**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 
 **FORM
        10-QSB/A**
 (Mark
        One)
 x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
  For
                    the quarterly period ended:
              June
                  30, 2004
  OR
  o
              **TRANSITION
                  REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE
                  ACT**
  For
                  the transition period from:
              
              to
 
 Commission
                  file number:
              001-32161
 
 VendingData
                    Corporation(Exact
                    name of small business issuer as specified in its
                    charter)Nevada
                
                91-1696010(State
                    or other jurisdiction of incorporation or organization)
                
                (I.R.S.
                    Employer Identification No.)6830
                    Spencer Street, Las Vegas, Nevada 89119(Address
                    of principal executive offices)(702)
                    733-7195(Issuer’s
                    telephone number)(Former
                    name, former address and former fiscal year, if changed since
                    last
                    report)Check
                    whether the issuer (1) filed all reports required to be filed
                    by Section
                    13 or 15(d) of the Exchange Act during the past 12 months (or
                    for such
                    shorter period that the registrant was required to file such
                    reports), and
                    (2) has been subject to such filing requirements for the past
                    90 days. Yes
                    xNo
                    o**APPLICABLE
                    ONLY TO CORPORATE ISSUERS**
  State
                      the number of shares outstanding of each of the issuer’s classes of common
                      equity,
                    as
                      of the latestpracticable
                      date:17,187,799shares
                      of common stock, $.001 par value, as ofJune
                      30, 2004Transitional
                    Small Business Disclosure Format (check one): Yes oNo
                    x
 
 
  **EXPLANATORY
        NOTE**
 
 VendingData
        Corporation is filing this Amendment No. 1 to its Quarterly Report on Form
        10-QSB for the quarter ended June 30, 2004 to reverse $731,000 and $1,238,000
        of
        revenue recognized during the three and six months ended June 30, 2004,
        respectively, with respect to four contracts and to restate inventory as
        of, and
        cost of sales during the three and six months ended, June 30, 2004 by ($169,000)
        and ($235,000), respectively, to make other resulting adjustments to its
        financial statements. The effect of the restatements was to increase previously
        reported net loss by $671,128 and $1,221,572 ($0.04 and $0.07 per share)
        for the
        three month and six month periods ended June 30, 2004, respectively. These
        adjustments will not result in present or future cash expenditures. (See
        the
        disclosure under the heading “Restatement” in Note 1 to the financial
        statements in this Quarterly Report on Form 10-QSB/A)
  The
        Items
        in our Form 10-QSB for the quarter ended June 30, 2004 that are amended and
        restated are as follows: Part I: Item 1 - Financial Statements; Item 2 -
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations; and Part II: Item 6 - Exhibits and Reports on Form 8-K.
  The
        remaining Items contained within this Amendment No. 1 to Quarterly Report
        on
        Form 10-QSB/A consist of all other Items originally contained in our Quarterly
        Report on Form 10-QSB for the quarter ended June 30, 2004 in the form filed
        on
        August 12, 2004. This Form 10-QSB/A does not reflect events occurring after
        the
        filing of the original Form 10-QSB, or modify or update those disclosures
        in any
        way other than as required to reflect the effects of the restatement.
  
  **VENDINGDATA
        CORPORATION**
  **FORM
        10-QSB**
  **TABLE
        OF CONTENTS**
  **PAGE****PART
                    I – FINANCIAL INFORMATION**
                
                
                1ITEM
                    1. FINANCIAL STATEMENTS
                
                
                1Balance
                    Sheets
                
                
                1Statements
                    of Operations
                
                
                2Statements
                    of Cash Flows
                
                
                3ITEM
                    2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
                    OPERATIONS
                
                
                7OVERVIEW
                
                
                7CRITICAL
                    ACCOUNTING POLICIES AND ESTIMATES
                
                
                7RESULTS
                    OF OPERATIONS
                
                
                9LIQUIDITY
                    AND CAPITAL RESOURCES
                
                
                12RISK
                    FACTORS
                
                
                13ITEM
                    3. CONTROLS AND PROCEDURES
                
                
                23**PART
                    II – OTHER INFORMATION**
                
                
                24ITEM 1. LEGAL PROCEEDINGS
                
                
                24ITEM 2. CHANGES IN SECURITIES
                
                
                24ITEM 3. DEFAULTS UPON SENIOR SECURITIES
                
                
                25ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                    HOLDERS
                
                
                25ITEM 5. OTHER INFORMATION
                
                
                25ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
                
                
                25
 
  **PART
        I - FINANCIAL INFORMATION**
  **Item
        1. FINANCIAL STATEMENTS**
  **VENDINGDATA
        CORPORATION**
 **Balance
        Sheets**
  **June
                  30,**
                **2004**
              
              **December
                  31,**
                **2003****ASSETS**
              
              **(unaudited)(Restated)****Current
                  assets**:Cash
                  and cash equivalents
              
              $
              2,407,419
              
              $
              11,526,664Current
                  portion of accounts receivable, trade, net of allowance for uncollectables
                  of $124,561
                and
                  $125,530
              
              
              2,297,184
              
              
              2,354,054Due
                  from affiliate
              
              
              18,407
              
              
              31,802Other
                  receivables
              
              
              67,133
              
              
              29,836Inventories
              
              
              5,585,867
              
              
              4,150,414Prepaid
                  expenses
              
              
              331,882
              
              
              52,02810,707,892
              
              
              18,144,798Equipment
                  rented to customers, net of accumulated depreciation of $441,894
                  and
                  $316,245
              
              
              523,350
              
              
              608,555Property
                  and equipment, net of accumulated depreciation of $2,060,740 and
                  $1,859,206
              
              
              998,270
              
              
              1,063,951Intangible
                  assets, net of accumulated amortization of $360,081 and
                  $288,203
              
              
              1,208,051
              
              
              1,282,088Due
                  from affiliate - non current
              
              
              118,800
              
              
              118,800Accounts
                  receivable, trade, net of current portion, less unamortized
                  discount
              
              
              1,623,926
              
              
              1,140,984Deferred
                  expenses
              
              
              444,825
              
              
              250,697Deposits
              
              
              1,138,278
              
              
              1,284,827Other
                  assets
              
              
              —
              
              
              265,478$
              16,763,392
              
              $
              24,160,178**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities**:Current
                  portion of leases payable
              
              $
              1,962,174
              
              $
              2,237,073Accounts
                  payable
              
              
              930,399
              
              
              1,727,460Accrued
                  expenses
              
              
              578,374
              
              
              824,307Deferred
                  revenues, current portion
              
              
              250,360
              
              
              171,875Short-term
                  debt
              
              
              238,250
              
              
              270,743Current
                  portion of convertible debt
              
              
              —
              
              
              2,368,077Customer
                  deposits
              
              
              198,560
              
              
              178,8054,158,117
              
              
              7,778,340Deferred
                  revenues, net of current portion
              
              
              276,045
              
              
              219,890Leases
                  payable, net of current portion
              
              
              1,011,966
              
              
              1,916,7235,446,128
              
              
              9,914,953**Stockholders'
                  equity**:Preferred
                  stock, $.001 par value, 10,000,000 shares authorized, no shares
                  issued and
                  outstanding
              
              
              —
              
              
              —Common
                  stock, $.001 par value, 25,000,000 shares authorized, 17,187,799
                  and
                  16,765,580 shares issued and outstanding
              
              
              17,188
              
              
              16,766Additional
                  paid-in capital
              
              
              59,659,307
              
              
              58,810,806Deficit
              
              
              (48,359,231
              )
              
              (44,582,347
              )Total
                  stockholders' equity
              
              
              11,317,264
              
              
              14,245,225Total
                  liabilities and stockholders' equity
              
              $
              16,763,392
              
              $
              24,160,178
  See
          accompanying notes to financial statements.
 –
            1
–
  **VENDINGDATA
        CORPORATION**
 **Statements
        of Operations**
  **(UNAUDITED)**
  **Three
                  Months Ended June 30,**
              
              **Six
                  Months Ended June 30,****2004****(restated)**
              
              **2003**
              
              **2004****(restated)**
              
              **2003****Revenues:**Sales
              
              $
              1,146,378
              
              $
              1,619,055
              
              $
              1,632,529
              
              $
              3,223,980Rental
              
              
              161,110
              
              
              300,430
              
              
              372,173
              
              
              630,743Other
              
              
              20,762
              
              
              12
              
              
              109,535
              
              
              1321,328,250
              
              
              1,919,497
              
              
              2,114,237
              
              
              3,854,855**Operating
                  expenses:**Cost
                  of sales
              
              
              899,701
              
              
              887,082
              
              
              1,614,580
              
              
              2,134,286Selling,
                  general and administrative
              
              
              1,502,469
              
              
              1,732,033
              
              
              2,972,953
              
              
              3,064,524Research
                  and development
              
              
              451,287
              
              
              228,476
              
              
              794,989
              
              
              372,8602,853,457
              
              
              2,847,591
              
              
              5,382,522
              
              
              5,571,670Loss
                  from operations
              
              
              (1,525,207
              )
              
              (928,094
              )
              
              (3,268,285
              )
              
              (1,716,815
              )Interest
                  expense, unrelated parties
              
              
              231,479
              
              
              556,095
              
              
              494,101
              
              
              1,053,771Interest
                  expense, related parties
              
              
              540
              
              
              149,572
              
              
              15,063
              
              
              309,393Gain
                  on disposition of assets
              
              
              —
              
              
              —
              
              
              (567
              )
              
