**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 
 **FORM
        10-QSB**
 (Mark
        One)
 x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
  For
                  the quarterly period ended:
              September
                  30, 2005
  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
                    
                    Check
                      whether the issuer is a shell company (as defined by Rule 12b-2
                      of the
                      Exchange Act).Yes oNo
                      x**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: 16,947,337 shares of common stock, $.001 par value, as
                      of November
                      3,
                      2005Transitional
                      Small Business Disclosure Format (check one):  
                      Yes oNo
                      x
 
 **Table
            of Contents**
  **VENDINGDATA
        CORPORATION**
 
 **FORM
        10-QSB**
 
 **TABLE
        OF CONTENTS**
 **Page**PART
                  I - FINANCIAL INFORMATION
              1ITEM
                  1. FINANCIAL STATEMENTS
              1Balance
                  Sheet
              1Statements
                  of Operations
              2Statements
                  of Cash Flows
              3ITEM
                  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION
              7OVERVIEW
              8RESTATEMENT
                  OF PREVIOUSLY ISSUED FINANCIAL
                  STATEMENTS
              8RESULTS
                  OF OPERATIONS
              8LIQUIDITY
                  AND CAPITAL RESOURCES
              12CRITICAL
                  ACCOUNTING POLICIES AND
                  ESTIMATES
              14ITEM
                  3. CONTROLS AND PROCEDURES
              19PART
                  II - OTHER INFORMATION
              20ITEM
                  1. LEGAL PROCEEDINGS
              20ITEM
                  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
              21ITEM
                  6. EXHIBITS
              22
 
 **Table
            of Contents**
  **PART
        I - FINANCIAL INFORMATION**
  **Item
                1.**
              **Financial
                  Statements**
  **VENDINGDATA
        CORPORATION**
 **Balance
        Sheet**
 **September
                  30,**
                **2005****ASSETS**
              
              **(unaudited)****Current
                  assets**:Cash
                  and cash equivalents
              
              $
              442,728Current
                  portion of accounts receivable, trade, net of allowance for uncollectibles
                  of $262,066
              
              
              1,433,894Due
                  from affiliate
              
              
              2,557Other
                  receivables
              
              
              179,824Inventories
              
              
              4,937,137Prepaid
                  expenses
              
              
              1,180,5298,176,669Equipment
                  rented to customers, net of accumulated depreciation of
                  $751,946
              
              
              212,999Property
                  and equipment, net of accumulated depreciation of
                  $2,280,487
              
              
              761,922Intangible
                  assets, at cost, net of accumulated amortization of
                  $581,098
              
              
              1,787,034Due
                  from affiliate
              
              
              79,400Accounts
                  receivable, trade, net of current portion, less unamortized
                  discount
              
              
              923,734Deferred
                  expenses
              
              
              790,350Deposits
              
              
              7,798$
              12,739,905**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities**:Current
                  portion of leases payable
              
              $
              753,956Accounts
                  payable
              
              
              2,613,870Accrued
                  expenses
              
              
              1,100,099Deferred
                  revenues, current portion
              
              
              152,613Short-term
                  debt
              
              
              50,000Customer
                  deposits
              
              
              188,4404,858,978Long
                  -term obligationsDeferred
                  revenues, net of current portion
              
              
              153,250Notes
                  payable
              
              
              12,000,000Leases
                  payable, net of current portion
              
              
              496,228Total
                  liabilities
              
              
              17,508,456**Stockholders'
                  equity**:Preferred
                  stock, $.001 par value, 10,000,000 shares authorized, no shares
                  issued and
                  outstandingCommon
                  stock, $.001 par value, 25,000,000 shares authorized, 17,312,058
                  shares
                  issued
              
              
              17,312Treasury
                  stock 448,053 shares of common stock at cost
              
              
              (846,820
              )Deferred
                  expenses
              
              
              (1,956,485
              )Additional
                  paid in capital
              
              
              63,410,010Deficit
              
              
              (65,392,568
              )Total
                  stockholders’ equity
              
              
              (4,768,551
              )Total
                  liabilities and stockholders’ equity
              
