      assembly, installation and service. We hire contract personnel on a varied
      basis
      depending upon production and installation volume.




**SUPPLIERS**




Most
      components for the shufflers and our DeckChecker are sourced in China. Shuffler
      and DeckChecker assembly is being done in China and final units are shipped
      to
      Las Vegas for distribution to the North America and European markets. The
      manufacturing of RFID casino chips is outsourced to Dolphin, who specializes
      in
      plastic injection molding and is located in Melbourne, Australia. Dolphin has
      established a very strong working relationship with Magellan Technology Pty
      Ltd
      in Sydney, Australia, who is the owner of the intellectual property for RFID
      technology. Dolphin is sourcing their RFID tags from Progressive Gaming
      International Corp (“PGIC”).




**INTELLECTUAL
      PROPERTY**




We
      have
      secured, and endeavor to secure, to the extent possible, exclusive rights in
      our
      products, primarily through federal and foreign intellectual property rights,
      such as patents, copyrights and trademarks. We have applied for various other
      patents with respect to other concepts and products, including potential
      non-gaming application of our technology. We believe that our intellectual
      property is critical to our future profitability and growth.




With
      respect to our shufflers, the United States Patent and Trademark Office has
      issued 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, Patent
      Nos. D488,193 and D490,481. These patents expire on dates between
      April 2014 and April 2024. In addition, there are seven patent applications
      on file with the United States Patent and Trademark Office. Our shufflers have
      also been issued two patents in Australia and one patent in Canada. For
      additional information with respect to the ongoing litigation involving Shuffle
      Master, Inc., see “Item 3. Legal Proceedings.”




With
      respect to the Deck Checker, we acquired the rights to the Deck Checker pursuant
      to a purchase and sale agreement dated December 23, 2002 in which we
      purchased all of the tangible and intangible assets related to the Deck Checker.
      The purchase price was $1,009,800, where $504,900 was payable upon the
      successful production of five fully operational units of the Deck Checker and
      $500,000 was payable within six months after the first payment is due. The
      first
      payment in the amount of $504,900 was made on August 1, 2003 and the final
      $500,000 payment was made in February 2004. In addition to the purchase 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 of the tangible and
      intangible assets related to the DeckChecker and not to compete with us for
      60 months.




-13-




With
      respect to the ChipWasher and DeckSetter, we acquired the rights to these
      pursuant to a patent and trade secret purchase agreement dated October 6, 2005
      in which we purchased all of the tangible and intangible assets related to
      the
      ChipWasher and DeckSetter from Dolphin. The purchase price was $566,000, where
      $200,000 was payable upon execution of the contract and $366,000 was payable
      over 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.




With
      respect to the RFID chip technology we acquired the rights to the technology
      pursuant to a patent purchase agreement dated October 1, 2005 in which we
      purchased the patent rights and all other intellectual property rights relating
      to the RFID chip from Dolphin. The purchase price was $750,000 plus one million
      shares of our common stock, where $125,000 was payable upon execution of the
      contract and second installment of $125,000 was to be paid on the execution
      of a
      Licensing and Manufacturing Agreement. The final $500,000 was payable over
      six
      months 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 the Licensing and Manufacturing Agreement on February
      27, 2006.




With
      respect to the RFID chip technology, the United States Patent and Trademark
      Office have an application for Patent No. 6659875. The RFID chip technology
      has
      been issued patents in Australia and the United Kingdom, and has a patent
      application in Canada.




There
      can
      be no assurance that any of the claims contained in our pending United States
      or
      foreign patent or trademark applications will be issued, that any of these
      rights will not be infringed by others or that already issued patents or
      trademark registrations will not be invalidated or canceled. Third parties
      could
      infringe on our rights or successfully duplicate our products without infringing
      on our legal rights. Many elements incorporated in our proprietary products
      are
      in the public domain or otherwise not amenable to legal protection and the
      steps
      taken by us will not, in and of themselves, preclude competition with our
      proprietary products.




**EMPLOYEES**




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




**ITEM
      1A.**  **RISK
      FACTORS**




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




-14-




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




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




***We
      may require additional funding in the future to continue to operate our
      business*** .  As
      of December 31, 2005, we had a working capital deficit of ($1,637,021). We
      have
      entered into an agreement to provide us with $18 million additional debt and
      equity financing, and believe that this financing, in addition to our existing
      cash and cash equivalents together with cash generated by operations, will
      meet
      our working capital needs, capital expenditures, and commitments for at the
      next
      12 months. In the event it is not sufficient, we will endeavor to raise
      additional required funds through various financing sources, including the
      sale
      of our equity and debt securities and the procurement of commercial debt
      financing. However, as result of our present level of debt and certain
      restrictions on our ability to incur additional indebtedness under our
      agreement, it is unlikely we will be able to obtain additional debt-based
      capital, unless a significant portion of the proceeds are used to retire
      existing debt. There can be no guarantees that such funds will be available
      on
      commercially reasonable terms, if at all. If such financing is not available
      on
      satisfactory terms, we may be unable to expand or continue our business as
      desired and operating results may be adversely affected. Any debt financing
      will
      increase expenses and must be repaid regardless of operating results and may
      involve restrictions limiting our operating flexibility. If we issue equity
      securities to raise additional funds, the following results may occur:




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




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




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




***We
      have a history of significant operating losses and anticipate continued
      operating losses, and we may be unable to achieve
      profitability.*** We have
      a history of significant operating losses and anticipate continued operating
      losses for the foreseeable future. For the years ended December 31, 2004
      and 2005, we have incurred net losses of $9,538,200 and $17,567,230,
      respectively, and our operations have used $10,660,135 and $14,752,740 of cash,
      respectively. As of December 31, 2004 and 2005, we had accumulated deficits
      of $54,120,549 and $71,687,777, respectively. Over the past several years,
      we
      have derived only limited revenues, which have been insufficient to sustain
      our
      operations. We may not generate sufficient revenue to sustain our operations.
      No
      independent organization has conducted market research providing management
      with
      independent assurance from which to estimate potential demand for our products.
      The overall market may not be receptive to our products, and we may not
      successfully compete in the target market for our products. ****




-15-




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




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




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




·
              patents
                  and pending patent
                  applications;




·
              trade
                  secret, copyright and trademark laws;
                  and




·
              certain
                  built-in technical product
                  features.




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




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




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




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




-16-




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




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




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




·
              resulting
                  in costly litigation; and




·
              disrupting
                  product sales and shipments.




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




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




***Our
      management holds a controlling interest in our common stock, giving our
      management the power to control all matters submitted to our stockholders.*** As
      of
      December 31, 2006, our executive officers and members of our board beneficially
      own approximately 8,048,022 shares of common stock, or approximately 47% of
      the
      outstanding shares of our common stock. Accordingly, these stockholders have
      the
      power to control all matters requiring approval by our stockholders, including
      the election of directors and approval of mergers and other significant
      corporate transactions. This concentration of ownership may make it more
      difficult for non-management stockholders to effect substantial changes in
      our
      company, and also has the effect of delaying, preventing or expediting, as
      the
      case may be, a change in control of our company.




***Shares
      eligible for sale in the near future may cause the market price for our common
      stock to decline.*** In
      addition to the number of shares registered on behalf of investors who purchased
      the Senior Notes and excluding the shares held by our executive officers and
      directors, as of February 28, 2005, we have approximately 9,530,970 shares
      of
      common stock that are either freely tradable pursuant 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 filed with the SEC. As such,
      the future sale of a substantial number of shares of our common stock in market
      transactions, or the perception that these sales could occur, may depress the
      market price for our common stock. These sales could also impair our ability
      to
      raise additional capital through the sale of our equity securities in the
      future.




***Our
      board of directors may issue blank check preferred stock, which may affect
      the
      voting rights of our holders and could deter or delay an attempt to obtain
      control of us.*** ** Our
      board
      of directors is authorized, without stockholder approval, to issue preferred
      stock in series and to fix and state the voting rights and powers, designation,
      preferences and relative, participating, optional or other special rights of
      the
      shares of each such series and the qualifications, limitations and restrictions
      thereof. Preferred stock 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 the voting power of holders of our common stock and could
      have
      the effect of deterring or delaying an attempt to obtain control of
      us.




-17-




**ITEM
          2.** **DESCRIPTION
          OF PROPERTY**




We
      lease
      approximately 58,725 square feet for our headquarters at 6830 Spencer Street,
      Las Vegas, Nevada 89119, which houses our corporate offices, including sales
      and
      engineering departments, and warehouse space. The current lease requires
      payments of approximately $55,254 per month and expires in January 2007. We
      have an option for an additional term of five years.




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




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




**ITEM
          3.** **LEGAL
          PROCEEDINGS** ****




On
      July
      12, 2005, we entered into a Settlement Agreement with Shuffle Master, Inc.,
      with
      respect to a legal proceeding filed on March 27, 2002, by Shuffle Master, Inc.,
      against us in the United States District Court, District of Nevada (Case No.
      CV-S-02-0438-JCM-PAL). The complaint alleged, among other things, claims for
      patent infringement relating to two of Shuffle Master’s patents and requested
      treble damages and an injunction enjoining us from infringing on such patents.
      The Shuffle Master patents at issue were United States patent numbers 6,325,373
      and 6,068,258, regarding registering use of a playing card shuffler apparatus
      and the displaying of "shuffler state" information. We denied the claims and
      asserted counterclaims against Shuffle Master. Shortly before trial, the parties
      settled the matter. Pursuant to the Settlement Agreement, the parties agreed
      to
      dismiss their claims and counter-claims in the particular action and Shuffle
      Master agreed not to bring any claims against us for the infringement of the
      above-referenced patents for past or future use of the technology, with the
      exception of matters involving infringement of the following aspects of Patent
      No. 6,325,373: (i) a method of recovering from a card jam in an automatic card
      shuffler, as further described in Claim 6 of Patent No. 6,325,373; and (ii)
      an
      automatic card shuffler with a card moving mechanism to clear card jams, as
      further described in Claim 7 of Patent 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.