              —232,019
              
              
              705,667
              
              
              508,597
              
              
              1,363,164Net
                  loss
              
              $
              (1,757,226
              )
              $
              (1,633,761
              )
              $
              (3,776,882
              )
              $
              (3,079,979
              )Basic
                  and diluted loss per share
              
              $
              (0.10
              )
              $
              (0.21
              )
              $
              (0.22
              )
              $
              (0.40
              )Weighted
                  average shares outstanding
              
              
              17,187,799
              
              
              7,646,430
              
              
              17,146,750
              
              
              7,636,185
 See
          accompanying notes to financial statements.
 –
            2
–
  **VENDINGDATA
        CORPORATION**
 **STATEMENTS
        OF CASH FLOWS**
  **(UNAUDITED)**
  **Six
                  Months Ended June 30,****2004**
                **(restated)**
              
              **2003****Operating
                  activities:**Net
                  cash used in operating activities
              
              $
              (6,180,134
              )
              $
              (7,016,487
              )**Investing
                  activities:**Acquisition
                  of intangible assets
              
              
              (4,900
              )
              
              (8,915
              )Acquisition
                  of plant and equipment
              
              
              (156,381
              )
              
              (450,525
              )Acquisition
                  of equipment produced for rental
              
              
              —
              
              
              (9,500
              )Disposition
                  of equipment produced for rental
              
              
              —
              
              
              502,791Other
              
              
              665
              
              
              705Deposits
              
              
              —
              
              
              (133,518
              )Net
                  cash used in investing activities
              
              
              (160,616
              )
              
              (98,962
              )**Financing
                  activities:**Proceeds
                  from sale of stock
              
              
              —
              
              
              362,550Reimbursement
                  of offering expense
              
              
              36,731
              
              
              —Proceeds
                  from leases payable
              
              
              —
              
              
              924,107Repayment
                  of leases payable
              
              
              (1,179,656
              )
              
              (1,362,931
              )Proceeds
                  from short-term debt
              
              
              —
              
              
              1,000,000Repayment
                  of short-term debt
              
              
              (32,493
              )
              
              (180,000
              )Proceeds
                  from convertible debt
              
              
              —
              
              
              5,000,000Repayment
                  of convertible debt
              
              
              (1,603,077
              )
              
              —Net
                  cash provided by (used in) financing activities
              
              
              (2,778,495
              )
              
              5,743,726**Change
                  in cash and cash equivalents:**Decrease
                  in cash
              
              
              (9,119,245
              )
              
              (1,371,723
              )Cash
                  and cash equivalents at beginning of period
              
              
              11,526,664
              
              
              1,778,297Cash
                  and cash equivalents at end of period
              
              $
              2,407,419
              
              $
              406,574
 See
          accompanying notes to financial statements.
 –
            3
–
  **VENDINGDATA
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS (UNAUDITED)**
  **Note 1—Basis
        of Presentation**
  The
        accompanying unaudited financial statements of VendingData Corporation (the
        "Company") have been prepared in accordance with generally accepted accounting
        principles for interim financial information and with the instructions
        incorporated in Regulation S-B of the Securities and Exchange Commission.
        Accordingly, they do not include all of the information and footnotes required
        by generally accepted accounting principles for complete financial statements.
        In the opinion of management, all adjustments (consisting of normal recurring
        adjustments and accruals) considered necessary for a fair presentation have
        been
        included.
  The
        results of operations for the periods presented are not necessarily indicative
        of the results to be expected for the full year. The accompanying financial
        statements should be read in conjunction with the Company's audited financial
        statements for the year ended December 31, 2003, as included in the
        Company's Annual Report on Form 10-KSB as filed with the Securities
        and
        Exchange Commission from which the accompanying balance sheet information
        as of
        that date was derived. Certain reclassifications have been made to amounts
        presented in prior periods for comparability to the current period presentation.
  **Restatement**
  As
        reported on our Form 8-K dated November 1, 2005 filed with the SEC, we
        concluded, after consultation with our independent auditors, that errors
        in
        revenue recognition practices and in allocation of labor and overhead costs
        to
        inventory costs require us to restate previously reported financial results
        for
        fiscal 2004. We have reversed $731,278 and $1,238,181 of revenue recognized
        during the three and six months ended, June 30, 2004 with respect to three
        contracts and restated inventory as of, and cost of sales during the three
        and
        six months ended, June 30, 2004 by $169,187 and $235,045, respectively, and
        made
        other resulting adjustments to its financial statements. The effect of the
        restatements was to increase previously reported net loss by $671,128 and
        $1,221,572 ($0.04 and $0.06 per share) for the three month and six month
        periods
        ended June 30, 2004, respectively. These adjustments have not resulted and
        will
        not result in past, present or future cash expenditures.
 
 **Note 2—Segments**
  The
        revenue segments identified for geographic region-based enterprise-wide data
        are
        as follows:
  **Three
                    Months Ended June 30,**
                
                **Six
                    Months Ended June, 30,****2004**
                  **(restated)**
                
                **2003**
                
                **2004**
                  **(restated)**
                
                **2003**United
                    States
                
                $
                566,585
                
                $
                1,844,497
                
                $
                1,218,180
                
                $
                3,603,963Asia
                
                
                11,665
                
                
                —
                
                
                146,057
                
                
                134,392Europe
                
                
                750,000
                
                
                75,000
                
                
                750,000
                
                
                75,000South
                    America
                
                
                —
                
                
                —
                
                
                —
                
                
                41,500
 
 –
            4
–
  The
        Company’s revenues, depreciation and operating income distribution by product
        are as follows:
  **Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2004**
                **(restated)**
              
              **2003**
              
              **2004**
                **(restated)**
              
              **2003**RevenuesSecureDrop®
              
              $
              83,242
              
              $
              185,223
              
              $
              130,305
              
              $
              1,334,733Shuffler
              
              
              584,672
              
              
              1,517,008
              
              
              1,041,947
              
              
              2,261,824Deck
                  CheckerTM
              
              
              639,574
              
              
              215,649
              
              
              832,450
              
              
              228,212Other
                  revenue
              
              
              20,762
              
              
              1,617
              
              
              109,535
              
              
              30,086$
              1,328,250
              
              $
              1,919,497
              
              $
              2,114,237
              
              $
              3,854,855Depreciation
                  and amortizationSecureDrop®
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0Shuffler
              
              
              56,220
              
              
              129,229
              
              
              111,782
              
              
              285,017Deck
                  CheckerTM
              
              
              7,207
              
              
              0
              
              
              13,867
              
              
              0Selling,
                  general and administrative
              
              
              145,592
              
              
              116,253
              
              
              300,332
              
              
              219,934209,019
              
              
              245,482
              
              
              425,981
              
              
              504,951Operating
                  income (loss)SecureDrop®
                  gross margin
              
              $
              18,813
              
              $
              (26,924
              )
              $
              (38,093
              )
              $
              654,029Shuffler
                  gross margin
              
              
              451,877
              
              
              1,218,455
              
              
              814,392
              
              
              1,702,546Deck
                  CheckerTMgross margin
              
              
              568,222
              
              
              134,506
              
              
              716,640
              
              
              137,689Other
                  cost of goods sold
              
              
              (610,363
              )
              
              (293,622
              )
              
              (993,282
              )
              
              (773,695
              )Selling,
                  general and administrative
              
              
              (1,502,469
              )
              
              (1,732,033
              )
              
              (2,972,953
              )
              
              (3,064,524
              )Research
                  and development
              
              
              (451,287
              )
              
              (228,476
              )
              
              (794,989
              )
              
              (372,860
              )$
              (1,525,207
              )
              $
              (928,094
              )
              $
              (3,268,285
              )
              $
              (1,716,815
              )
 