              $
              12,739,905
 See
          accompanying notes to financial statements.
  -1-
 **Table
            of Contents**
  **VENDINGDATA
        CORPORATION**
 **Statements
        of Operations**
  **(UNAUDITED)**
 **Three
                    Months Ended Sept 30,**
                
                **Nine
                    months Ended Sept 30,****2005**
                
                **2004**
                
                **2005**
                
                **2004****Revenues:**Sales
                
                $
                131,852
                
                $
                643,866
                
                $
                1,751,521
                
                $
                2,276,395Rental
                
                
                159,662
                
                
                137,002
                
                
                416,441
                
                
                509,175Other
                
                
                27,469
                
                
                42,782
                
                
                87,909
                
                
                152,317318,983
                
                
                823,650
                
                
                2,255,871
                
                
                2,937,887Sales
                    returns and allowances
                
                
                (20,002
                )
                
                
                
                
                (310,840
                )298,981
                
                
                823,650
                
                
                1,945,031
                
                
                2,937,887**Operating
                    costs and expenses:**Cost
                    of sales
                
                
                338,419
                
                
                857,733
                
                
                1,557,872
                
                
                2,472,313Selling,
                    general and administrative
                
                
                2,306,338
                
                
                1,832,645
                
                
                7,172,331
                
                
                4,805,598Research
                    and development
                
                
                591,807
                
                
                350,112
                
                
                1,069,496
                
                
                1,145,101Inventory
                    write down
                
                
                2,584,290
                
                
                575,446
                
                
                2,584,290
                
                
                575,4465,820,854
                
                
                3,615,936
                
                
                12,383,989
                
                
                8,998,458Loss
                    from operations
                
                
                (5,521,873
                )
                
                (2,792,286
                )
                
                (10,438,958
                )
                
                (6,060,571
                )Interest
                    expense, unrelated parties
                
                
                384,665
                
                
                188,261
                
                
                1,193,472
                
                
                682,362Interest
                    expense, related parties
                
                
                
                
                
                9,460
                
                
                15,063
                
                
                24,523(Gain)
                    loss on disposition of assets
                
                
                
                
                
                
                
                
                1,900
                
                
                (567
                )384,665
                
                
                197,721
                
                
                1,210,435
                
                
                706,318Net
                    loss
                
                $
                (5,906,538
                )
                $
                (2,990,007
                )
                $
                (11,649,393
                )
                $
                (6,766,889
                )Basic
                    loss per share
                
                $
                (0.35
                )
                $
                (0.17
                )
                $
                (0.68
                )
                $
                (0.39
                )Weighted
                    average shares outstanding
                
                
                16,864,005
                
                
                17,198,198
                
                
                17,105,093
                
                
                17,184,127
 See
        accompanying notes to financial statements.
   -2-
 **Table
            of Contents**
  **VENDINGDATA
        CORPORATION**
 **Statements
        of Cash Flows**
  **(UNAUDITED)**
 **Nine
                  months Ended Sept 30,****2005**
              
              **2004**Net
                  loss
              
              $
              (11,649,394
              )
              $
              (6,766,889
              )Adjustments
                  to reconcile net income (loss) to net cashprovided
                  by operating activities:Depreciation
              
              
              582,850
              
              
              633,146Amortization
                  of deferred interest
              
              
              158,552
              
              
              209,070Non-cash
                  compensation expense
              
              
              365,126
              
              
              113,207Loss
                  on disposition of assets
              
              
              1,900
              
              
              (567
              )Equipment
                  produced and held for rental
              
              
              0
              
              
              (46,193
              )Write
                  down of inventory
              
              
              2,584,290
              
              
              575,446Equipment
                  converted from rental to sales
              
              
              –
              
              
              6,615Increase
                  in operating assets:Trade
                  accounts receivable
              
              
              710,717
              
              
              (261,085
              )Other
                  receivables
              
              
              (32,391
              )
              
              (78,176
              )Inventory
              
              
              (1,074,013
              )
              