On
      October 5, 2004, Shuffle Master filed a separate patent infringement action
      in
      the United States District Court, District of Nevada (Case No.
      CV-S-04-1373-JCM-LRL) claiming that the use, importation and offering for sale
      of our PokerOne shuffler infringed Shuffle Master’s United States Patent No.
      6,655,684. We responded by denying Shuffle Master’s claim of patent infringement
      and requesting that the court enter a declaratory judgment of non-infringement.
      On November 30, 2004, however, the District Court granted Shuffle Master's
      motion for preliminary injunction, prohibiting us from selling our PokerOne
      shuffler in the United States pending resolution of the lawsuit. On March 4,
      2005, the Federal Circuit Court of Appeals issued an order staying the
      injunction pending our appeal of the matter. On December 27, 2005, the Federal
      Circuit held that the District Court erred in failing to properly construe
      Shuffle Master's patent claims before preliminarily enjoining us and on this
      basis vacated the order. As a result, we may seek to recover from Shuffle Master
      any damages we suffered as a result of the wrongful injunction. With respect
      to
      the merits of Shuffle Master's action, a Magistrate Judge appointed by the
      District Court to conduct a Markman hearing to determine the proper construction
      of Shuffle Master's patent claims recommended on September 26, 2005 that the
      Court adopt the claim construction urged by us. The Magistrate's recommendation
      is not binding on the District Court and the District Court’s ruling on
      interpretation of the claims is still pending.




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




Not
      applicable.




-18-




**PART
      II**




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




**Market
      Information**




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




The
      following table sets forth the high and low closing sale price of our common
      stock, as reported by the AMEX for each quarter during the past two fiscal
      years, except for the first quarter during 2004 during which our shares were
      traded on the OTC Bulletin Board..




**2005**
            
            **Low**
            
            **High**Fourth
                Quarter
            
            $
            2.29
            
            $
            3.70Third
                Quarter
            
            $
            1.34
            
            $
            2.25Second
                Quarter
            
            $
            1.80
            
            $
            2.15First
                Quarter
            
            $
            1.49
            
            $
            2.22**2004**
            
            
            **Low**
            
            
            **High**Fourth
                Quarter
            
            $
            1.25
            
            $
            3.60Third
                Quarter
            
            $
            3.62
            
            $
            4.75Second
                Quarter *
            
            $
            3.45
            
            $
            4.50First
                Quarter*
            
            $
            3.50
            
            $
            4.00




*
      Prices
      shown in the table above for the second quarter of 2004 are high and low closing
      sale prices as reported 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 stock on 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 the high and low closing bid prices of our common stock on the OTC
      Bulletin Board.




**Shareholders**




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




**Dividend
      Policy**




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




**Recent
      Sales of Unregistered Securities**




We
      have
      previously reported in our filings with the SEC on Forms 8-K and 10-QSB
      information about unregistered sales of our securities made during the period
      covered by this report pursuant to applicable exemptions from the registration
      requirements of the Securities Act of 1933, as amended.




-19-




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




**OVERVIEW**




Our
      strategy is to develop and deliver cost-effective, customer-focused, niche
      products and services that increase the security, productivity and profitability
      for the global gaming industry.. Our strategy involves marketing certain of
      our
      products for sale or lease, depending on the product, the geographic location
      of
      the customer and other factors. We rely on our internal sales staff and
      distributor relationships for the sale and rental of our products.




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




For
      the
      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 were offset by sales
      returns and allowances of $739,263. Specific product line results for the year
      ended December 31, 2005 compared to the year ended December 31, 2004 are
      provided below. Sales declined as a result of the discontinuation of the
      SecureDrop procduct line, disrupted sales of the PokerOne product line as a
      result of a patent lawsuit, and delays in getting the RandomPlus through
      jurisdictional reviews **.**




For
      the
      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 inventory write down of $3,068,846. Cost of sales,
      not including in the write down, for the year ended December 31, 2005, was
      $4,667,220, or 31% more than the year ended December 31, 2004. The cost of
      sales
      increase can be attributed to the additional costs in deploying new versions
      of
      the PokerOne and the rollout of the RandomPlus. The manufacturing of products
      in
      China is expected to continue to reduce cost of sales on a per unit basis
      through the first half of 2006 as we identify more efficiency and optimize
      vendors in China. These efforts should result in further improvements in gross
      margin.




The
      gross
      margin on revenue for the year ended December 31, 2005 was $(2,305,745),
      excluding the impact of the inventory write down of $3,068,846, compared to
      the
      gross margin on revenue for the year ended December 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 Sales1
            
            
            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
            %)**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 Sales2
            
            
            3,015,807
            
            
            2,617,361
            
            
            (15
            %)Gross
                Margin
            
            
            (3,476,452
            )
            
            (2,446,199
            )
            
            (12
            %)




1 Cost of
      Sales includes manufacturing costs including labor and overhead and does not
      include the $3,068,846 of inventory write down.


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




-20-





**SecureDrop
      Sales.** As
      a
      result of our decision 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 in place. The
      decrease in cost of sales to $10,159 reflects the reduced sales from the prior
      period.




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




**Shuffler
      Rentals.** The
      decrease in shuffler rental revenue reflects the reduced number of shufflers
      placed on a rental basis as a result of the conversion of rental units to
      purchased units in 2004 and the failure to place additional shuffler units
      on a
      rental basis. This failure was due, in part, to the production delays related
      to
      the introduction of new shuffler products, such as the RandomPlus shuffler.
      Cost
      of sales include shuffler rental depreciation of $467,983 during the year ended
      December 31, 2005 compared to $277,208 during the prior year period. The cost
      of
      sales increase can be attributed to the additional costs in deploying new
      versions of the PokerOne and the rollout of the RandomPlus.




**Deck
      Checker Sales.** The
      decrease in Deck Checker sales resulted primarily from reduced international
      sales.




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




**Other
      Income** .
      The
      decrease in other revenues is due to product returns offset by the sale of
      products that are not produced by us and sold only on a limited basis. We also
      had sales returns and allowances of $739,263 for the year ended December 31,
      2005, compared to $0 during the prior year period **.**




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




For
      the
      year ended December 31, 2005, our general and administrative expenses were
      $9,220,636 or 31% more than the year ended December 31, 2004. The increase
      in
      general and administrative expenses related primarily to a $1,875,000 increase
      in legal and regulatory costs due to defense of the patent lawsuits and
      legal/regulatory issues pertaining to former senior management, a $638,000
      increase in payroll primarily related to the expensing of stock options, a
      $530,000 increase in consulting expenses related to the management change in
      March 2005, a $355,000 increase in depreciation related to the write off of
      leasehold improvements on the old China 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 in bad debt expense,
      a
      decrease of $1,153,160 in non-cost of sales service related expenses, and
      $92,510 increase in shipping), offset by a $52,000 decrease in travel and
      entertainment, a $16,000 decrease in supplies, and a $14,500 decrease in rent
      expenses.




-21-




***Research
      and Development Expenses***




For
      the
      year ended December 31, 2005, research and development expenses were $1,394,000,
      or 2% less than the year ended December 31, 2004.




***Interest
      Expense***




For
      the
      year ended December 31, 2005, we incurred interest 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 to our previously outstanding 9% senior
      secured notes, the currently outstanding 10% senior secured convertible notes
      and the $5 million line of credit. The debt service on our 10% senior secured
      convertible notes will continue until February and March 2008 at which time
      the
      principal amount is due.




**FINANCIAL
      CONDITION**




As
      of
      December 31, 2005, we had a working capital deficit of $(1,637,021). We believe
      that we will need an at least $12 million of additional capital, in addition
      to
      our existing cash and cash equivalents together with cash generated by
      operations, in order to meet our working capital needs, capital expenditures,
      and commitments for at the next 12 months. We will endeavor to raise additional
      required funds through various financing sources, including the sale of our
      equity and debt securities and the procurement of commercial debt financing.
      However, as result of our present level of debt and certain restrictions on
      our
      ability to incur additional indebtedness under our Senior Notes, it is unlikely
      we will be able to obtain additional debt-based capital, unless a significant
      portion of the proceeds are used to retire existing debt. There can be no
      guarantees that such funds will be available on commercially reasonable terms,
      if at all. If such financing is not available on satisfactory terms, we may
      be
      unable to expand or continue our business as desired and operating results
      may
      be adversely affected.




***Liquidity
      and Capital Resources***




As
      a
      result of our operating loss and our use of cash, our net working capital has
      decreased from $4,511,094 at December 31, 2004 to $(1,637,022) at
      December 31, 2005, as shown in the table below:




-22-





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





***Sources
      of Capital***




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




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




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




In
      2005,
      to fund our continuing operating cash flow deficits, in addition to using the
      remaining cash we had on hand at the beginning of 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 Senior Notes” and together with the
      February Senior Notes, the “Senior Notes”).




·
              On
                  February 15, 2005, we completed a private placement of our February
                  Senior
                  Notes, which mature on February 15, 2008. The February Senior Notes
                  are
                  secured by a first priority security interest in our assets. The
                  February
                  Senior Notes require semi-annual payments of interest only on August
                  1 and
                  February 1 of each year, with the principal and any unpaid interest
                  due at
                  February 15, 2008. Any prepayments of the February Senior Notes
                  made prior
                  to February 2007 require the payments of premiums that decline
                  each year.
                  Holders of the February Senior Notes have a one-time right to convert
                  up
                  to 50% of the then outstanding principal of the February Senior
                  Notes into
                  shares of our common stock, $.001 par value, at a rate $1.65 per
                  share.
                  Through the private placement we issued an aggregate of $10,000,000
                  in
                  February Senior Notes, in return for exchanged notes in the aggregate
                  principal amount of $3,250,000 and gross cash proceeds of
                  $6,750,000.