 **Note 3—Loss
        per Share (Basic and Diluted)**
  The
        basic
        loss per share is computed by dividing the net loss for the period by the
        weighted average number of common shares outstanding for the period. Loss
        per
        share is unchanged on a diluted basis since the assumed exercise of common
        stock
        equivalents would have an anti-dilutive effect due to the existence of operating
        losses.
  **Note 4—Debt**
  The
        company retired $2,368,077 of convertible debt during the six months ended
        June
        30, 2004 with cash payments and conversions to common stock.
  **Note 5—Options**
  The
        Company currently has two stock option plans. No stock-based employee
        compensation expense for stock options was reflected in net income for years
        prior to 2003, as all stock options granted under those plans had an exercise
        price equal to or greater than the fair market value of the underlying common
        stock on the date of grant. The exercise price range is between $1.75 and
        $15.00
        with a weighted average exercise price of $3.52. There were 2,008,470 options
        outstanding as of June 30, 2004.
  **Note 6—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 2004 operating plan to increase
        its
        sales by expanding its product line and improving its sales efforts domestically
        and internationally. Increased sales in the year ended December 31,
        2003
        show increased acceptance of the Company’s product line. Management has adopted
        a program to reduce operating costs through the transfer of manufacturing
        operations to China and restructuring service functions to reduce labor and
        rental expense. Management focused on financial condition and liquidity
        improvements through its capital raising efforts in 2003 along with substantial
        debt reduction and debt conversion. 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 the second
        half of 2004. In addition, the Company’s financial advisors have expressed
        confidence that additional capital can be raised by the Company, if necessary,
        in 2004, and the Company has received a one-year commitment for a $3.0 million
        lease line of credit.
  –
            5
–
  **Note 7—Trade
        Receivables From Major Customers**
  As
        of and
        during the six months ended June 30, 2004, approximately 2.7% of trade
        receivables and 8.5% of total sales and, as of and during the year ended
        December 31, 2003, approximately 17.6% of trade receivables and 13.3%
        of
        total sales were concentrated in the Nevada gaming industry among five customers
        under common ownership. The Company's future operations could be affected
        by
        adverse changes in the financial condition of, or the Company's relationships
        with, the commonly owned Nevada gaming customers, or economic, competitive
        and
        political conditions in our customers' respective local areas or the gaming
        industry, in general.
  The
        Company manages its concentrations of 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.
  **Note 8—Contingencies**
  The
        Company is a party to certain claims, legal actions, and complaints, including
        a
        patent infringement action between the Company and one of its main competitors.
        The Company cannot predict the likely outcome of any such litigation or whether
        any such substantial litigation would have a material adverse effect on its
        business as presently conducted or as anticipated.
  In
        early
        February 2004, the State of Nevada initiated a sales/use tax audit of Central
        and Madison Leasing, companies through which the Company has obtained lease
        financing. As of this filing the State of Nevada has not made a determination
        if
        there has been a shortfall in the payment of the sales/use tax. The Company
        has
        sold and leased back shufflers and Deck CheckersTM over the last five years. The
        auditor for the State of Nevada is trying to determine at what level a sales/use
        tax needs to be collected. The Company now collects from our customers in
        Nevada
        and remits payments to the State of Nevada. If the State of Nevada determines
        that the sales of the products to the leasing companies is the level at which
        sales/use tax should have been collected, liability of the leasing companies
        would be passed to the Company. The amount of this potential liability could
        range from a refund of $230,000 to the payment of sales/use tax with interest
        and penalties of up to $500,000. The Company intends to defend its position
        in
        this matter.
  –
            6
–
  **Item
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATIONS.**
  **Statement
        on Forward-Looking Information**
  Certain
        information included herein contains statements that may be considered
        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,
        such as
        statements relating to plans for product development, product placement,
        capital
        spending and financing sources. Such forward-looking information involves
        important risks and uncertainties that could significantly affect anticipated
        results in the future and, accordingly, such results may differ from those
        expressed in any forward-looking statements made herein. These risks and
        uncertainties include, but are not limited to, those relating to our liquidity
        requirements, our ability to locate necessary sources of capital to sustain
        our
        operations, the continued growth of the gaming industry, the success of our
        product development activities, the acceptance of our products in the
        marketplace, vigorous competition in the gaming industry, our dependence
        on
        existing management, changes in gaming laws and regulations (including actions
        affecting licensing), our leverage and debt service (including sensitivity
        to
        fluctuations in interest rates) and domestic or global economic
        conditions.
  