              (1,858,950
              )Prepaid
                  expenses
              
              
              (116,516
              )
              
              (339,630
              )Deferred
                  expenses
              
              
              (2,358,931
              )
              
              (597,378
              )Deposits
                  with vendors
              
              
              (3,079
              )
              
              353,769Other
                  assets
              
              
              –
              
              
              265,478Accounts
                  payable
              
              
              1,189,145
              
              
              (617,858
              )Accrued
                  expenses
              
              
              668,671
              
              
              (261,411
              )Deferred
                  expenses
              
              
              (132,402
              )
              
              90,625Customer
                  expenses
              
              
              (5,175
              )
              
              17,555Total
                  adjustments
              
              
              2,538,744
              
              
              (1,796,337
              )Net
                  cash used in operating activities
              
              
              (9,110,650
              )
              
              (8,563,226
              )Cash
                  flows from investing activities:Acquisition
                  of intangible assets
              
              
              –
              
              
              (4,900
              )Acquisition
                  of plant and equipment
              
              
              (897,707
              )
              
              (193,043
              )Disposition
                  of equipment produced for rental
              
              
              –
              
              
              –Disposition
                  of intangible assets
              
              
              –
              
              
              665Proceeds
                  from sale of plant and equipment
              
              
              4,700
              
              
              –Net
                  cash used in investing activities
              
              
              (893,007
              )
              
              (197,278
              )Cash
                  flows from financing activities:Reimbursement
                  of offering expense
              
              
              
              
              
              36,731Proceeds
                  from sale of stock
              
              
              3,566,852
              
              
              –Acquisition
                  of treasury stock
              
              
              (846,820
              )Repayment
                  of leases payable
              
              
              (1,743,057
              )
              
              (1,731,966
              )Proceeds
                  from notes payable
              
              
              8,750,000
              
              
              3,250,000Repayment
                  of short-term debt
              
              
              (188,250
              )
              
              (32,493
              )Repayment
                  of convertible debt
              
              
              –
              
              
              (1,603,077
              )Net
                  cash provided by (used in) financing activities
              
              
              9,538,725
              
              
              (80,805
              )Decrease
                  in cash and cash equivalents
              
              
              (464,932
              )
              
              (8,841,309
              )Cash
                  and cash equivalents at beginning of period
              
              
              907,660
              
              
              11,526,664Cash
                  and cash equivalents at end of period
              
              $
              442,728
              
              $
              2,685,355
 See
        accompanying notes to financial
        statements.
  -3-
 **Table
            of Contents**
  **VENDINGDATA
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS (UNAUDITED)**
  
 **Note 1—Basis
        of Presentation**
  The
        accompanying unaudited financial statements of VendingData Corporation (the
        "Company") have been prepared in accordance with generally accepted accounting
        principles for interim financial information and with the rules and regulations
        of the Securities and Exchange Commission applicable to interim financial
        information. Accordingly, they do not include all of the information and
        footnotes required by generally accepted accounting principles for complete
        financial statements. In the opinion of management, all adjustments considered
        necessary for a fair presentation have been included.
  The
        results of operations for the current period presented here are not necessarily
        indicative of the results to be expected for the full year. The accompanying
        financial statements should be read in conjunction with the Company's audited
        financial statements for the year ended December 31, 2004, included
        in the
        Company's Annual Report on Form 10-KSB filed with the Securities and
        Exchange Commission. As noted below, the Company intends to restate its
        financial statement for the year ended December 31, 2004 and file the restated
        fiscal 2004 financial statements by way of an amendment to its 2004 Annual
        Report on Form 10-KSB.  Certain
        reclassifications have been made to amounts presented in prior periods for
        comparability to the current period presentation.
  The
        accompanying unaudited financial statements, including the results of operations
        for the three and nine month periods ended September 30, 2004, give effect
        to
        the restatements discussed in the amended Quarterly Report on Form 10-QSB/A
        for
        those periods filed on November 14, 2005.
 