-23-


·
              On
                  March 14, 2005, we completed an additional $2 million private placement
                  of
                  our March Senior Notes, which mature on 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
                  first priority security interest in our assets. The March Senior
                  Notes
                  require semi-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. Any prepayments of the March Senior Notes made prior to March
                  2007
                  require the payments of premiums that decline each year. Holders
                  of the
                  March Senior Notes have a one-time right to convert up to 50% of
                  the then
                  outstanding principal of the March Senior Notes into shares of
                  our common
                  stock, $.001 par value, at a conversion price of $1.65 per
                  share.




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




To
      fund
      our continuing operating cash flow deficits, on
      March
      29, 2006, we entered into an agreement to issue and sell our secured promissory
      notes for aggregate gross proceeds 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 the net offering proceeds in early April 2006. In connection
      with this debt financing, we also entered into a definitive agreement with
      the
      purchasers of our notes whereby we may, at our sole option, require them to
      purchase up to $5 million of our common stock. This agreement, sometimes
      referred to as equity 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 price of our shares on the day of a drawdown, subject to a ceiling
      price
      of $3.50 per share. In addition, we have reached an agreement in principal
      to
      issue and sell an additional $6 million of our common stock at price of $2.50
      per share for a total of 2.4 million shares.




The
      financings described in the preceding paragraph are conditioned upon the
      concurrent pay off or conversion into common stock of all of our outstanding
      senior secured convertible promissory notes. As of the date of this report,
      we
      had approximately $11.6 million principal amount of senior secured convertible
      promissory notes outstanding. Of this amount, the holders of these notes are
      expected to convert approximately $5.6 million in principal and interest into
      shares of our common stock and we expect to pay off the remaining $6.0 million
      outstanding balance with a portion of the proceeds from the financings described
      above.




In
      addition to retiring our preexisting notes, we expect to use approximately
      $5
      million of the proceeds from the financings described above to pay down our
      existing line of credit. The balance of $7 million of proceeds would be
      available to us for general working capital purposes. We believe that we will
      have 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 ended December 31,
      2005
      consisted primarily of $1,333,875 from the acquisition of plant and equipment.




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




Net
      cash
      provided by financing activities reported for the year ended December 31, 2005
      consisted of $12,000,000 provided by the issuance of 10% senior secured
      convertible notes (offset by the repayment of $3,250,000 of the 9% notes),
      proceeds from the sale of stock of $3,567,000, offset by the repayment of
      equipment leases of $1,743,100, and acquisition of treasury stock of $846,820;
      and the one
      year
      revolving credit facility in the amount of $5,000,000 which we drew down to
      $4,000,000




-24-




**Contractual
      Cash Obligations and Off Balance Sheet Arrangements .**




Our
      contractual cash obligations under our debt agreements, capital leases and
      operating leases for the 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
              
              $
              0Capital
                  Leases
              
              
              893,244
              
              
              471,269
              
              
              421,975
              
              
              0
              
              
              0Operating
                  Leases1
              
              
              —
              
              
              —
              
              
              —
              
              
              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.




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




Following
      is a summary of what our management believes are the critical accounting
      policies related to our operations. The application of these policies, in some
      cases, requires management to make subjective judgments and estimates regarding
      the effect of matters that are inherently uncertain. See Note 1,
“Description of Business and Significant Accounting Policies,” to financial
      statements included in this annual report for a more detailed discussion of
      our
      accounting policies. Except as described below, we do not employ any critical
      accounting policies selected from among available alternatives or that require
      the exercise of significant management judgment to apply, and we believe none
      of
      our estimates are so highly uncertain or susceptible to change as to present
      a
      significant risk of a material impact on our financial condition or operating
      performance.




***Allowance
      for Doubtful Accounts.***




In
      connection with the preparation of our financial statements, management reviews
      and evaluates the collectability of our trade receivables and adjusts our
      allowance for estimated uncollectible accounts as deemed necessary in the
      circumstances. These estimates have the potential for critically affecting
      the
      determination of results of operations for any given period. Factors considered
      by management in making such estimates and adjustments include any
      concentrations among customers, changes in our relationships therewith, payment
      history and the apparent financial condition thereof.




***Revenue
      Recognition.***




We
      recognize revenue from the sale of our shuffler and Deck CheckerTM products upon
      shipment against valid customer contracts or purchase orders. Sales are
      recognized immediately when shufflers that are rented are converted to purchases
      depending on the creditworthiness and payment history of the casino company
      since payment terms are from 20 to 48 months. We recognize revenue from our
      sales to independent distributors at the time that the distributor takes
      possession of our product and title transfers to the buyer. The extended
      warranty and maintenance components that are part of long term sales contracts
      are unbundled and recognized as deferred revenue amortized over the remaining
      life of the sales agreement after the initial 90−day warranty as required by the
      Emerging Issues Task Force Issue No. 00−21, *Revenue
      Arrangements with Multiple Deliverables* .
      The
      useful life of our shufflers and Deck CheckersTM is five years with proper
      maintenance; the life can be extended with the replacement of component parts.
      If the customer does not possess the required creditworthiness or an established
      payment history with us, we would then book the revenue as an installment sale
      and recognize it over time as payments are received. Revenue from shuffler
      rentals is recorded at the first of each month in accordance with rental
      contract terms. All rental contracts are cancelable upon 30−day written notice
      by the customer. Maintenance expense for rental units is recorded in the period
      it is incurred. Although sales are made with a right to return, returns are
      subject to a claim of unacceptable performance. Sales returns and allowances
      are
      recorded after returned goods are received and inspected. We provide currently
      for estimated warranty repair costs associated with sales contracts. Although
      there are no extended warranties offered for our products, we do provide for
      maintenance contracts that are billed and recognized on a monthly
      basis.




-25-




***Intangible
      Assets.***




We
      amortize our intangible assets (patent and technology rights) on a straight-line
      basis over currently estimated useful lives of 10 years. Based on its assessment
      of the potential for product obsolescence and other impairment factors, we
      believe that the useful life of our patents and technology rights equals the
      full term of the patent.




***Legal
      defense costs***




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




**Recent
      Accounting Pronouncements**




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




In
      May
      2005, the FASB issued SFAS No. 154 *,
      Accounting Changes and Error Corrections, a Replacement of*  *APB
      Opinion No. 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 in
      accounting principles. SFAS No. 154 applies to all voluntary changes in
      accounting principles. It also applies to changes required by an accounting
      pronouncement in the unusual instance that the pronouncement does not include
      specific transition provisions. When a pronouncement includes specific
      transition provisions, those provisions should be followed. The provisions
      of
      SFAS No. 154 will be effective for accounting changes made in fiscal year
      beginning after December 15, 2005. We
      have
      no present expectation to make any accounting changes in the foreseeable future
      that would be subject to SFAS No. 154.




**ITEM** **7.** **FINANCIAL
          STATEMENTS** ****




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





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




None.




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




(a)  *Evaluation
      of Disclosure Controls.* Our
      Chief Executive Officer and Chief Financial Officer have evaluated the
      effectiveness of our disclosure controls and procedures as of the end of our
      2005 fiscal year. Disclosure controls and procedures are controls and other
      procedures that are designed to ensure that information required to be disclosed
      by us in the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in the
      SEC’s rules and forms. Disclosure controls and procedures include, without
      limitation, controls and procedures designed to ensure that information required
      to be disclosed by us in the reports that we file under the Exchange Act is
      accumulated and communicated to our management, as appropriate to allow timely
      decisions regarding required disclosure. Based on their evaluation, our Chief
      Executive Officer and Chief Financial Officer have concluded that our disclosure
      controls and procedures were effective as of December 31, 2005.




-26-




** (b)  *Changes
      in internal control over financial reporting.* Since
      joining VendingData in the fourth quarter of 2005, our current financial
      management team has and is continuing to implement improvements to our internal
      controls and procedures to address weaknesses and deficiencies identified by
      current senior management. Specifically, we have modified, or are in the process
      improving, our procedures for reconciling intercompany accounts, posting
      accounts receivable in our accounting system, communicating between sales and
      accounting personnel, reviewing journal entries, authorizing purchase orders
      and
      integrating our financial reporting databases. On March 27, 2006, our
      independent registered public accounting firm notified our Audit Committee
      that,
      during the course of performing its audit of our 2005 financial statements,
      it
      had identified one material weakness concerning the proper dating of payments
      received, which affects the aging of accounts receivable, and a significant
      deficiency regarding our internal controls over our financial reporting
      concerning the reconciliation of the separate databases used by us in our
      financial reporting and inventory tracking. The material weakness and
      significant deficiency related to processes in place when our current financial
      management joined our company in the fourth quarter of 2005. We have already
      addressed and resolved the material weakness concerning the proper dating of
      payments received. We are in the process of addressing and resolving the
      significant deficiency concerning the reconciliation of the separate databases
      and expect that it will be corrected by the end of the second quarter of 2006.




While
      we
      are in the process of taking the foregoing steps and developing and implementing
      a formal set of internal controls and procedures for financial reporting as
      required by the Sarbanes-Oxley Act of 2002, the efficacy of the steps we have
      taken to date and steps we are still in the process of completing is subject
      to
      continued management review supported by confirmation and testing by management
      and by our auditors. As a result, we anticipate that additional changes
      will be made to our internal controls and procedures. Other than the
      foregoing initiatives, no change in our internal control over financial
      reporting occurred during the fiscal year ended December 31, 2005 that has
      materially affected, or is reasonably likely to affect, our internal control
      over financial reporting.




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





**ITEM
      8B. OTHER INFORMATION**




Not
      applicable.