 **OVERVIEW**
  Our
          strategy is to develop cost-effective niche products for the global gaming
          industry. We focus on products that increase the security, productivity
          and
          profitability of casino operations. Our strategy involves marketing certain
          of
          our products for sale or lease, depending on the product, the geographic
          location of the customer and other factors. We rely on our internal sales
          staff
          and distributor relationships for the sale and rental of our products.
          Although
          we anticipate significant sales development and revenue growth, there is
          no
          assurance that we will generate sufficient revenue, cash flow or profit
          to
          sustain our operations.
  **CRITICAL
          ACCOUNTING POLICIES AND ESTIMATES**
  The
        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 our management to make subjective judgments
        regarding the effect of matters that are inherently uncertain.
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires our management to make estimates and assumptions
        that affect reported amounts and disclosures, some of which may require revision
        in future periods. Actual results could differ from these estimates. The
        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 our management to make subjective judgments
        and estimates regarding the effect of matters that are inherently uncertain.
  ***Allowance
        for Doubtful Accounts.***
  In
        connection with the preparation of our financial statements, management reviews
        and evaluates the collectibility 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.
  –
            7
–
  ***Revenue
        Recognition.***
  We
        recognize revenue from the sale of our products upon installation and functional
        testing at customer locations because that is when the customer’s obligation
        becomes fixed and certain pursuant to our standard contracts for the sale
        of
        units of the SecureDrop® System, shufflers and Deck CheckersTM. 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. 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 not generally made with a right to return,
        upon occasion, usually associated with the performance warranty, sales returns
        and allowances are recorded after returned goods are received and inspected.
        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.
  ***Intangible
        Assets.***
  We
        have
        acquired patent rights for various products since 2001 and acquired the patent
        rights for the Deck CheckerTM for $1,004,900 in the third quarter of 2003. We
        have estimated an economic useful life of 10 years for the Deck CheckerTM
        patents. We currently amortize our intangible assets on a straight-line basis
        over the estimated useful lives of 10 years.
  **FINANCIAL
          CONDITION** **(Certain
          2004 amounts have been restated.)**
  Total
        assets decreased from $24,160,178 to $16,763,392 between December 31,
        2003
        and June 30, 2004, a decrease of $7,396,786 or 30.6%. The decrease
        in total
        assets was due primarily to the $9,119,245 decrease in cash, offset, in part,
        by
        an increase in our inventories. The decrease in cash was due to continuing
        negative operating cash flows and debt reduction. Inventories have increased
        during the current period by $1,435,453 between December 31, 2003
        and
        June 30, 2004. The increase is primarily due to the ramping up of
        manufacturing in China for Deck CheckerTM units, shuffler production and the
        PokerOneTM Shuffler.
  Total
        liabilities have decreased from $9,914,953 to $5,446,128 between
        December 31, 2003 and June 30, 2004, a decrease of $4,468,825
        or
        45.1%. Accounts payable decreased by $797,061 between December 31,
        2003 and
        June 30, 2004 primarily due to the payment of the final $500,000 for
        the
        intellectual property rights for the Deck CheckerTM and the payment of
        outstanding payables with funds received from the public offering in December
        of
        2003. From December 31, 2003 to June 30, 2004, we eliminated
        our
        convertible debt of $2,368,077 through cash payments and conversions to common
        stock. Short-term debt decreased by $32,493 between December 31, 2003
        and
        June 30, 2004 due to the repayment of short-term debt.
  –
            8
–
  **RESULTS
          OF OPERATIONS**
 ***Comparison
        of Three Months Ended June 30, 2004 and 2003*** **(Certain
        2004 amounts have been restated.)**
  **Revenue**
  For
        the
        three months ended June 30, 2004, total revenues decreased from $1,919,497
        to
        $1,328,250, compared to the three months ended June 30, 2003, a decrease
        of
        $591,247 or 30.8%. The decrease in total revenues was due primarily to decreases
        in our shuffler revenue and SecureDrop® revenue , offset, in part, by increases
        in our Deck Checker TM revenue
        .
  **Deck
        CheckerTM.** Revenue
        related to the sale and rental of our Deck Checker TM product
        increased substantially compared to the three months ended June 30, 2003.
        Introduced in the second quarter of 2003, we expect Deck Checker TM revenue
        will continue to grow as the number of jurisdictions where we can sell the
        product increases along with the anticipated acceptance rate of the product
        in
        the casino industry. Since production has begun at our China facility at
        a much
        lower cost per unit, we will be able to establish a more aggressive price
        point
        while maintaining margins.
  **SecureDrop®.** Our
        SecureDrop® revenue decreased by 55.1% during the three months ended June 30,
        2004 in comparison to the three months ended June 30, 2003. The decrease
        was due
        to the a major installation of SecureDrop® products at three properties operated
        by Caesars Entertainment Inc. during the three months ended June 30, 2003.
        Although we are currently in negotiations for new contracts that would impact
        revenue in the second half of the year, we anticipate that we will continue
        to
        experience fluctuations in SecureDrop® revenue through the end of 2004.
  **Shufflers.** Our
        shuffler sales revenue decreased during the three months ended June 30, 2004
        in
        comparison to the three months ending June 30, 2003. Since the majority of
        the
        sales occurring in the second quarter of 2003 were from the conversion of
        shufflers on rent to purchases through long-term sales agreements that range
        from 24-48 months, we do not anticipate that conversions will contribute
        significantly to our shuffler sales in the future. We made a strategic decision
        to offer our customers the choice to either continue renting or to purchase
        our
        shufflers for the same monthly payments. This decision was based on competitive
        forces in the marketplace and the anticipated introduction of our next
        generation shufflers in 2004. By offering some of our customers the ability
        to
        trade up to our new shuffler, the RandomPlus Ô Shuffler, when approved by the relevant regulatory bodies, we will be able
        to
        obtain binding purchase commitments for our shufflers and ensure that our
        products are not readily replaced with those of our competitors.
  Our
        shuffler rental revenue for the three months ended June 30, 2004 decreased
        compared to the three months ended June 30, 2003 due to the reduced number
        of
        shufflers placed on a rental basis. The conversion of rental units to purchases
        reduced the number of shufflers that were rented throughout this quarter
        compared to the second quarter of 2003. With the introduction of the new
        RandomPlus Ô shuffler
        in the fourth quarter 2004, we anticipate an increase in the number of units
        placed on a rental basis.
  **Other
        Revenues.** Our
        other revenues for the three months ended June 30, 2004 increased compared
        to
        the three months ended June 30, 2003 due to increases in the sale
        of
        supplies for SecureDrop® and the Deck CheckerTM. The upward trend will continue
        for these consumables as we increase the installed base of these two product
        lines.
  –
            9
–
  **Cost
        of Sales**
  For
        the
        three months ended June 30, 2004, our cost of sales increased to $899,701,
        compared to $887,082 for the three months ended June 30, 2003, an
        increase
        of $12,619 or 1.4%. The gross margin on revenue for the three months ended
        June
        30, 2004 was 32.3%. This compares to 53.8% for the three months ended June
        30,
        2003. The decrease in gross margin from the same period of the prior year
        reflects the costs in transitioning our manufacturing to China. As this
        transition is completed, we expect to experience improvement in our gross
        margin
        percentage.
  The
        gross
        margin percentage on revenue from Deck Checker TM sales
        revenue was 88.9% during the three months ended June 30, 2004, compared to
        62.4%
        during the three months ended June 30, 2003. We originally purchased our
        inventory of Deck Checkers TM from a
        manufacturer located in New Zealand and, as of June 30, 2004, have sold most
        of
        these Deck Checkers TM .
        We are
        now manufacturing our Deck Checkers TM at our
        China facility and, after initial transitional costs, anticipate lower costs
        per
        unit.
  Our
        cost
        of SecureDrop® **** sales
        revenue decreased by 69.6%. The decrease is directly related to the decrease
        in
        SecureDrop® sales during the same period. The gross margin percentage on revenue
        from SecureDrop® **** sales
        revenue was 22.6% in the three months ended June 30, 2004 compared
        to a
        gross margin deficit percentage of 14.5% for the three months ended
        June 30, 2003.
  Our
        cost
        of shuffler **** revenue
        for the three months ended June 30, 2004 decreased by 55.5% compared to the
        three months ended June 30, 2003. The decrease in the cost of
        shuffler **** sales
        revenue was due to the decreased sale of shuffler **** units
        during the three months ended June 30, 2004. The gross margin percentage
        on
        revenue from shuffler **** sales
        revenue was 83.2% in the three months ended June 30, 2004 compared
        to 86.1%
        for the three months ended June 30, 2003. The conversion of existing
        rental
        shufflers with low book values due to depreciation to purchases reduced the
        product cost in the prior year.
  **Selling,
        General and Administrative Expense**
  For
        the
        three months ended June 30, 2004, our selling, general and administrative
        expenses were $1,502,469, a decrease of $229,564, or 13.3%, from $1,732,033
        for
        the three months ended June 30, 2003. The decrease in selling, general and
        administrative expenses related primarily to decreases in travel and
        entertainment expense, legal and regulatory expense and other expense offset
        by
        increases in salaries and related costs.
  Our
        general and administrative expenses for the three months ended June 30,
        2004 consisted of the following: salaries and related costs of $675,159;
        consulting and accounting services of $70,642; advertising and marketing
        costs
        of $8,119; travel and entertainment costs of $174,933; gaming industry show
        costs of $68,033; rent of $49,291; repairs and maintenance expense of $10,519;
        supplies of $16,834; legal and regulatory expenses of $259,860; insurance
        expenses of $7,188; depreciation and amortization of $136,559; and other
        expenses of $25,332.
  **Research
        and Development Expenses**
  For
        the
        three months ended June 30, 2004, research and development expenses
        were
        $451,287, an increase of $222,881, or 97.5%, from $228,476 for the three
        months
        ended June 30, 2003. The increase in research and development expenses
        was
        due to the development of the RandomPlusTM shuffler and PokerOneTM. Although
        research and development has been a significant cost, we anticipate that
        these
        costs will decrease in the future as most of the research and development
        functions have been or are being moved to our China facility.
  –
            10
–
  **Interest
        Expense**
  For
        the
        three months ended June 30, 2004, we incurred interest expenses of
        $232,019, compared to $705,667 for the three months ended June 30,
        2003, a
        decrease of $473,648 or 67.1%. This decrease was primarily attributable to
        the
        reduced debt service as a result of a decrease in our outstanding indebtedness
        and the retirement and conversion of $20,331,995 convertible debt in 2003
        and
        early 2004.
  **Net
        Loss**
  For
        the
        three months ended June 30, 2004, we had a net loss of $1,757,226
        compared
        to a net loss of $1,633,761 for the three months ended June 30, 2003,
        an
        increase of $123,465, or 7.6%. The increase in net loss was primarily due
        to
        increases in cost of sales, and selling, general and administrative expenses.
        Basic loss per share was $0.10 for the three months ended June 30,
        2004,
        compared to $0.21 for the three months ended June 30, 2003.
  ***Comparison
        of Six Months Ended June 30, 2004 and 2003***
  **Revenue**
  For
        the
        six months ended June 30, 2004, our revenues were $2,114,237, compared
        to
        $3,854,855 for the six months ended June 30, 2003, a decrease of $1,740,618,
        or
        45.1%. The decrease was due primarily to decreases in SecureDropTM sales and
        shuffler sales and rentals incurred in the three months ended March 31, 2004
        and
        the three months ended June 30, 2004, offset, in part by an increase in Deck
        CheckerTM revenue during the same period.
  **Cost
        of Sales**
  For
        the
        six months ended June 30, 2004, our cost of sales was $1,614,580,
        compared
        to $2,134,286 for the six months ended June 30, 2003, a decrease of
        $519,706, or 24.4%. The gross margin on revenue for the six months ended
        June 30, 2004 was $499,657 or 23.6%, compared to the gross margin
        on
        revenue for the six months ended June 30, 2003 of $1,720,569, or 44.6%.
        The
        decrease in gross margin of $1,220,912 from the six months ended June 30,
        2003 to the six months ended June 30, 2004 reflects a decrease in revenues
        during the period.
  **Selling,
        General and Administrative Expenses**
  For
        the
        six months ended June 30, 2004, our selling, general and administrative
        expenses were $2,972,953, compared to $3,064,524 for the six months ended
        June 30, 2003, a decrease of $91,571, or 3.0%. The decrease in selling,
        general and administrative expenses related primarily to decreases in rent,
        legal and regulatory expense and other offset by increases in salaries and
        related expense.
  Our
        selling, general and administrative expenses for the six months ended
        June 30, 2004 consisted of the following: salaries and related costs
        of
        $1,461,725; consulting services of $171,940; advertising and marketing costs
        of
        $14,028; travel and entertainment costs of $355,144; gaming industry trade
        show
        costs of $109,131; rent of $100,186; repairs and maintenance expenses of
        $24,414; legal and regulatory expenses of $457,755; supplies of $42,214;
        insurance expenses of $34,827; depreciation and amortization of $297,974;
        and
        other expenses of $(96,385).
  **Research
        and Development Expense**
  For
        the
        six months ended June 30, 2004, our research and development expenses
        were
        $794,989, compared to $372,860 for the six months ended June 30, 2003,
        an
        increase of $422,129, or 113.2%. The increase was due to the our continued
        development efforts on the RandomPlus TM and
        PokerOne TM shufflers.
  –
            11
–
  **Interest
        Expense**
  For
        the
        six months ended June 30, 2004, we incurred interest expense of $509,164,
        compared to $1,363,164 for the six months ended June 30, 2003, a decrease
        of $854,000, or 62.6%. This decrease was primarily attributable to the reduced