 **Note 2—Segments**
  The
        segments identified for geographic region-based enterprise-wide data are
        as
        follows:
  **Three
                    Months Ended Sept 30,**
                
                **Nine
                    months Ended Sept, 30,****2005**
                
                **2004**
                
                **2005**
                
                **2004**North
                    America
                
                $
                298,981
                
                $
                791,995
                
                $
                1,553,981
                
                $
                2,893,609Asia
                
                
                —
                
                
                31,655
                
                
                267,300
                
                
                44,278Europe
                
                
                —
                
                
                —
                
                
                99,000
                
                
                —South
                    America
                
                
                —
                
                
                —
                
                
                24,750
                
                
                —
  
 -4-
 **Table
            of Contents**
  The
        Company's revenues, depreciation and operating income distributed by product
        are
        as follows:
 **Three
                          Months Ended**
                      
                      **Nine
                          months Ended****Sept
                          30,**
                      
                      **Sept
                          30,****2005**
                      
                      **2004**
                      
                      **2005**
                      
                      **2004**RevenuesSecure
                          Drop®
                      
                      $
                      8,641
                      
                      $
                      106,637
                      
                      $
                      81,235
                      
                      $
                      236,942Shuffler
                      
                      
                      124,957
                      
                      
                      106,947
                      
                      
                      1,289,706
                      
                      
                      1,148,894Deck
                          CheckerTM
                      
                      
                      157,916
                      
                      
                      567,284
                      
                      
                      797,021
                      
                      
                      1,399,734Other
                      
                      
                      27,469
                      
                      
                      42,782
                      
                      
                      87,909
                      
                      
                      152,317Sales
                          returns and allowances
                      
                      
                      (20,002
                      )
                      
                      
                      
                      
                      (310,840
                      )$
                      298,981
                      
                      $
                      823,650
                      
                      $
                      1,945,031
                      
                      $
                      2,937,887Depreciation
                          and amortizationSecureDrop®
                      
                      $
                      0
                      
                      $
                      0
                      
                      $
                      0
                      
                      $
                      0Shuffler
                      
                      
                      55,469
                      
                      
                      75,526
                      
                      
                      159,908
                      
                      
                      167,386Deck
                          CheckerTM
                      
                      
                      9,229
                      
                      
                      9,229
                      
                      
                      27,687
                      
                      
                      23,096Selling,
                          general and administrative
                      
                      
                      106,705
                      
                      
                      162,594
                      
                      
                      395,255
                      
                      
                      442,664$
                      171,403
                      
                      $
                      247,349
                      
                      $
                      582,850
                      
                      $
                      633,146Operating
                          income (loss)SeSecure
                          Drop®
                      
                      $
                      8,412
                      
                      $
                      61,691
                      
                      $
                      73,262
                      
                      $
                      23,598Shuffler
                      
                      
                      (164,266
                      )
                      
                      12,702
                      
                      
                      704,558
                      
                      
                      827,094Deck
                          CheckerTM
                      
                      
                      149,952
                      
                      
                      484,115
                      
                      
                      711,216
                      
                      
                      1,200,755Other
                          costs of goods sold
                      
                      
                      (33,536
                      )
                      
                      (592,591
                      )
                      
                      (1,101,878
                      )
                      
                      (1,585,873
                      )Selling,
                          general and administrative
                      
                      
                      (2,306,338
                      )
                      
                      (1,832,645
                      )
                      
                      (7,172,331
                      )
                      
                      (4,805,598
                      )Research
                          and development
                      
                      
                      (591,807
                      )
                      
                      (350,112
                      )
                      
                      (1,069,496
                      )
                      
                      (1,145,101
                      )Inventory
                          adjustment
                      
                      
                      (2,584,290
                      )
                      
                      (575,446
                      )
                      
                      (2,584,290
                      )
                      
                      (575,446
                      )$
                      (5,521,873
                      )
                      $
                      (2,792,286
                      )
                      $
                      (10,438,959
                      )
                      $
                      (6,060,571
                      )
 
 **Note 3—Loss
        per Share**
  The
        basic
        loss per share is computed by dividing the net loss for the period by the
        weighted average number of common shares outstanding for the period. Loss
        per
        share is unchanged on a diluted basis since the assumed exercise of common
        stock
        equivalents would have an anti-dilutive effect because of losses.
  **Note 4—Options**
  The
        Company currently has two stock option plans. The exercise price of the options
        ranges from $1.34 to $13.00 with a weighted average exercise price of $3.09.
        There were 2,943,538 options outstanding as of September 30, 2005.
 