-27-




**PART
      III**




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




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




**Executive
      Officers and Directors**




**Name**
            
            **Age**
            
            **Position**Mark
                R. Newburg
            
            51
            
            President
                and CEOArnaldo
                F. Galassi
            
            49
            
            Vice
                President and Chief Financial OfficerPeter
                Zee
            
            59
            
            Vice
                President of Engineering and ManufacturingSimon
                Herbert
            
            42
            
            Vice
                President of SalesJames
                E. Crabbe
            
            60
            
            Chairman
                of the Board of DirectorsRonald
                O. Keil
            
            73
            
            DirectorBob
                L. Smith
            
            68
            
            Vice-Chairman
                of the Board of DirectorsMaj.
                Gen. Paul A. Harvey
            
            68
            
            DirectorVincent
                L. DiVito
            
            46
            
            DirectorRobert
                L. Miodonski
            
            55
            
            Director




***Mark
      R. Newburg*** joined
      our board of directors as Executive Director in March 2005, was appointed
      Treasurer in April, 2005, and was named President and CEO in October 2005.
      Mr.
      Newburg previously served as the president and chief executive officer and
      as a
      member of the board of directors of VirtGame Corp. since August 2004. From
      March
      2004 to November 2004, Mr. Newburg served as chief operating officer to
      Left Right Marketing Technologies, an internet retailing start-up in Las Vegas.
      From March 2003 to March 2004, Mr. Newburg was president and chief executive
      officer of C2Consulting Inc., a firm specializing in areas such as strategic
      planning, change management, organizational integration, international
      operations, and organizational alignment. From July 2001 to March 2003, Mr.
      Newburg served as president of Aristocrat Technologies Inc, an Australia based
      designer, builder and marketer of proprietary software and hardware to the
      international gaming market. Previously, Mr. Newburg had a 20 year career
      at NCR, a $5.9 billion provider of store automation, self-service, payment,
      and
      data-warehousing solution. Mr. Newburg earned his MBA from the University of
      Dayton 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 started working as
      a
      consultant with VendingData in March 2005 and joined the company as an employee
      in October 2005. Mr. Galassi has over 20 years of high level international
      finance and corporate treasury experience. He joined AT&T in 1983 and rose
      to treasury director for Asia Pacific located in Hong Kong. In 1996 he joined
      Lucent Technologies and established its treasury operations in Asia Pacific
      region. He then joined NCR Corporation and was promoted to NCR's director of
      corporate finance after spending the previous five years living and working
      in
      Singapore managing NCR's Finance and Treasury Center (Singapore) and NCR's
      treasury operations in Amsterdam and London. Most recently, Mr. Galassi was
      the
      CFO of VirtGame Corp.




***Peter
      Zee*** **** is
      our
      Vice President of Engineering and Manufacturing. Mr. Zee started working as
      a
      consultant with VendingData in March 2005 and joined the company as an employee
      in October 2005. Mr. Zee has extensive international manufacturing, engineering,
      sales management, marketing, strategy and planning experience with NCR. Mr.
      Zee
      is credited with negotiating the 1997 manufacturing joint venture for NCR with
      the Chinese government and built and operated NCR’s Greater China organization
      that achieved tremendous growth in sales and manufacturing volume. Mr. Zee
      retired from NCR in 2004 after 34 years of service. After retirement, Mr. Zee
      joined Tech Elite Group as its CEO. Mr. Zee started working as a consultant
      with
      VendingData in March 2005 and joined the company as an employee in October
      2005.




-28-




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




***James
      E. Crabbe*** became
      a
      member and Vice-Chairman of our board 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 investment portfolio. He spent 34 years in the money
      management business. In 1980, he co-founded the Crabbe-Huson Group, Inc., an
      investment management company, of which he served as president, portfolio
      manager and analyst until his retirement in 2000. Mr. Crabbe earned his
      bachelor’s degree from the University of Oregon in 1967. He also serves on the
      board of directors of Viewpoint Corporation, a publicly traded software
      company.




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




***Bob
      L. Smith*** joined
      our board in May 1998 and served as Chairman of our board from April 1999 until
      August 2001, when he became Vice-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’s Industries, Inc., a company co-founded by Mr. Smith in
      1968 that oversees restaurant, hotel and real estate development in five Western
      states. Mr. Smith serves on the Boards of Directors of Flying J., Inc., an
      integrated oil company, and Regency of Oregon (formerly Blue Cross and Blue
      Shield of Oregon), and previously served on the Boards of Directors of the
      Crabbe-Huson Funds, Inc., an investment management company, and Centennial
      Bank
      (now Umpqua Bank). Mr. Smith received a bachelor’s degree in Business
      Administration from the University of Oregon in 1962.




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




***Vincent
      L. DiVito*** **** joined
      our board in October 2005 and he chairs our Audit Committee. Mr. DiVito is
      Vice
      President, Chief Financial Officer and Treasurer of Lonza, a Swiss-based life
      sciences chemical company headquartered in Allendale, New Jersey. Previously,
      Mr. DiVito was the Vice President and Chief Financial Officer of Algroup
      Wheaton, a global pharmaceutical and cosmetics packaging company. Mr. DiVito
      spent two years on the audit team of Ernst & Whinney (now Ernst &
Young). Mr. DiVito is a certified public accountant and certified management
      accountant. He is a member of the Board of Directors of the Riviera Hotel in
      Las
      Vegas, NV and was a member of the Board of Directors of VirtGame Corporation.




-29-




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




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




Our
      business 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
      the
      benefit of our stockholders and, to the extent appropriate under governing
      law,
      of other constituencies, which include our employees, customers, suppliers
      and
      creditors. Our board strives to ensure the success and continuity of our
      business through the selection of a qualified management team. It is also
      responsible for ensuring that our activities are conducted in a responsible
      ethical manner. Our board of directors has three standing committees, an audit
      committee and a nominating committee and has recently formed a compensation
      committee that will replace the executive committee.




Our
      board
      of directors met 11 times in 2005. All of the incumbent directors attended
      the
      meetings during the period for which they have been a director and the 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 of Messrs. DiVito, Keil, Smith, and Miodonski.
      Mr. DiVito serves as the audit committee chair. Our audit committee
      generally meets quarterly, and in 2005, our audit committee held two meetings.
      As stated in the audit committee charter, our audit committee has the
      responsibility of selecting the firm that will serve as our independent public
      accountants, approving and reviewing the scope and results of the audit and
      any
      non-audit services provided by the independent public accountants and meeting
      with our financial staff to review internal control, procedures and
      policies.




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




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




-30-





***Compliance
      Committee*** **.** The
      compliance committee is comprised of Messrs. Harvey, Miodonski, and
      Newburg. Mr. Harvey serves as the compliance committee chair. Formed in
      late 2005, the compliance committee will meet quarterly. As stated in the
      compliance plan, our compliance committee has the responsibility of identifying
      and evaluating situations or material events that may impact public faith or
      the
      reputation and integrity of the Company within the gaming industry.




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




In
      2005,
      our nominating committee held one meeting. The members of our nominating
      committee are independent, as independence for directors is defined in Section
      121A of the American Stock Exchange Company Guide.





**Section
      16(a) Beneficial Ownership Reporting Compliance**




Rules
      adopted 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 own
      more than 10% of the issued and outstanding shares of our equity securities,
      to
      file reports of their ownership, and changes in ownership, of such securities
      with the Securities and Exchange Commission on Forms 3, 4 or 5, as appropriate.
      Such persons are required by the regulations of the Securities and Exchange
      Commission to furnish us with copies of all forms they file pursuant to
      Section 16(a).




Based
      solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to
      us
      during our most recent fiscal year, and any written representations provided
      to
      us, we believe that all of the officers, directors, and owners of more than
      ten
      percent of the outstanding shares of our common stock complied with Section
      16(a) of the Exchange Act for the year ended December 31, 2005.





**Code
      of Ethics**




We
      have
      adopted a Code of Ethics that applies to our board of directors, chief executive
      officer, chief financial officer, controller and any other individual serving
      in
      similar capacities. The Code of Ethics is designed to serve as the foundation
      of
      our standards of behavior and to promote honest and ethical conduct, proper
      disclosure of financial information in our periodic reports, and compliance
      with
      applicable laws, rules, and regulations by our directors and senior officers
      who
      have operating and financial responsibilities. On April 28, 2005, our board
      amended and restated our Code of Ethics so that it now applies to all directors,
      officers and employees. Our Code of Ethics is posted on the “Investors” section
      of our Internet web site at  http://www.vendingdata.com/investors/ethics.





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




**Summary
      Compensation Table**




The
      following table sets forth the compensation awarded to, earned by or paid to,
      our chief executive officer and our other executive officers earning in excess
      of $100,000 for services rendered in all capacities during fiscal years ended
      December 31, 2005, 2004 and 2003. We provide certain perquisites and other
      personal benefits to some or all of our executives. The unreimbursed incremental
      cost to us of providing perquisites and other personal benefits did not exceed,
      as to any of the executives for any year, the lesser of $50,000 or 10% of the
      total salary and bonus paid to such executive for such year.




-31-





**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
            —
            150,000President
                and CEO
            2004
            —
            —
            —
            —2003
            —
            —
            —
            —Steven
                J. Blad
            2005
            106,022
            —
            —
            116,667Former
                President and CEO
            2004
            340,400
            —
            —
            —2003
            282,000
            7,800
            500,000
            —





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




**Option
      Grants In Last Fiscal Year**




The
      following table summarizes option grants during the fiscal year ended December
      31, 2005 to each of 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
            1/31/2015200,000
            5.4%
            $1.85
            (1)750,000
            20.4%
            $1.34
            (2)Steven
                J. Blad
              Former
                President and CEO
            —
            —
            —
            —





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




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




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




The
      following table sets forth information regarding exercises of stock options
      and
      stock appreciation rights, or SARs, during the fiscal year ended
      December 31, 2005 made to the named executive officers.




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


1 750,000
      of which are contingent upon a change of control of the Company.