        debt service resulting from the substantial decrease in our outstanding
        indebtedness and the retirement and conversion into shares of common stock
        of
        $20,331,995 convertible debt in 2003 and in the three months ended March
        31,
        2004.
  **Net
        Loss**
  For
        the
        six months ended June 30, 2004, we had a net loss of $3,776,882, compared
        to a net loss of $3,079,979 for the six months ended June 30, 2003,
        an
        increase of $696,903, or 22.6%. The increase in net loss was primarily due
        to
        the decrease in revenue and interest expense, offset, in part, by the increase
        in loss from operations. Basic loss per share was $0.22 for the six months
        ended
        June 30, 2004, compared to $0.40 for the six months ended June 30,
        2003.
  **LIQUIDITY
          AND CAPITAL RESOURCES**
 Because
        of our efforts to transition from a development stage company to an operating
        company, we have generated substantial cash flow deficits from operations,
        including cash used in operating activities of $6,180,134 and $7,016,487
        in the
        six months ended June 30, 2004 and 2003, respectively. In addition,
        to fund
        our development and operating activities, we generated cash through financing
        activities in 2003 of $23,047,432. We have used cash of $2,778,495 in financing
        activities during the six months ending June 30, 2004 for the repayment
        of
        leases payable, short-term debt, and convertible debt.
  Consequently,
        we have been substantially dependent on cash from financing activities to
        fund
        our development and operating activities. We will continue to require cash
        from
        financing activities for our current operating needs until our operations
        generate sufficient cash flow to provide for such cash requirements. 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 the second half of 2004. In terms of sources of additional capital,
        we
        have received a one-year commitment for a $3.0 million lease line of credit
        and
        have been advised by our financial advisors that additional capital can be
        raised, if necessary, in 2004.
  **Sources
        of Capital**
  In
        the
        event our cash on hand plus cash from operations should be insufficient during
        future periods, we anticipate relying upon private and institutional sources
        of
        debt and equity, and we may seek public, private and institutional sources
        of
        capital for working capital purposes. During the years ended December 31,
        2003
        and 2002, our sources of capital included a public stock offering, equipment
        financing from a third party, short-term notes from stockholders, convertible
        debentures and other private sources of capital.
  With
        respect to our equipment financing where we have sold and leased back most
        of
        our furniture, equipment, tooling and shufflers held for rent, we have repaid
        $1,179,656 for the six months ended June 30, 2004, received proceeds
        of
        $2,988,385 and repaid $2,823,331 for the year ended December 31, 2002
        and
        have received proceeds of $989,820 and repaid $2,754,607 for the year ended
        December 31, 2003. As of June 30, 2004, we had outstanding
        equipment
        financing of $2,974,140. 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 have received proceeds of $2,264,871 and
        repaid $650,000 for the year ended December 31, 2002 and have received
        proceeds of $7,400,000 and repaid $1,310,000 for the year ended December
        31,
        2003 and have repaid $32,493 for the six months ended June 30, 2004.
        As of
        June 30, 2004, we had outstanding short-term loans in the aggregate
        amount
        of $238,250. Prior to 2003, we were substantially dependent on short-term
        loans
        from our principal stockholder and other directors. Despite such reliance,
        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.
  –
            12
–
  With
        respect to our convertible debentures, we received proceeds of $4,903,076
        and
        $11,050,000 during the years ended December 31, 2002 and 2003,
        respectively, and have completely retired the convertible debentures during
        the
        three months ended March 31, 2004.
  With
        respect to the public offering of common stock in December 2003, we sold
        5,500,000 shares at $5.00 per share for gross proceeds of $27,500,000. The
        net
        proceeds after all offering and commission expenses were
        $24,800,000.
  **Outlook**
  Our
        ability to maintain adequate liquidity is substantially dependent upon the
        success of management’s plans to address and overcome prior operating losses.
        Management has developed and refined its 2004 operating plan to increase
        its
        sales by expanding its product line and improving its sales efforts domestically
        and internationally. Increased sales in the year ended December 31,
        2003
        show increased acceptance of our product line. Management has adopted efforts
        to
        reduce operating costs through the transfer of manufacturing operations to
        China
        and restructuring service functions to reduce labor and rental expense.
        Management has focused on financial condition and liquidity improvements
        through
        its capital raising efforts in 2003 along with substantial debt reduction
        and
        debt conversion, resulting in positive cash position and substantially reduced
        indebtedness at June 30, 2004. As a result of anticipated sales improvements
        and
        operating cost initiatives, management believes that we will begin to generate
        positive operating cash flow by the end of 2004. In addition, our financial
        advisors have expressed confidence that additional capital can be raised
        by us,
        if necessary, in 2004 and we have received a one-year commitment for a $3.0
        million lease line of credit.
  Based
        on
        presently known commitments and plans, we believe that we will be able to
        fund
        our operations and required expenditures through the fourth quarter of 2004
        through cash on hand, cash flow from operations, and cash from private
        placements of debt or equity or from lease financing sources. **** In
        the
        event that such sources are insufficient or unavailable, we will need to
        seek
        cash from public or private placements of debt or equity, institutional or
        other
        lending sources, sell certain assets or change operating plans to accommodate
        such liquidity issues. No assurances can be given that we will successfully
        obtain liquidity sources necessary to fund our operations in the upcoming
        year.
        If we continue to generate significant losses from our operations and we
        are not
        able to locate additional sources of liquidity, we may be unable to continue
        as
        a going concern.
  **RISK
          FACTORS**
 **RISKS
          RELATED TO VENDINGDATA**
 ***Given
        our recurring losses and accumulated deficits, we must manage our
        liquidity.***
  Our
        financial statements report recurring losses and accumulated deficits. Based
        on
        presently known commitments and plans, we believe that we will be able to
        fund
        our operations and required expenditures through the fourth quarter of 2004
        from
        cash on hand, cash flow from operations and cash from debt or equity financings
        or from lease financing sources. The completion of the offering of 5,500,000
        shares of common stock in December 2003 allowed us to pay off all bridge
        financing, to convert approximately $5,730,000 of our convertible debt and
        accrued interest, to repay our convertible debt, to retire $7,500,000 of
        our
        convertible 10% senior notes and still have adequate funds available with
        which
        to fund additional product inventory, and use for general corporate purposes.
        If
        we are unable to generate a sufficient amount of sales of our products to
        fund
        our operations, we will need to seek cash from private or public placements
        of
        debt or equity, institutional or other lending sources, to sell certain assets
        or to change operating plans to accommodate our liquidity issues. We may
        not be
        able to obtain other liquidity sources as may be necessary to fund our
        operations in the future.
  –
            13
–
  ***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 six months ended June 30, 2004
        and
        years ended December 31, 2003 and 2002, we have incurred net losses
        of
        $3,776,882, $7,812,089 and $6,192,786, respectively, and our operations have
        used $6,180,134, $11,731,150 and $5,206,489 of cash, respectively. As of
        June
        30, 2004, December 31, 2003 and 2002, we had accumulated deficits
        of
        $48,359,231, $44,582,347 and $36,770,258, respectively. If we are unable
        to
        generate a positive cash flow in 2004, we will be required to locate additional
        sources of capital. If our revenues do not increase very substantially, or
        if
        our spending levels exceed our expectations, we will not become profitable.
        Revenues may not grow in the future, and we may not generate sufficient revenues
        for profitability. If we become profitable, we may not be able to sustain
        profitable operations.
  ***Even
        if our operations do not become profitable, we will continue to be obligated
        to
        pay our management substantial salaries and benefits.***
  We
        currently compensate our executive officers and significant employees with
        substantial salaries and other benefits and, in the future, may pay increased
        salaries and benefits. In 2003, we paid an aggregate amount equal to
        approximately $1,300,000 to our executive officers and significant employees.
        In
        June and July 2003, we extended our employment agreements for an additional
        five
        years with Mr. Blad and an additional three years with seven other
        key
        employees. In February 2004, we expanded our management team with the hiring
        of
        H. Michael Jahnke as our Chief Operating Officer. We intend to continue to
        pay
        substantial salaries and benefits to Mr. Blad and our other key employees.
        The payment of such compensation and benefits may be a burden on us and may
        be a
        factor in limiting or preventing our profitability. Upon the expiration of
        those
        employment agreements, we may elect to continue compensating management with
        similar or higher salaries and other benefits.
  ***The
        demand for our products may be insufficient to generate enough revenues to
        sustain our operations.***
  If
        we
        fail to generate sufficient demand for our products, we may be unable to
        sustain
        operations or generate a return to investors. Until January 2000, we were
        in the
        development stage and derived minimal revenues from our products. Currently
        we
        are an operating company that continues to develop new products. Since January
        2000, our activities have been limited to analyzing and consulting with persons
        in the gaming industry, developing and manufacturing new products, establishing
        distribution networks for our products, marketing our products to the gaming
        industry, and commencing product sales. During such time, we have derived
        only
        limited revenues, which have been insufficient to sustain our operations.
        We may
        not generate sufficient revenue to sustain our operations. No independent
        organization has conducted market research providing management with independent
        assurance from which to estimate potential demand for our products. The overall
        market may not be receptive to our products, and we may not successfully
        compete
        in the target market for our products.
  –
            14
–
  ***Due
        to the limited placement of our SecureDrop® System and the Deck
        Checker*** **Ô** **,we
        may not achieve significant market acceptance of these products and, as a
        result, general sufficient revenue to sustain our
        operations.**
  Although
        we installed our SecureDrop® System and have placed units of the Deck CheckerTM
        at a limited number of properties, we not be able to achieve significant
        market
        acceptance of our SecureDrop® System or the Deck CheckerTM. We have only sold our
        SecureDrop® Hard Count Module to a small number of casinos. The SecureDrop®
        System Soft Count Module has been slow to sell outside Nevada. Due to the
        resistance of gaming companies to the implementation of unproven technologies
        and product flaws that we subsequently corrected, we have experienced longer
        than expected sales cycles for our SecureDrop® System. In addition, we have only
        placed 156 Deck CheckerTM units (including 20 rentals) as of June 30, 2004.
        The commercial success of our SecureDrop® System and Deck CheckerTM will depend
        upon the degree of market acceptance of these products in the gaming community
        and will depend on a number of factors, including:
  ·
                demonstration
                    of effectiveness and reliability;
  ·
                the
                    prevalence and severity of any quality problems or defects in
                    the early
                    stage of introduction that were not anticipated in the design
                    of those
                    products;
  ·
                effectiveness
                    of our marketing and distribution capabilities;
  ·
                ability
                    to promptly service and repair the products; and
  ·
                receipt
                    of approval by respective gaming
                    jurisdictions.
  If
        we
        fail to expand our sales and leases for our SecureDrop® System and our Deck
        CheckerTM, we may be unable to generate sufficient revenues to continue to
        operate our business.
  ***Our
        revenues and receivables are concentrated among a few major customers, which
        means that our financial condition could deteriorate if any meaningful reduction
        in the level of sales to any of these customers occurs.***
  We
        are
        substantially dependent upon sales to a few major customers. In the first
        two
        quarters 2004 and in the fiscal year 2003, Caesars Entertainment, Inc. (formerly
        Park Place Entertainment Corporation), our largest customer, accounted for
        more
        than 5% of our revenues. During the six months ending June 30, 2004,
        approximately 2.7% of trade receivables and 8.5% of total sales and during
        the
        year ended December 31, 2003, approximately 17.6% of trade receivables
        and
        13.3% of total sales were concentrated in the Nevada gaming industry among
        five
        customers under the common ownership of Caesars Entertainment, Inc. 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 us.
  ***The
        acceptance and expansion of coinless gaming may adversely affect the demand
        for
        our SecureDrop® Hard Count Module.***
  Certain
        gaming operators have tested and employed as part of their current operations
        certain gaming devices that have totally eliminated the use of coins or tokens,
        or use a combination of coins and “cashless” vouchers. The acceptance and
        expansion of totally coinless gaming devices may reduce the demand for the
        SecureDrop® Hard Count Module, which is based on coin usage, and may adversely
        affect our operations in the future. For example, International Game Technology
        has introduced the EZ-PayTM system, which attempts to reduce operating costs and
        machine downtime by providing gaming operators with machines that drop coins
        for
        smaller payouts and print tickets for larger, predetermined payouts. As a
        result
        of the issuance of tickets, players are not required to wait for attendants
        in
        order to be paid larger payouts and may use their tickets at other machines
        equipped with the EZ-PayTM system or similar systems. Due to positive customer
        response, the number of slot operations with online systems that use coinless
        gaming systems continues to grow. However, while SecureDrop® Hard Count Module
        sales may be adversely impacted, we believe demand for our SecureDrop® Soft
        Count Module has been enhanced.
  –