  **Note 5—Contingencies**
  The
        Company is a party to certain claims, legal actions, and complaints, including
        a
        patent infringement action between the Company and one of its main competitors.
        The Company cannot predict the outcome of any such litigation or say with
        certainty whether any such litigation would have a material adverse effect
        on
        its business as presently conducted or as anticipated.
  In
        early
        2004, the State of Nevada initiated a sales/use tax audit of the Company’s
        equipment lessors. As of the date of this report, the State of Nevada has
        not
        determined whether there has been a shortfall in the payment of the sales/use
        tax. The Company has sold and leased back shufflers and Deck Checkers over
        the
        last five years. The auditor for the State of Nevada is trying to determine
        at
        what level a sales/use tax needs to be collected. The Company now collects
        from
        our customers in Nevada and remits payments to the State of Nevada. If the
        State
        of Nevada determines that the sales of the products to the leasing companies
        is
        the level at which sales/use tax should have been collected, liability of
        the
        leasing companies would be passed to the Company. The amount of this potential
        liability could range from zero, with a refund of up to $144,000 to the payment
        of sales/use tax with interest and penalties of up to $500,000. Accordingly,
        no
        provision for probable loss has been accrued. The Company intends to defend
        its
        position in this matter.
  -5-
 **Table
            of Contents**
  The
        Company records legal defense costs as period costs.
  **Note 6—
        Subsequent Events**
  On
        October 6, 2005, the Company entered into a credit agreement with two holders
        of
        the February and March Senior Notes (see, Note 4). Pursuant to the credit
        agreement, the lenders have agreed to loan the Company up to $5,000,000 over
        a
        12-month period ending October 1, 2006, at which time all amounts advanced
        under
        the credit agreement will become due and payable (unless subject to mandatory
        prepayment as described below). The Company may request advances from the
        lenders from time to time in amounts not to exceed $500,000. Interest will
        accrue on the outstanding and principal balance of the advances at the rate
        of
        nine percent (9%) per annum, payable monthly in arrears. The Company may
        prepay
        the obligations and is required to apply against the outstanding principal
        and
        accrued interest any amounts received by the Company for the sale of its
        equity
        or debt securities or the sale of any of its assets.
  As
        of
        November 11, 2005, the lenders had advanced an aggregate of $2,000,000 million
        pursuant to the credit agreement. The lenders have a one time option to
        terminate the credit agreement on November 15, 2005. The lenders have not
        indicated an intention to terminate the credit agreement on November
        15 th ,
        but
        have requested that the Company extend the election date to December 1, 2005.
  Amounts
        advanced pursuant to the credit agreement are secured by a first priority
        security interest in certain assets of the Company, including accounts
        receivable, intellectual property and inventory.
 
 Pursuant
        to the credit agreement, and in consideration for the loan commitments made
        thereunder, the Company issued to the lenders warrants to purchase an aggregate
        of 3,000,000 shares of its common stock at an exercise price of $1.25 per
        share.
        The warrants are immediately exercisable and expire on October 1,
        2011.
   -6-
 **Table
            of Contents**
  **Item
                2.**
              **Management’s
                  Discussion and Analysis or Plan of Operation.**
  **CAUTIONARY
        STATEMENT**
 
 You
        should read the following discussion and analysis in conjunction with our
        unaudited condensed consolidated financial statements and the related notes
        thereto contained elsewhere in this report. The information contained in
        this
        quarterly report on form 10-QSB is not a complete description of our
        business or the risks associated with an investment in our common stock.
        We urge
        you to carefully review and consider the various disclosures made by us in
        this
        report and in our other reports filed with the Securities and Exchange
        Commission, or SEC, including our annual report on form 10-KSB for
        the year
        ended December 31, 2004 and subsequent reports on Forms 10-QSB
        and
        8-K, which discuss our business in greater detail.
 