-32-




**Compensation
      of Directors**




Our
      non-employee members of our board of directors receive an initial grant of
      1,000
      options and an annual grant of 10,000 options on the date of the annual or
      special meeting of stockholders at which directors are elected. The exercise
      price shall be the then-current market price of our common stock. Our directors
      are reimbursed for their out-of-pocket expenses related to their services as
      directors or meeting attendance. Members of our board of directors that are
      employees do not receive compensation for their services as directors. In
      addition, upon joining the board, Directors DiVito, Harvey and Miodonski each
      received options to purchase 100,000 shares of common stock at $1.34 per share
      over 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 shares
      of common stock to be accrued in increments of 10,000 shares over the next
      5
      quarters and issued upon receipt of shareholder approval.




**Employment
      Agreements**




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




On
      February 4, 2005, we entered into a consulting agreement with Mark Newburg
      through which Mr. Newburg provided us with detailed independent analysis of
      our
      operational matters. Pursuant to the consulting agreement, we agreed to provide
      an initial payment of $20,000, provide monthly compensation of $10,000 beginning
      on March 1, 2005, $20,000 monthly effective April 1, 2005, and issued
      options 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 directors as
      Executive Director on March 25, 2005 to oversee all aspects of our operations,
      Mr. Newburg continued to be compensated pursuant to the terms of this consulting
      agreement until he entered into a formal employment agreement in September
      2005. On April 28, 2005, our Board of Directors, without Mr. Newburg
      participating, granted to Mr. Newburg an additional option to purchase 200,000
      shares of our common stock at an exercise price of $1.85 per share .  On
      September 29, 2005 we entered into a two year employment agreement with Mr
      Newburg. Terms of the agreement provide for an annual salary of $250,000, a
      signing bonus of $75,000 split in two equal payments to be made on the signing
      of the employment agreement and on December 15, 2005, and 750,000 stock options
      priced at $1.34 to be issued on any change of control. Mr Newburg is also
      eligible for annual bonuses of up to 50% of his salary provided certain
      performance milestones are met.




On
      March
      1, 2005, we entered into a consulting agreement with Arnaldo F. Galassi through
      which Mr. Galassi provided
      us with financial analysis of our operational matters. Pursuant to the
      consulting agreement, we agreed to provide monthly compensation of $5,000
      beginning on March 1, 2005 and issued options to purchase 100,000 shares of
      common stock at an exercise price of $1.92 per share. On September 29, 2005
      we entered into a two year employment agreement with Mr. Galassi to be the
      Company’s vice president and chief financial 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 change of control. Mr. Galassi is also eligible for
      an
      annual bonus of up to 50% of his salary provided certain performance milestones
      are met.




-33-




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





**Security
      Ownership of Certain Beneficial Owners and Management**




The
      table
      below sets forth the beneficial ownership of our common stock, as of March_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 than 5% of our outstanding
                  common
                  stock.




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




**Name
                of Director or Executive Officer**
            
            
            **Shares1**
            
            
            **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
            %





*  Denotes
      less than 1%.




-34-





1
            Unless
                otherwise noted, the persons identified in this table have sole voting
                and
                sole investment power with regard to the shares beneficially owned
                by
                them.




2
            Includes
                4,574,066 shares held directly by Mr. Crabbe, 70,600 shares issuable
                upon the exercise of stock options and 2,460,407 shares held by Mr.
                Crabbe, as Trustee of the James E. Crabbe Revocable Trust. Mr. Crabbe
                disclaims any ownership of any shares of common stock beneficially
                owned
                by Phileo Foundation, a charitable foundation of which Mr. Crabbe
                is a
                trustee and president, or by Yvonne M. Huson, or her related trusts,
                for which Mr. Crabbe formerly held voting
                power.




3
            Includes
                164,012 shares held directly by Mr. Smith, 232,162 shares held by
                VIP’s Industries, Inc., 67,288 shares held 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, 71,000 shares issuable upon
                the exercise of stock options.




5
            Includes
                108,333 shares issuable upon the exercise of stock
                options.




6
            Includes
                1,000 shares held directly by Mr. Galassi and 34,000 shares issuable
                upon
                the exercise of stock options.




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




8
            Based
                on a Form 3 filed on February 8, 2006 and information provided, includes
                shares beneficially owned by Triage Offshore Fund, Ltd. issuable
                upon the
                conversion of notes into 1,061,363 shares and the exercise of warrants
                into 697,021 shares; shares beneficially owned by Triage Capital
                Management B LP issuable upon the conversion of notes into 128,029
                shares
                and the exercise of warrants into 964,688 shares; shares beneficially
                owned by Triage Capital Management LP issuable upon the conversion
                of
                notes into 98,484 shares and the exercise of warrants into 700,844
                shares;
                and shares beneficially owned by Periscope Partners LP issuable upon
                the
                conversion of notes into 75,757 shares and the exercise of warrants
                into
                10,000 shares.




9
            Based
                on information provided, includes 212,321 shares issued directly,
                1,860,000 shares issuable upon the exercise of warrants and 984,848
                shares
                issuable upon the conversion of convertible
                notes.




**Equity
      Compensation Plan Information**




We
      have
      two stock options plans, the Amended and Restated 1999 Stock Option Plan and
      the
      Amended and Restated 1999 Directors’ Stock Option Plan, through which 5,000,000
      shares and 300,000 shares are authorized, respectively. Pursuant to our stock
      options plans, as of December 31, 2005, there were options outstanding to
      purchase 4,116,972 shares of our common stock with a weighted average exercise
      price per share of $2.12 and options remaining to purchase 1,183,028 shares
      of
      our common stock.




The
      following table sets forth certain information as of December 31, 2005
      about our equity compensation plans under which our equity securities are
      authorized 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
            1,183,028Equity
                compensation plans not
              approved
                by security holders
            —
            —
            —**Total**
            12,936,995
            $1.85
            1,183,028





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




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




-35-




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




**Transaction
      Review**




We
      have
      adopted a policy that any transactions with directors, officers or entities
      of
      which they are also officers or directors or in which they have a financial
      interest, will only be on terms consistent with industry standards and approved
      by a majority of the disinterested directors of our board. Our bylaws provide
      that no such transactions by us shall be either void or voidable solely because
      of such relationship or interest of directors or officers or solely because
      such
      directors are present at the meeting of our board or a committee thereof which
      approves such transactions, or solely because their votes are counted for such
      purpose if:




·
                The
                    fact of such common directorship or financial interest is disclosed
                    or
                    known by our board or committee and noted in the minutes, and
                    our board or
                    committee authorizes, approves or ratifies the contract or transaction
                    in
                    good faith by a vote for that purpose without counting the vote
                    or votes
                    of such interested directors;
                    or




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




·
              The
                  contract or transaction is fair and reasonable to us at the time
                  it is
                  authorized or approved.




In
      addition, interested directors may be counted in determining the presence of
      a
      quorum at a meeting of our board or a committee thereof that approves such
      transactions. If there are no disinterested directors, we shall obtain a
      majority vote of the stockholders approving the transaction.




**Private
      Placement**




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





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





The
      rights and obligations of the subscribers of our 10% senior secured convertible
      notes in February 2005 and March 2005 are governed by a collateral agent
      agreement, 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.




-36-





**Transactions
      Involving Leonid Frenkel and his Affiliates**




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




**Securities
      and Exchange Commission Position on Certain
      Indemnification**




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




Insofar
      as indemnification for liabilities arising under the Securities Act of 1933,
      or
      the Securities Act, may be permitted to our directors, officers or persons
      controlling us pursuant to the provisions contained in our amended and restated
      articles of incorporation, our amended and restated bylaws, Nevada law or
      otherwise, we have been informed that, in the opinion of the SEC, such
      indemnification is against public policy as expressed in the Securities Act
      of
      1933 and is therefore unenforceable. If a claim for indemnification against
      such
      liabilities, other than the payment by us of expenses incurred or paid by one
      of
      our directors, officers or controlling persons in the successful defense of
      any
      action, suit, or proceeding, is asserted by such director, officer or
      controlling person, we will, unless in the opinion of our counsel the matter
      has
      been settled by controlling precedent, submit to a court of appropriate
      jurisdiction the question whether such indemnification by us is against public
      policy as expressed in the Securities Act of 1933 and will be governed by the
      final adjudication of this issue.




**Indemnification
      Agreements**




In
      June
      2003, July 2003, July 2005, and November 2005 we entered into indemnification
      agreements with members of our board of directors and certain of significant
      and
      other employees in which we agreed to hold harmless and indemnify such
      directors, officers and employees to the fullest extent authorized under Nevada
      law, and to pay any and all related expenses reasonably incurred by the
      indemnitee. The relevant members of our board of directors are James E. Crabbe,
      Ronald O. Keil, Mark R. Newburg Bob L. Smith, Vincent L. DiVito, Paul A.
      Harvey and Robert L. Miodonski. The relevant significant and other employees
      are: D. Dean Barnett, Vice President of Sales; Joseph D. Corradino,
      Director of Sales/Table Games; Kenneth R. Dickinson, Vice President of
      Engineering; and Robert G. Pietrosanto, Vice President of Sales. In
      addition, Indemnification Agreements are being processed for Arnaldo F. Galassi,
      Secretary and Chief Financial Officer; Simon B. Herbert, Vice President of
      International Sales; and Peter Zee, Senior Vice President of Engineering and
      Production.




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




The
      exhibits to this Annual Report on Form 10-KSB are listed in the Exhibit Index
      contained at the end of this report. The Exhibit Index indicates each management
      contract or compensatory plan or arrangement required to be filed as an exhibit
      to this Annual Report on Form 10-KSB.




-37-




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




Piercy
      Bowler Taylor & Kern, Certified Public Accountants, Las Vegas, Nevada, or
      PBTK, served as our independent public accountants and auditors for fiscal
      years
      ended December 31, 2005 and 2004.




Our
      board
      is responsible for pre-approving all audit and permissible non-audit services
      provided by our independent auditor, PBTK, with certain limited exceptions.
      Our
      board of directors has concluded that the non-audit services provided by PBTK
      are compatible with maintaining auditor independence. In 2005 and 2004, no
      fees
      were paid to PBTK pursuant to the “de minimus” exception to the pre-approval
      policy permitted under the Securities Exchange Act of 1934, as
      amended.