            15
–
  ***We
        place our leased shufflers in casinos under short-term lease arrangements,
        which
        make these products susceptible to replacement due to pressure from competitors,
        changes in economic conditions, obsolescence and declining
        popularity.***
  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 dissatisfied 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. Our ability to compete may
        be
        damaged, and our revenues may be reduced if we are unable to protect our
        intellectual property rights adequately.
  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
        adversely impact the manufacture and sale of certain of our shuffler products.***
  Shuffle
        Master, Inc., our principal competitor in the shuffler market, has sued us
        for
        patent infringement and alleges that our shufflers violate two of its patents
        concerning registering use of a playing card shuffler apparatus and the
        displaying of the use on a display. Shuffle Master seeks treble damages,
        which,
        if awarded, could result in us owing it substantial sums of money, and, if
        large
        enough, could have a material adverse effect on our liquidity and our ability
        to
        conduct operations. Although we believe our position to be meritorious,
        litigation of this nature is a drain on our cash resources and our management’s
        time. Inasmuch as Shuffle Master has asserted patent infringement claims
        and we
        have reasonable defenses to the same, we cannot determine whether we will
        prevail in this litigation, 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 our shuffler products unless we change certain components
        used in
        the shufflers or obtain a license from Shuffle Master to use the playing
        card
        shuffler apparatus and the display. Similarly, we cannot determine whether
        Shuffle Master will assert other litigation claims based upon other patents
        it
        may currently or in the future own, nor can we determine the likely outcome
        of
        any such litigation or whether any such substantial litigation would have
        a
        material adverse effect on our business as presently conducted or as
        anticipated.
  –
            16
–
  ***We
        believe that it is likely that our PokerOneTM Shuffler will be the subject of
        future patent litigation if the product is 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, Inc. 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, Inc. will bring one or more claims against us seeking damages,
        injunctive or other equitable relief, or both. Moreover, we believe that
        it is
        reasonably likely that if we introduce the PokerOneTM Shuffler in the United
        States, Shuffle Master will bring one or more claims against us seeking various
        remedies at equity or law. We cannot predict the outcome of any future
        litigation that may occur.
  If
        our
        future products incorporate technology that infringes the proprietary rights
        of
        third parties and we do not secure licenses from them, we could be liable
        for
        substantial damages that would cause a material reduction in revenues and
        impair
        our prospects for achieving growth and profitability.
  In
        furtherance of the development of our services or products, we may need to
        acquire licenses for intellectual property to avoid infringement of third
        party
        rights or claims of infringement. These licenses may not be available on
        commercially reasonable terms, if at all. Claims for infringement, if made,
        could damage our business prospects, our results of operations and financial
        condition, whether or not the claims have merit, by:
  ·
                consuming
                    substantial time and financial resources required to defend against
                    them;
  ·
                diverting
                    the attention of management from growing our business and managing
                    operations;
  ·
                resulting
                    in costly litigation; and
  ·
                disrupting
                    product sales and shipments.
  If
        any
        third party prevails in an action against us for infringement of its proprietary
        rights, we could be required to pay damages and either enter into costly
        licensing arrangements or redesign our products so as to exclude the infringing
        technology. As a result, we would incur substantial costs and delays in product
        development, sales and shipments, our revenues may decline substantially
        and we
        may not be able to achieve the growth required for us to achieve
        profitability.
  ***Our
        failure to compete successfully against innovative competitors or new entrants
        could adversely impact our ability to sell our products and generate revenues.***
  Our
        market is characterized by changing technology, periodic product obsolescence
        and continuous protection of proprietary technology. Our success will depend
        upon our ability to sell our current products, and to develop successor systems.
        We will need to introduce new products and features in a timely manner to
        meet
        evolving customer requirements. We may not succeed in these efforts. Even
        if we
        succeed, products or technologies developed by others may render our products
        or
        technologies noncompetitive or obsolete, which would impair our ability to
        sell
        our products and reduce our revenue.
  –
            17
–
  ***Our
        inability to complete the development of our specialty game shuffler could
        adversely impact potential revenue growth.***
  We
        may
        not be able to complete development of the PokerOneTM Shuffler. We are continuing
        to fine tune this product and we plan to start the testing phase in Asia
        by the
        end of the second quarter of 2004. We have expended significant time and
        resources into the development of this product, and our failure to bring
        about a
        viable product may limit our long-term revenue growth in our shuffler product
        line.
  ***Scrutiny
        and attempts by third parties to compromise our products’ security, if
        successful, could injure product demand and force us to take back impacted
        products.***
  In
        the
        event that our products become susceptible to attacks by third parties that
        result in a decrease or compromise of the security of our customers’ operations,
        we will most likely be required to take back our products from existing
        customers and will lose sales and rentals from prospective customers. Although
        we have tested our products for security and our products have been tested
        by
        certain gaming regulators as part of the approval process, our products may
        be
        susceptible to schemes by third parties to defraud the properties where our
        products are used. Vulnerabilities in the security of our products will almost
        certainly reduce demand for these products. Our shufflers may become vulnerable
        to card counters or expert players, and the use of our shufflers may result
        in
        financial losses for our customers. The occurrence of any of these events
        would
        likely have a material adverse effect on our sales revenues.
  ***Any
        conditions that adversely affect the gaming industry could also have a material
        adverse effect on demand for our products.***
  The
        success of our business depends solely on the gaming industry where revenues
        are
        sensitive to general economic conditions and generally rise or fall rapidly
        in
        relation to the condition of the overall economy. Although we cannot accurately
        estimate the economic impact of past or future terrorist attacks or current
        international conflicts at this time, the gaming industry has been negatively
        affected by the reduction in air travel and tourism, and we expect that any
        significant decline in the economic health or growth of the gaming industry
        will
        reduce demand for our products.
  ***We
        are unable to predict the future impact that extraordinary events, such as
        terrorism, the uncertainty of war and worldwide health concerns, may have
        on our
        business and operations.***
  Extraordinary
        events, such as terrorist attacks, acts of war or worldwide health concerns,
        may
        cause damage or disruption to our operations, which, in turn, could
        significantly impact our revenues, costs and expenses, and financial condition.
        The terrorist attacks that took place in the United States on September 11,
        2001 were unprecedented events that have created many economic and political
        uncertainties, especially to the gaming industry, some of which have materially
        adversely affected our business, results of operations, and financial condition
        and may do so again in the future. In particular, the gaming industry has
        been
        affected by the downturn in the tourist industry as a result of the
        September 11, 2001 attacks. Because our business is directly tied
        to the
        gaming industry, the long-term effects from the September 11, 2001
        attacks
        are unknown. The potential for future terrorist attacks, the national and
        international responses to terrorist attacks, other acts of war or hostility
        and
        concerns about the spread of certain diseases, including severe acute
        respiratory syndrome, or SARS, have created many economic and political
        uncertainties, which could materially adversely affect our business, results
        of
        operations and financial condition in ways that we currently cannot
        predict.
  ***Supply
        interruption from our manufacturing facility in China could cause us to fail
        to
        supply customer orders on a timely basis.***
  We
        have
        centralized most phases of the manufacturing process for our products at
        our own
        facility in Xiaolan Town in Zhongshan City, China. We will be adversely impacted
        if there is an interruption in our ability to receive components or inventory
        from, or a material increase in labor costs in, China. Factors that may cause
        a
        supply interruption include political unrest, closure of ports, worldwide
        health
        concerns, including SARS, and other events beyond our control. In the event
        that
        our manufacturing operations in Xiaolan Town are interrupted, our ability
        to
        fill orders, ship such orders and realize the revenues therefrom could be
        adversely affected.
  –
            18
–
  ***Our
        efforts to expand into international markets pose special risks that could
        adversely affect all of our business.***
  As
        a
        result of the opening of our manufacturing facility in China, we are currently
        operating in international markets, and we propose to further expand our
        international sales and operations. Engaging in business outside the United
        States will subject us to the customary risks of doing business in foreign
        countries. These risks include fluctuations in foreign currency exchange
        rates
        and controls, competitive disadvantages to established foreign businesses
        with
        significant current market share and business/customer relationships,
        nationalization and other economic, tax and regulatory policies of local
        governments and the possibility of trade embargoes, political instability
        or war
        or other hostility, as well as the laws and policies of the United Sates
        affecting foreign trade and investment. Any one or more of these factors
        could
        materially adversely affect our ability to conduct business outside the United
        States and therefore our business as whole.
  ***Our
        reliance on distributors in international markets and our limited sales
        experience in foreign countries could cause us to lose sales and collections
        on
        such sales.***
  In
        general, substantially all sales of our products outside the United States
        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 United States, we have limited sales experience and history in
        foreign markets.
  ***Due
        to our management’s controlling interest in our common stock, our management has
        the power to control all matters submitted to our stockholders, which renders
        non-management stockholders’ efforts to effect substantial changes in our
        company more difficult.***
  Our
        executive officers and members of our board beneficially own approximately
        9,060,278 shares of common stock, or approximately 50.3% of the outstanding
        shares of our common stock, assuming exercise or conversion of all options,
        warrants and convertible debentures held by our executive officers and members
        of our board that are exercisable within 60 days of June 30, 2004. 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 also has the effect of delaying, preventing
        or
        expediting, as the case may be, a change in control of our company.
  ***The
        loss of our executive officers, significant employees or certain members
        of our
        management could adversely impact our operations.***
  Our
        success is substantially dependent upon the efforts and skills of Steven J.
        Blad, our chief executive officer and president, and H. Michael Jahnke, our
        chief operating officer. We have entered into employment agreements with
        Messrs. Blad and Jahnke and nine other significant employees. However,
        if
        we were to lose the services rendered by any of our executive officers or
        significant employees, key management, product development and sales functions
        could be adversely affected. In addition, we compete with other potential
        employers for employees, and we may not succeed in hiring and retaining the
        executives and other employees that we need. An inability to hire and retain
        quality employees could have a material adverse effect on our business,
        financial condition and results of operations.
  –
            19
–
  **RISKS
          RELATED TO OUR INDUSTRY**
 ***We
        face intense competition from companies with longer operating histories,
        greater
        resources and more established brand names that could use such advantages
        to
        lower our market share and reduce our revenues.***
  There
        is
        significant competition in the shuffler market, where we compete with
        established companies and other entities, most of which possess substantially
        greater resources than we do. Almost all of the companies with which we compete
        in the shuffler market 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.
        It is also likely that other competitors will emerge in the near future.
        Other
        companies may develop products competitive to our SecureDrop® System. We may not
        be able to compete successfully with other established gaming product
        manufacturers. Our inability to compete successfully will likely result in
        loss
        of market share and lower revenues, or increases in operating costs, such
        as
        marketing costs.
  ***We
        face extensive regulation from gaming and other government
        authorities.***
  The
        gaming industry is a highly regulated industry and is subject to numerous
        statutes, rules and regulations administered by the gaming commissions or
        similar regulatory authorities of each jurisdiction. Generally, companies
        that
        seek to introduce gaming products or concepts into such jurisdictions may
        be
        required to submit applications relating to their activities or products
        (including detailed background information concerning controlling persons
        within
        their organization), which are then reviewed for approval. In this regard,
        we
        may incur significant expenses in seeking to obtain licenses for our gaming
        products and concepts, and our products may not be approved in all
        jurisdictions. The failure to obtain such approval in any jurisdiction in
        which
        we may seek to introduce our products or concepts could have a material adverse
        effect on our business. In addition, any change to the applicable statutes,
        rules and regulations that restricts or prevents our ability to operate could
        have an adverse effect on us.
  ***Any
        person who is the beneficial owner of our common stock or with whom we have
        a
        material relationship that fails or refuses to apply for a finding of
        suitability, or that is found unsuitable for licensing, would be required
        to
        dispose of all of our stock.***
  Certain
        gaming regulatory agencies to which we are subject may investigate any
        beneficial holder of our voting securities (regardless of the numbers of
        shares
        owned), and any individual who has a material relationship or involvement
        with
        us, in order to determine whether such individual is suitable or should be
        licensed as a business associate of ours. In addition, the gaming authorities
        of
        various jurisdictions may require our officers, directors and certain key
        employees to be licensed or found suitable by these gaming authorities, which
        would require these officers, directors and key employees to submit detailed
        background information. Any person who fails or refuses to apply for a finding
        of suitability or a license after being ordered to do so by gaming regulatory
        agencies may be found unsuitable, and we could be subject to adverse regulatory
        action. In the event that the gaming authorities were to find an officer,
        director, key employee, stockholder, or any other individual that has a material
        relationship with us, unsuitable for licensing or unsuitable to continue
        having
        a relationship with us, we would have to sever all relationships with that
        individual, and that individual would be required to dispose of all of our
        stock. This could result in the loss of key persons critical to our success
        or
        in significant selling pressure on our stock if such persons are required
        to
        dispose of shares of our common stock in an amount that exceeds typical trading
        volumes in our shares.
  –
            20
–
  ***Our
        focus on products for the gaming industry subjects us to greater risk than
        we
        would have if we marketed our products to multiple industries.***
  We
        design
        and manufacture products and concepts solely for the gaming industry and
        depend
        almost exclusively on our ability to generate revenues from the rental or
        sale
        of our products to customers in the gaming industry. The economic health
        of the
        gaming industry, and, therefore, our revenues, are affected by a number of
        factors beyond our control, including:
  ·
                general
                    economic conditions, such as recession, inflation, business cycle
                    fluctuations and interest
                    rates;
  ·
                levels
                    of disposable income of gaming property
                    patrons;
  ·
                acts
                    of terrorism and anti-terrorism
                    efforts;
  ·
                increased
                    transportation costs resulting in decreased travel by gaming
                    patrons;
  ·
                changes
                    or proposed changes in tax
                    laws;
  ·
                legal
                    and regulatory issues affecting the development, operation and
                    licensing
                    of our gaming customers; and
  ·
                competitive
                    conditions in the gaming industry.
  These
        factors may adversely impact the demand for our products and materially affect
        the revenues that we realize on the sale or placement of our
        products.
  **RISKS
          RELATED TO OUR COMMON STOCK**
 ***There
        has only recently been a public market for our common stock, so our stockholders
        may be unable to dispose of their investment, or may lose the total value
        of
        their investment.***
  There
        had
        been no trading market for our common stock until September 10, 2003,
        when
        our common stock became eligible for quotation on the OTC Bulletin Board.
        Due to
        the limited trading history of our common stock, an active trading and/or
        a
        liquid market may not be maintained. Moreover, in the event that we are unable
        to continue as a going concern and we are dissolved or otherwise terminated,
        you
        could lose your entire investment in our common stock. Investment in our
        common
        stock is at risk of complete loss if our operations are unsuccessful.
  Historically,
        our common stock has been deemed to be “penny stock” as that term is defined in
        Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, or the
        Exchange Act. Penny stock may be more difficult for investors to resell.
        Penny
        stocks are stocks:
  ·
                with
                    a price of less than $5.00 per
                    share;
  ·
                that
                    are not traded on a “recognized” national exchange (exchange-listed
                    securities must still have a price of not less than $5.00 per
                    share);
  ·
                whose
                    prices are not quoted on the Nasdaq automated quotation system
                    (Nasdaq-listed stock must still have a price of not less than
                    $5.00 per
                    share); or
  ·
                from
                    issuers with net tangible assets less than $2.0 million (if the
                    issuer has
                    been in continuous operation for at least three years) or $5.0
                    million (if
                    in continuous operation for less than three years), or with average
                    revenues of less than $6.0 million for the last three
                    years.
  Although
        our AMEX listing application has been approved and our common stock began
        trading on the AMEX on May 4, 2004, since the closing price for our common
        stock
        was less than $5.00 per share as of June 30, 2004, our common stock is deemed
        to
        be penny stock for purposes of Section 15(b)(6) of the Exchange Act. Federal
        rules and regulations generally impose additional sale practice and disclosure
        requirements and penalties on broker/dealers and persons associated with
        or
        seeking to become associated with such broker/dealers who sell or recommend
        penny stocks to certain investors. These requirements may reduce the potential
        market for our common stock by reducing the number of potential investors,
        and
        any or all of these factors may make it more difficult for investors in our
        common stock to sell shares to third parties or to otherwise dispose of them
        and
        could cause our stock price to decline. Moreover, broker/dealers are required
        to
        determine whether an investment in a penny stock is a suitable investment
        for a
        prospective investor and receive the investor’s written consent to the
        transaction.
  –
            21
–
  ***Investors
        seeking guaranteed dividend-paying investments should not invest in our common
        stock.***
  Our
        operations may not become profitable. If we become profitable, we intend
        to use
        any earnings that may be generated to finance the growth of our business.
        Any
        payment of future dividends will be at the discretion of our board of directors
        and will depend on, among other things, our earnings, financial condition,
        capital requirements, level of indebtedness, statutory and contractual
        restrictions applying to the payment of dividends, and other considerations
        that
        our board of directors deems relevant. Accordingly, stockholders may have
        to
        sell some or all of their common stock in order to generate cash flow from
        their
        investment. Stockholders may not realize a gain on their investment, and
        they
        may lose all or a significant amount of their investment when they sell their
        common stock.
  ***If
        we are unable to generate sufficient revenue to provide the cash required
        to
        fund our operations in the future, we may be required to issue additional
        equity
        or convertible debt securities to provide our operations with additional
        working
        capital, which, in turn, will have the effect of diluting the relative ownership
        of our existing stockholders.***
  We
        have
        supplemented the cash deficit arising from our operations with the proceeds
        of
        our December 2003 offering of 5,500,000 shares of common stock and have received
        a one-year commitment for a $3 million lease line of credit, and will, if
        necessary, continue to supplement with cash from private or public placements
        of
        debt or equity, institutional or other lending sources. We have also utilized
        convertible debt securities and warrants to raise capital in the past. The
        issuance of additional equity or convertible debt securities will have the
        effect of reducing the percentage ownership of our current stockholders.
        In
        addition, these equity or convertible debt securities may have additional
        rights, preferences or privileges to those of our common stock, such as
        registration rights and preferences in liquidation. In the event we are required
        to raise additional funds to support our operations, additional funds may
        not be
        available on terms favorable to our company, or at all. If adequate funds
        are
        not available or are not available on acceptable terms, we may not be able
        to
        fund our operations or otherwise continue as a going concern.
  ***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 the Selling
        Stockholders, we have approximately 7,595,200 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.
  –
            22
–
  ***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.
  **ITEM
            3.** ****CONTROLS
            AND PROCEDURES****
  (a)  *Evaluation
        of Disclosure Controls.* In our
        quarterly report on Form 10-QSB for the period ended June 30, 2004 filed
        by us
        with the SEC on August 12, 2004 (“Original Quarterly Report”),  we
        evaluated the effectiveness of our disclosure controls and procedures as
        of the
        end of the three months ended June 30, 2004. This evaluation was done with
        the
        participation of our chief executive officer and our chief financial officer.
        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.
  In
        the
        Original Quarterly Report, we disclosed that based on the evaluation conducted
        as of June 30, 2005 we concluded that, subject to certain limitations noted
        in
        the Original Quarterly Report, our disclosure controls and procedures are
        effective to ensure that information we are required to disclose in 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. In
        connection with analysis that led up to the restatements set forth in this
        Amendment No. 1 to the Original Quarterly Report, we concluded that the
        circumstances underlying the restatements indicate that our disclosure controls
        and procedures as of and for the three months ended June 30, 2004 were deficient
        in respect of certain actions by former senior management to override
        established financial controls and procedures. We believe that all such
        deficiencies were corrected prior to September 30, 2005.
  (b)  *Changes
        in Disclosure Controls and Procedures.* In the
        Original Quarterly Report we disclosed that although there have been no
        significant changes in internal controls or in other factors that could
        significantly affect these controls subsequent to the date of their evaluation,
        we are continuously evaluating means of enhancing our internal controls.
        During
        the twelve months ended December 31, 2003, we added qualified staff
        to our
        accounting department, we improved our approval process for accounting entries,
        and we commenced implementation of MAS-500 integrated financial and
        manufacturing software application. MAS-500 has been implemented in Las Vegas
        to
        provide an integrated control process for purchasing, inventory control and
        manufacturing and should improve the accuracy and timeliness of our financial
        reporting. With respect to our China facility, we completed the implementation
        of and training on MAS-500 during the second quarter of 2004.
  –
            23
–
  **PART
        II – OTHER INFORMATION**
  ****ITEM
        1. LEGAL PROCEEDINGS****
  On
        March 27, 2002, Shuffle Master, Inc., or Shuffle Master, filed
        a
        complaint (Case No. CV-S-02-0438-JCM-PAL) against VendingData in the
        United
        States District Court, District of Nevada. The amended complaint alleges,
        among
        other things, claims for patent infringement and requests treble damages,
        an
        injunction enjoining us from infringing on two of Shuffle Master’s patents, an
        accounting of our gains and profits that resulted from our alleged infringement,
        and for interest, costs and attorneys’ fees. The Shuffle Master patents that are
        at issue in the litigation concern registering use of a playing card shuffler
        apparatus and the displaying of the use on a display. We have filed our answer,
        counterclaims, and amended counterclaims against Shuffle Master. In our answer,
        we deny Shuffle Master’s allegation of patent infringement and request that
        Shuffle Master’s complaint be dismissed. We also seek, in our amended
        counterclaim, a declaration that we do not infringe Shuffle Master’s patents and
        that Shuffle Master’s patents and certain of its related claims are invalid. We
        further assert counterclaims against Shuffle Master for breach of contract
        and
        violation of the Uniform Trade Secrets Act. On May 20, 2002, the United
        States District Court, District of Nevada denied Shuffle Master’s motion for
        preliminary injunction against us. Discovery in this litigation is now closed.
        On May 28, 2003, we filed a motion for summary judgment requesting
        that the
        court dismiss the case against us. The hearing for our motion for summary
        judgment was taken off calendar pending a ruling by a magistrate judge with
        respect to a October 24, 2003 claim construction hearing to determine
        the
        scope and definition of the patent claims at issue. On March 31, 2004, the
        magistrate judge issued an order with regard to claim interpretation, to
        which
        we have filed written objections. On June 25, 2004, the District Court affirmed
        the magistrate judge's order. Although we anticipate that in due course the
        District Court will rule on our arguments for summary judgment against the
        patent claims of Shuffle Master, if this matter is not resolved as a result
        of
        our motion for summary judgment, the District Court will set a date for
        trial.
  **ITEM
          2. CHANGES IN SECURITIES.**
 On
        December 18, 2003, we completed a public offering of 5,000,000 shares of
        our
        common stock. The placement agent for the offering was Philadelphia Brokerage
        Corporation. Our shares of common stock sold in the offering were registered
        under the Securities Act in a Registration Statement on Form SB-2, as amended
        (File No. 333-109115), or the Registration Statement. The Securities and
        Exchange Commission, or the Commission, declared the Registration Statement
        effective on December 11, 2003.
  The
        public offering price was $5.00 per share for an aggregate sales price of
        $27,500,000. We paid commissions of $1,925,000 to our placement agent, a
        non-accountable expense allowance of $25,000 to our placement agent and offering
        expenses of approximately $750,000. None of the expenses related to the initial
        public offering were paid directly or indirectly to any of our directors,
        officers, general partners or their associates, or to any persons owning
        10% or
        more of any class of our equity securities, or to any of our affiliates.
        We
        received net proceeds from the public offering of approximately $24,800,000
        after deducting the underwriting discounts and commissions and the offering
        expenses.
  From
        the
        effective date of the Registration Statement through the six months ended
        June
        30, 2004, we have used approximately $22,400,000 of the $24,800,000 of net
        proceeds from the initial public offering as follows:
  –
            24
–
  **USE
                    OF PROCEEDS TO DATE**
              