For
      the
      fiscal years ended December 31, 2005 and 2004, the fees for services billed
      by
      PBTK were as follows:




**2005**
            
            **2004**Audit
                fees
            
            $
            104,059
            
            $
            98,547Audit-related
                fees
            
            
            5,280
            
            
            4,923Tax
                fees
            
            
            13,970
            
            
            21,970All
                other fees
            
            
            36,328
            
            
            2,300**$**
            **159,637**
            
            $
            **127,740**





Audit
      fees generally included fees related to the audit of our annual financial
      statements included in our Form 10-KSB’s, the review of our interim financial
      statements included in our Form 10-QSB’s and the consents and assistance in
      connection with other filings and public offering documents filed with the
      Securities and Exchange Commission.




Audit
      related fees generally included fees for assurance and related services that
      are
      reasonably related to the performance of the audit or review of our financial
      statements, such as accounting consultations concerning financial accounting
      and
      reporting standards, internal control reviews and other non-statutory
      attestation services.




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




All
      other
      fees generally included fees related to miscellaneous, non-recurring
      engagements In 2004 other fees billed by PBTK represented research related
      to Generally Accepted Accounting Principles. In 2005 other fees billed by PBTK
      represented research related to Generally Accepted Accounting Principles and
      fees associated with restatement of financials related to the 10QSB for March
      31, 2004, June 30, 2004, September 30, 2004, March 31, 2005, June 30, 2005
      and
      the Decemer 31, 2004 10KSB..




-38-




**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
      duly
      caused this report to be signed on our behalf by the undersigned, thereunto
      duly
      authorized.




**VENDINGDATA
                CORPORATION**Date:
                March 30, 2006
            By:
            /s/
              Mark R. NewburgMark
                R. Newburg, Chief Executive Officer, Principal Executive
                Officer







In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.







**Signature**
            
            **Title**
            **Date**/s/Mark
              R. Newburg
            
            Executive
                Director
            March
                30, 2006Mark
                R. Newburg
            
            (Chief
                Executive Officer)/s/
Arnaldo
              F. Galassi
            
            Chief
                Financial Officer
            March
                30, 2006Arnaldo
                F. Galassi
            
            (Principal
                Financial and Accounting Officer)/s/
James
              E. Crabbe
            
            Chairman
                of the Board
            March
                30, 2006James
                E. Crabbe/s/
Ronald
              O. Keil
            
            Director
            March
                30, 2006Ronald
                O. Keil/s/
Bob
              L. Smith
            
            Director
            March
                30, 2006Bob
                L. Smith/s/
Paul
              Harvey
            
            Director
            March
                20, 2006Paul
                Harvey/s/
Vincent
              Devito
            
            Director
            March
                20, 2006Vincent
                Devito/s/
Robert
              Miodonski
            
            Director
            March
                30, 2006Robert
                Miodonski





-39-




**INDEX
      TO FINANCIAL STATEMENT**


Report
                  of Independent Registered Public Accounting Firm
              F-2Balance
                  Sheets at December 31, 2005 and 2004
              F-3Statements
                  of Operations for the Years Ended December 31, 2005 and
                  2004
              F-4Statements
                  of Changes in Stockholders’ Equity for the Years Ended December31, 2005
                  and 2004
              F-6Statements
                  of Cash Flows for the Years Ended December 31, 2005 and
                  2004
              F-6Notes
                  to Financial Statements
              F-7




F-1




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board
      of
      Directors and Stockholders


VendingData
      Corporation





We
      have
      audited the balance sheets of VendingData Corporation as of December 31, 2005
      and 2004, and the related statements of operations, changes in stockholders’
equity, and cash flows for the years then ended. These financial statements
      are
      the responsibility of the Company’s management. Our responsibility is to express
      an opinion on these financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, audits of its internal control
      over financial reporting. Our audits included consideration of internal control
      over financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company's internal control over financial
      reporting. Accordingly, we express no such opinion.  An
      audit
      also includes examining on a test basis, evidence supporting the amounts and
      disclosures in the financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall financial statement presentation. We believe that
      our
      audits provide a reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above, present fairly, in all
      material respects, the financial position of VendingData Corporation as of
      December 31, 2005 and 2004, and the results of its operations and cash flows
      for
      the years then ended, in conformity with accounting principles generally
      accepted in the United States of America.







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




Las
      Vegas, Nevada


February
      28, 2006




F-2




**VENDINGDATA
      CORPORATION**





**Balance
      Sheets**


**December
      31, 2005 and 2004**





**ASSETS**
            
            **2005**
            
            **2004**Current
                assets:Cash
                and cash equivalents
            
            $
            935,243
            
            $
            924,802Current
                portion of accounts receivable, trade net of allowance foruncollectibles
                of $276,420 and 125,530
            
            
            1,550,559
            
            
            1,596,017Due
                from affiliate
            
            
            4,098
            
            
            25,000Prepaid
                expenses and other receivables
            
            
            113,557
            
            
            121,969Inventories
            
            
            3,045,334
            
            
            6,124,1715,648,791
            
            
            8,791,959Accounts
                receivable, trade, net of current portion, less unamortized
                discount
            
            
            600,430
            
            
            1,264,914Equipment
                rented to customers, net ofaccumulated
                depreciation of $228,032 and $316,245
            
            
            146,527
            
            
            400,594Property
                and equipment, at cost, net ofaccumulated
                depreciation of $2,408,234and $1,859,206
            
            
            585,431
            
            
            923,459Intangible
                assets, at cost, net ofaccumulated
                amortization of $836,281and $288,203
            
            
            1,862,268
            
            
            1,129,644Due
                from affiliate
            
            
            —
            
            
            118,800Deferred
                costs
            
            
            748,171
            
            
            753,030Deposits
            
            
            759,653
            
            
            980,216$
            10,351,271
            
            $
            14,362,616**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Capital
                leases payable, current portion
            
            $
            471,269
            
            $
            1,941,445Accounts
                payable
            
            
            1,836,234
            
            
            1,240,676Accrued
                expenses
            
            
            794,203
            
            
            427,199Deferred
                revenues, current portion
            
            
            52,248
            
            
            239,680Short-term
                debt
            
            
            4,050,000
            
            
            238,250Customer
                deposits
            
            
            81,858
            
            
            193,6157,285,812
            
            
            4,280,865Deferred
                revenues, net of current portion
            
            
            161,335
            
            
            198,585Notes
                payable, net of current portion
            
            
            11,654,500
            
            
            3,250,000Capital
                leases payable, net of current portion
            
            
            421,975
            
            
            893,24419,523,622
            
            
            8,622,694Stockholders’
                equity:Preferred
                stock, $.001 par value, 10,000,000 shares authorized
            
            
            —
            
            
            —Common
                stock, $.001 par value, 50,000,000 shares authorized17,741,511
                and 17,312,058 share issued and outstanding
            
            
            18,142
            
            
            17,200Additional
                paid-in capital
            
            
            66,763,192
            
            
            59,843,270Treasury
                stock 448,053 shares at cost
            
            
            (846,820
            )
            
            0Deferred
                expense
            
            
            (3,419,088
            )
            
            0Deficit
            
            
            (71,687,777
            )
            
            (54,120,547
            )Total
                stockholder’s equity (deficiency)
            
            
            (9,172,351
            )
            
            5,739,923Total
                liabilities and stockholders’ equity (deficiency)
            
            $
            10,351,271
            
            $
            14,362,617






**See
      accompanying notes to financial statement**




F-3




**VENDINGDATA
      CORPORATION**





**Statements
      of Operations**


**Years
      Ended December 31, 2005 and 2004**




**Year
                Ended December
                31,****2005**
            
            **2004**Sales
            
            $
            2,302,484
            
            $
            2,648,684Rental
            
            
            519,635
            
            
            616,714Other
            
            
            278,619
            
            
            171,1623,100,738
            
            
            3,436,560Less
                sales returns and allowances
            
            
            (739,263
            )
            
            0Net
                sales
            
            
            2,361,475
            
            
            3,436,560Operating
                costs and expenses:Cost
                of sales
            
            
            7,736,066
            
            
            3,570,070Selling,
                general and administrative
            
            
            9,220,636
            
            
            7,046,005Research
                and development
            
            
            1,394,006
            
            
            1,423,09618,350,708
            
            
            12,039,171Loss
                from operations
            
            
            (15,989,233
            )
            
            (
                8,602,611
            )Interest
                expense, including $15,063 and $31,974 to related parties
            
            
            1,577,996
            
            
            935,589Net
                loss
            
            $
            (17,567,230
            )
            $
            (9,538,200
            )Basic
                loss per share
            
            $
            (1.03
            )
            $
            (0.55
            )Weighted
                average shares outstanding
            
            
            17,050,398
            
            
            17,187,664







**See
      accompanying notes to financial statements.**




F-4




**VENDINGDATA
      CORPORATION**





**Statements
      of Changes in Stockholders’ Equity**


**Years
      Ended December 31, 2005 and 2004**




AdditionalCommon
                Shares
            
            Paid-in
            
            Treasury
            
            DeferredActivity
            
            Stock
            
            Dollars
            
            Capital
            
            stock
            
            expense
            
            Deficit
            
            TotalBalances****January 1,
                2004
            
            
            16,765,580
            
            $
            16,766
            
            $
            58,810,806
            
            
            
            
            
            
            
            $
            (44,582,347
            )
            $
            14,245,225Exercise
                of employee options
            
            
            1,360
            
            
            2
            
            
            2,380
            
            
            
            
            
            
            
            
            
            
            
            2,382Stock
                issued for conversion of debt
            
            
            362,218
            
            
            362
            
            
            814,566
            
            
            
            
            
            
            