              **AMOUNT**Retirement
                  of loan from Mellon Bank HBV SPV, LLC
              
              $
              2,775,000Retirement
                  of loan from Triage Capital Management LP
              
              
              850,000Retirement
                  of loan from Triage Offshore Fund, Ltd.
              
              
              1,000,000Retirement
                  of loan from LC Capital Master Fund, Ltd.
              
              
              1,000,000Retirement
                  of a portion of 10% convertible senior notes
              
              
              7,100,000Repayment
                  of convertible senior notes
              
              
              1,600,000Lease
                  payments
              
              
              1,200,000Funding
                  to increase product inventory
              
              
              1,500,000Purchase
                  of fixed assets
              
              
              160,000Payment
                  of operating expenses
              
              
              5,215,000**TOTAL**
              
              **$**
              **22,400,000**
 
 **ITEM
          3. DEFAULTS UPON SENIOR SECURITIES.**
  Not
          applicable.
  **ITEM
          4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**
  Not
          applicable.
  **ITEM
          5. OTHER INFORMATION.**
  Not
          applicable.
  **ITEM
          6. EXHIBITS AND REPORTS ON FORM 8-K.**
  (a)
                Exhibits.
  31.1
                Certifications
                    Pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002.
  31.2
                Certifications
                    Pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002.
  32.1
                    Certification
                        of President and Chief Financial Officer Pursuant to Section
                        906 of the
                        Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
                        1350).
  (b)
                  Reports
                      on Form 8-K.
 During
          the three months ended June 30, 2004, we filed the following:
  ·
                Current
                    Report on Form 8-K filed on May 10, 2004 reporting the approval
                    of our
                    common stock for listing on the American Stock Exchange under
                    the ticker
                    symbol, “VNX”;
  ·
                Current
                    Report on Form 8-K filed on May 14, 2004 reporting our financial
                    results
                    for the period ended March 31, 2004;
                    and
  ·
                Current
                    Report on Form 8-K filed on May 27, 2004 reporting the separation
                    agreements entered into with John R. Spina, our former Chief
                    Financial
                    Officer, and Stacie L. Brown, our former Secretary and Corporate
                    Counsel.
  –
              25
–
 
 **SIGNATURE**
  In
          accordance with the requirements of the Exchange Act, the registrant caused
          this
          report to be signed on its behalf by the undersigned, thereunto duly
          authorized.
  **VENDINGDATA
                    CORPORATION**
                  (Registrant)Date:December
                      9, 2005
                By:
                /s/ Mark
                  R. NewburgMark
                  R. NewburgIts:
                President,
                    Chief Executive Officer and
                  Treasurer
                    (Principal Executive Officer)Date:December
                      9, 2005
                By:
                /s/
                    Arnaldo F. GalassiArnaldo
                    F. GalassiIts:
                Chief
                    Financial Officer and Secretary
                  (Principal
                    Financial Officer)
   –
              26
–