            
            
            
            
            814,928Exercise
                of warrants
            
            
            70,400
            
            
            70
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            70Repayment
                for stock issue Expenses
            
            
            
            
            
            
            
            
            36,731
            
            
            
            
            
            
            
            
            
            
            
            36,731Employee
                options issued
            
            
            
            
            
            
            
            
            178,790
            
            
            
            
            
            
            
            
            
            
            
            178,790Net
                loss for 2004
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (9,538,200
            )
            
            (9,538,200
            )Balances,
                December 31, 2004
            
            
            17,199,558
            
            
            17,200
            
            
            59,843,273
            
            
            
            
            
            
            
            
            (54,120,547
            )
            
            5,739,926Exercise
                of employee options
            
            
            70,000
            
            
            70
            
            
            130,080
            
            
            
            
            
            
            
            
            
            
            
            130,150Stock
                issued for conversion of debt
            
            
            209,393
            
            
            209
            
            
            345,290
            
            
            
            
            
            
            
            
            
            
            
            345,499Shares
              issued for deferred compensation
            
            
            
            
            
            
            
            
            4,129,903
            1
            
            
            
            
            (3,419,088
            )
            
            
            
            
            710,815Acquisition
              of stock for warrants
            
            
            
            
            
            
            
            
            1,143,570
            
            
            (846,820
            )
            
            
            
            
            
            
            
            296,750Exercise
                of warrants
            
            
            162,500
            
            
            163
            
            
            418,576
            
            
            
            
            
            
            
            
            
            
            
            418,739Stock
                issued for services
            
            
            100,000
            
            
            100
            
            
            152,900
            
            
            
            
            
            
            
            
            
            
            
            153,000Sale
                of shares
            
            
            
            
            
            400
            2
            
            599,600
            
            
            
            
            
            
            
            
            
            
            
            600,000Net
                loss for 2005
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (17,567,230
            )
            
            (17,567,230
            )Balances,
                December 31, 2005
            
            
            17,741,451
            
            $
            18,142
            
            $
            66,763,192
            
            
            $(846,820
            )
            
            $(3,419,088
            )
            $
            (71,687,777
            )
            $
            (9,173,351
            )





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


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







**See
      accompanying notes to financial statements.**




F-5




**VENDINGDATA
      CORPORATION**





**Statements
      of Cash Flows**


**Years
      Ended December 31, 2005 and 2004**




**December
                31,****2005**
            
            **2004**Net
                cash used in operating activities
            
            $
            (14,816,322
            )
            $
            (10,660,135
            )Cash
                flows from investing activities:Acquisition
                of property and equipment
            
            
            (1,312,937
            )
            
            (271,261
            )Disposition
                of equipment produced for rental
            
            
            (42,138
            )Proceeds
                from sale of plant and equipment
            
            
            21,200Acquisition
                of intangible assets
            
            
            
            
            
            (4,900
            )Net
                cash used in investing activities
            
            
            (1,333,875
            )
            
            (
                276,161
            )Cash
                flows from financing activities:Reimbursement
                of offering expense
            
            
            —
            
            
            36,731Proceeds
                from sale of stock, warrants and options
            
            
            5,728,545
            
            
            2,380Proceeds
                from capital leases financing
            
            
            —
            
            
            723,839Repayment
                of capital leases
            
            
            (2,129,657
            )
            
            (2,042,946
            )Acquisition
                of treasury stock
            
            
            
            
            
            —Proceeds
                from issuance of convertible debt
            
            
            12,750,000
            
            
            3,250,000Repayment
                of convertible and other debt
            
            
            188,250
            
            
            (1,635,570
            )Net
                cash provided by financing activities
            
            
            16,160,638
            
            
            334,434Increase
                (decrease) in cash and cash equivalents
            
            
            10,441
            
            
            (10,601,862
            )Cash
                and cash equivalents, beginning of year
            
            
            924,602
            
            
            11,526,664Cash
                and cash equivalents, end of year
            
            $
            935,243
            
            $
            924,802








**See
      accompanying notes to financial statements.**




F-6




**VENDINGDATA
      CORPORATION**




**NOTES
      TO FINANCIAL STATEMENTS**




**Note
      1.**  **Description
      of Business and Significant Accounting Policies**




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




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




***Cash*** **equivalents**




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




***Estimates***




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




***Inventory*** ****




Inventory
      is stated at the lower 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
      over the estimated useful lives of the assets of 3-5 years, which, in the case
      of leasehold 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 amortized using the straight-line method
      over an appropriate estimated useful life pursuant to SFAS No. 142, *Goodwill
      and Other Intangible Assets* .
      The
      Company amortizes these intangible assets on a straight-line basis over
      currently estimated useful lives of 10 years **.**




***Fair
      value of financial instruments***




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




F-7




***Revenue
      recognition***




We
      recognize revenue from the sale of our shuffler and Deck CheckerTM products upon
      shipment against valid customer contracts or purchase orders. Sales are
      recognized immediately when shufflers that are rented are converted to purchases
      depending on the creditworthiness and payment history of the casino company
      since payment terms are from 20 to 48 months. We recognize revenue from our
      sales to independent distributors at the time that the distributor takes
      possession of our product and title transfers to the buyer. The extended
      warranty and maintenance components that are part of long term sales contracts
      are unbundled and recognized as deferred revenue amortized over the remaining
      life of the sales agreement after the initial 90−day warranty as required by
      Emerging Issues Task Force Issue No. 00−21, *Revenue
      Arrangements with Multiple Deliverables* .
      The
      estimated useful life of our shufflers and Deck CheckersTM is five years with
      proper maintenance; the life can be extended with the replacement of certain
      component parts. If the customer does not possess the required creditworthiness,
      the revenue is recorded as an installment sale and recognized over time as
      payments are received. Revenue from shuffler rentals is recorded monthly in
      accordance with rental contract terms. All rental contracts are cancelable
      upon
      30−day written notice by the customer. Maintenance expense for rental units is
      recorded in the period it is incurred. Although sales are generally made with
      a
      right of return, such returns are usually associated with unacceptable
      performance, therefore, sales returns and allowances are not provided for based
      on estimates but rather recorded after returned goods are received and
      inspected. The Company provides currently for estimated warranty repair costs
      associated with sales contracts. Although there are no extended warranties
      offered for our products, we do provide for maintenance contracts that are
      billed and recognized on a monthly basis over the life of the
      contract.




***Advertising***




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




***Stock-based
      compensation***




The
      Company presently uses the fair value recognition provisions of SFAS
      No. 123, *Accounting
      for Stock-Based Compensation.*




In
      December, 2004, the SFAS No. 123 (Revised 2004), *Share
      Based Payment* (“SFAS
      123R”) requires certain changes in the way compensation cost related to share
      based employee compensation transactions 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, if any, to be
      incurred by the Company in connection with outstanding litigation and other
      disputed matters but, instead, records such costs as the related legal and
      other
      services are rendered.




***Loss
      per share***




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




***Warranties***




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




F-8




**Note
      2.**  **Segments**




The
      segments identified for geographic 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
            
            $
            2,643,866Asia
            
            
            —
            
            
            550,198
            
            
            962,775
            
            
            530,025Europe
            
            
            501,584
            
            
            —
            
            
            187,666
            
            
            —South
                America
            
            
            8,250
            
            
            —
            
            
            —
            
            
            —Australia
            
            
            —
            
            
            —
            
            
            288,287
            
            
            —







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
      3.**  **Inventory**




** Inventory
      consisted of the following at December 31, 2005 and 2004.




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




**Note** **4.**  **Property
      and Equipment**




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




**December
                31, 2005**
            
            **December 31,
                2004**Equipment
                and vehicles, furniture and fixtures
            
            $
            1,990,463
            
            $
            1,983,744Tooling
            
            
            858,720
            
            
            768,280Leasehold
                improvements
            
            
            500,093
            
            
            421,8673,349,276
            
            
            3,173,891Less
                accumulated depreciation and amortization
            
            
            2,763,845
            
            
            2,250,432$
            585,431
            
            $
            923,459





A
      substantial portion of the Company’s furniture and equipment are held under
      capital leases (Note 7).




F-9




**Note** **5.
      Intangible assets**




The
      Company acquired the patent rights for the Deck CheckerTM for $1,004,900 in 2003.
      The following table sets forth the estimated aggregate amortization of these
      and
      other intangible asset costs for the next five years:




2006
            
            $
                156,8132007
            
            $
                141,2862008
            
            $
                138,8292009
            
            $
                134,9852010
            
            $
                125,623





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




2006
            
            $56,6002007
            
            $56,6002008
            
            $56,6002009
            
            $56,6002010
            
            $56,600





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




2006
            
            $75,0002007
            
            $75,0002008
            
            $75,0002009
            
            $75,0002010
            
            $75,000







**Note
      6. Short Term Debt**




On
      October 6, 2005, we negotiated a one year revolving credit facility in the
      amount of $5,000,000 and carrying an interest rate of 9.0%. The facility is
      secured by receivables. As of December 31, 2005, we had borrowed $4,000,000
      under the credit line.




F-10




**Note** **7.**  **Convertible
      Debt with Warrants and Leases Payable**




As
      of
      December 31, 2005 and 2004, our long-term obligations consist of
      convertible notes and capital lease 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)
            
            
            
            
            $
            3,250,00011,654,500
            
            
            3,250,000Capitalized
                lease obligations for furniture, tooling and equipment(2)
            
            
            893,244
            
            
            2,834,68912,547,744
            
            
            6,084,689Less
                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 original notes through the conversion
                  date
                  of February 15, 2005.




(2)
              In
                  a prior year, the Company entered into certain sale-leaseback transactions
                  primarily for assets rented to, or intended to be rented to, customers,
                  under operating leases. Since the leases contained effective mandatory
                  buyback provisions resulting in the Company retaining rights to
                  use these
                  assets in its business for their remaining useful lives, no gain
                  or loss
                  was recognized on the sale-leaseback transactions pursuant to
                  paragraph 17 of SFAS No. 28 Accounting for Sales with
                  Leasebacks. The amortization of the assets recorded as capital
                  leases is
                  included with depreciation. The effective annual interest rates
                  implicit
                  in the capital leases range from 25% to 28%. The terms of the leases
                  range
                  from 36 months to 39 months.




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




Due
                during the year ending December 31:2006
            
            $
            523,0792007
            
            
            363,0892008
            
            
            76,5002009
            
            
            —2010
            
            
            —Minimum
                future lease payments
            
            
            962,668Less
                interest component
            
            
            69,424893,244Less
                current portion
            
            
            471,269Long-term
                portion
            
            $
            421,975





F-11




**Note** **8.**  **Warranties**




The
      following summarizes the accrual of product warranties that is recorded as
      accrued expenses in the accompanying balance sheets at December 31, 2005
      and 2004.




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







**Note** **9.**  **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
            
            $
            2.502,753,472







11,200,000
      options are exercisable at $1.34 in the event of a change of
      control.




The
      following is a summary of transactions involving stock options:




**Shares**
            
            **Range
                of**
              **Exercise
                Prices**
            
            **Average
                Price**Balance
            
            
            12/31/00
            
            
            253,320
            
            
            $5.00
                - $15.00
            
            $
            10.00Granted
            
            
            
            
            
            652,150
            
            
            $1.75-$13.00
            
            $
            4.20Cancelled
            
            
            
            
            
            70,800
            
            
            $5.00-$15.00
            
            $
            5.75Balance
            
            
            12/31/01
            
            
            834,670
            
            
            $5.00-$15.00
            
            $
            5.40Granted
            
            
            
            
            
            117,550
            
            
            $1.75-$13.00
            
            $
            3.80Cancelled
            
            
            
            
            
            25,450
            
            
            $7.50-$13.00
            
            $
            9.68Balance
            
            
            12/31/02
            
            
            926,770
            
            
            $1.75-$15.00
            
            $
            5.09Granted
            
            
            
            
            
            1,246,850
            
            
            $1.75-$3.90
            
            $
            2.60Cancelled
            
            
            
            
            
            66,490
            
            
            $1.75-$13.00
            
            $
            8.47Balance
            
            
            12/31/03
            
            
            2,107,130
            
            
            $1.75-$15.00
            
            $
            3.51Granted
            
            
            
            
            
            319,836
            
            
            $1.66-$3.98
            
            $
            2.63Cancelled
            
            
            
            
            
            238,540
            
            
            $1.75-$13.00
            
            $
            5.77Balance
            
            
            12/31/04
            
            
            2,188,426
            
            
            $1.69-$15.00
            
            $
            4.97Granted
            
            
            
            
            
            3,279,686
            
            
            $1.34-$3.01
            
            $
            1.89Cancelled
            
            
            
            
            
            1,444,640
            
            
            $1.66-$15.00
            
            $
            5.73Exercised
            
            
            
            
            
            70,000
            
            
            $1.75-$2.50
            
            $
            2.13Balance
            
            
            12/31/05
            
            
            3,953,472
            
            
            $1.34-$15.00
            
            $
            3.55




F-12


The
      weighted average fair value at the date of grant for options granted during
      2005
      and 2004 as described above were $1.24 in 2005 and $0.77 per share in 2004.
      The
      fair value of the options at the date of grant was estimated using the
      Black-Scholes model with assumptions as follows:




**2005**
            
            **2004**Market
                value
            $1.34-$3.01
            
            $1.69-$3.98Expected
                life in years
            3
                to 6
            
            3
                to 6Interest
                rate
            1.95%
            
            1.95%Volatility
            10%-70%
            
            10%-70%Dividend
                yield
            0.00%
            
            0.00%





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




**Warrants.** The
      Company has outstanding 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
      warrants to purchase common stock at $50.00 per share, and 448,053 warrants
      to
      purchase common stock at $0.01 per share outstanding at December 31, 2005. As
      of
      December 31, 2005, there were options and warrants outstanding to purchase
      a total of 9,346,525 shares of common stock with a weighted average exercise
      price of $2.55 per share.




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




**Note** **10.**  **Income
      Taxes**




At
      December 31, 2005, the Company had net operating loss carry-forwards for federal
      income tax purposes of approximately $71,518,000 that may be offset against
      future taxable income. These operating loss carry-forwards expire in the years
      2010 through 2024. No tax benefit has been reported in the financial statements
      because the potential tax benefits of the net operating loss carry-forwards
      are
      effectively offset by a 100% valuation allowance as a result of significant
      uncertainties as to ability to realize them in the future.




The
      reconciliation of the effective tax rate to the statutory 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
                ofpermanentdifferences
            
            
            (24,254
            )
            
            
            
            
            (26,640
            )Valuation
                allowance
            
            
            (5,948,604
            )
            34%
            
            
            (3,216,348
            )
            34%Net
                deferred tax assets
            
            
            —
            
            0%
            
            
            —
            
            0%$
            —
            
            
            
            
            $
            —





F-13


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




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





**Note** **11.**  **Commitments
      and Contingencies**




**Building
      Lease.** The
      Company is obligated under a building lease agreement for our Las Vegas office
      at 6830 Spencer Street, Las Vegas until January 2007, with an option to renew
      for five years. The lease provides for scheduled increases based, in part,
      on
      the annual Consumer Price Index. However, we do not indeed to renew the lease
      and will move to a new location at the termination of the lease. The Company
      also leases office space in other locations including China and certain office
      equipment under operating leases.




Future
      minimum 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 and 2004, respectively.




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




**Tax
      Audit.** In
      early
      February 2004, the State of Nevada initiated a sales/use tax audit of Central
      and Madison Leasing. The Company has sold and leased back shufflers and Deck
      Checkers over the last five years. The auditor for the State of Nevada is trying
      to determine at what level a sale tax needs to be collected. The Company now
      collects from our customers in Nevada and remits to the State of Nevada. There
      is a possibility that if the State of Nevada determines that the sales of the
      products to the leasing company is the level at which sales/use tax should
      have
      been collected there would 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 to the payment of sales/use tax with interest and
      penalties up to $500,000. A hearing was scheduled for May 2005 with the State
      of
      Nevada Department of Taxation was delayed due to the resignation of the
      Department’s director. We are awaiting the appointment of a new or interim
      director in order to re-schedule the hearing. The Company is defending its
      position in this matter. ****




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




F-14




**Note
      12. Subsequent Event**




On
      March
      29, 2006, we entered into an agreement to issue and sell our secured promissory
      notes for aggregate gross proceeds 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 the net offering proceeds in early April 2006. In connection
      with this debt financing, we also entered into a definitive agreement with
      the
      purchasers of our notes whereby we may, at our sole option, require them to
      purchase up to $5 million of our common stock. This agreement has a term of
      five years and grants us a binding “put” right to sell our shares at a 20%
      discount to the volume weighted average price of our shares on the day of a
      drawdown, subject to a ceiling price of $3.50 per share. In addition, we have
      reached an agreement in principal to issue and sell an additional $6 million
      of
      our common stock at price of $2.50 per share for a total of 2.4 million shares.




**Note** **13.
      Additional cash flow information**




**December
                31,****2005**
            
            **2004**Net
                loss
            
            $
            (17,567,230
            )
            $
            (9,538,200
            )Adjustments
                to reconcile net loss to net cash provided by operating activities:Depreciation
                and amortization
            
            
            1,186,249
            
            
            816,535Amortization
                of deferred interest
            
            
            188,213
            
            
            269,174Other
                non-cash cost
            
            
            3,516,852
            
            
            153,316Changes
                in assets and liabilities:Decrease
                in accounts receivable
            
            
            709,942
            
            
            634,107Decrease
                in prepaid expenses andother
                receivables
            
            
            173,362
            
            
            (33,305
            )Increase
                in inventory
            
            
            9,992
            
            
            (
                1,973,758
            )Decrease
                in other assets
            
            
            (25,248
            )
            
            266,143(Increase)
                decrease in deposits
            
            
            220,563
            
            
            14,810Increase
                in deferred expenses
            
            
            (3,855,138
            )
            
            (786,178
            )Increase
                (decrease) in accounts payable
            
            
            595,558
            
            
            (486,783
            )Increase
                in accrued expenses
            
            
            367,004
            
            
            (347,107
            )Increase
                (decrease) in deferred revenues
            
            
            (224,682
            )
            
            46,500Increase
                in customer deposits
            
            
            (111,759
            )
            
            304,611Net
                cash used in operating activities
            
            $
            (14,816,322
            )
            $
            (10,660,135
            )Supplemental
                cash flow information:Cash
                paid for interest
            
            $
            664,342
            
            $
            611,629Non-cash
                investing and financing activities:Loans
                converted into common stock
            
            $
            345,500
            
            $
            765,000Loans
                refinanced
            
            $
            2,904,500Stock
                acquired with options
            
            $
            846,820




F-15


**EXHIBIT
        INDEX**
 
 Exhibit
                Number
              Exhibit
                  Description3.1
              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, 2003.10.11
              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.10.26
                License
                    and Manufacturing Agreement dated February 27, 2006, between
                    VendingData
                    Corporation and Dolphin Products Pty Limited10.27
                Patent
                    Purchase Agreement dated October 1, 2005 among VendingData Corporation,
                    William Westmore Purton, Dolphin Products Pty Ltd. and Dolphin
                    Advanced
                    Technologies Pty Ltd.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.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).
 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 & Kern31.1
                Certification
                    of Mark R. Newburg under Section 302 of the Sarbanes-Oxley Act
                    of
                    2002.31.2
                Certification
                    of Arnaldo F. Galassi under Section 302 of the Sarbanes-Oxley
                    Act of
                    2002.32.1
                Certifications
                    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
                    U.S.C.
                    Section
                    1350.