 In
        this
        report we make, and from time to time we otherwise make, written and oral
        statements regarding our business and prospects, such as projections of future
        performance, statements of management’s plans and objectives, forecasts of
        market trends, and other matters that are forward-looking statements within
        the
        meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
        Securities Exchange Act of 1934. Statements containing the words or phrases
        “will likely result,”“are expected to,”“will continue,”“is
        anticipated,”“estimates,”“projects,”“believes,”“expects,”“anticipates,”“intends,”“target,”“goal,”“plans,”“objective,”“should”
        or similar expressions identify forward-looking statements, which may appear
        in
        documents, reports, filings with the Securities and Exchange Commission,
        news
        releases, written or oral presentations made by officers or other
        representatives made by us to analysts, stockholders, investors, news
        organizations and others, and discussions with management and other of our
        representatives. For such statements, we claim the protection of the safe
        harbor
        for forward-looking statements contained in the Private Securities Litigation
        Reform Act of 1995.
  Our
        future results, including results related to forward-looking statements,
        involve
        a number of risks and uncertainties. No assurance can be given that the results
        reflected in any forward-looking statements will be achieved. Any
        forward-looking statement speaks only as of the date on which such statement
        is
        made. Our forward-looking statements are based upon assumptions that are
        sometimes based upon estimates, data, communications and other information
        from
        suppliers, government agencies and other sources that may be subject to
        revision. Except as required by law, we do not undertake any obligation to
        update or keep current either (i) any forward-looking statement to reflect
        events or circumstances arising after the date of such statement, or (ii)
        the
        important factors that could cause our future results to differ materially
        from
        historical results or trends, results anticipated or planned by us, or which
        are
        reflected from time to time in any forward-looking statement.
  In
        addition to other matters identified or described by us from time to time
        in
        filings with the SEC, there are several important factors that could cause
        our
        future results to differ materially from historical results or trends, results
        anticipated or planned by us, or results that are reflected from time to
        time in
        any forward-looking statement. Some of these important factors, but not
        necessarily all important factors, include those matters included in the
        section
“Risk Factors” further below.
  **RESTATEMENTS
        OF PREVIOUSLY ISSUED FINANCIAL
        STATEMENTS**
  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.
  -7-
 **Table
            of Contents**
 
 Accordingly,
        we are in the process of preparing restated 2004 financial statements and currently
        expect to amend our annual
        report on Form 10-KSB for the year ended December 31, 2004, and have previously
        prepared and filed an amended Quarterly Report on Form 10-QSB/A for the third
        quarter of 2004. We also intend to amend our quarterly reports on Form 10-QSB
        for the first and second quarters of both 2004 and 2005 to reflect the 2004
        adjustments. Therefore, the financial statements of the Company previously
        issued by us for these periods should no longer be relied upon
 
 The
        unaudited financial statements and other results of operations and financial
        condition set forth in this quarterly report, including the results of
        operations for the three- and nine-month periods ended September 30, 2004,
        and
        the discussion that follows below, give effect to the restatements as described
        therein.
 
 **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.
  **Results
        of Operations**********
  ***Comparison
        of Three Months Ended*** **September
        30, 2005 and 2004 (as restated)**
  For
        the
        three months ended September 30, 2005, we generated gross revenues of $318,983
        or 63% less than the three months ended September 30, 2004. Gross revenue
        was
        offset by sales returns and allowances of $20,002. Specific product line
        results
        for the three months ended September 30, 2005 compared to the three months
        ended
        September 30, 2004 are provided below.
 
 For
        the
        three months ended September 30, 2005, our cost of sales was $338,419, or
        61%
        less than the three months ended September 30, 2004, excluding the respective
        inventory write downs of $2,584,290 and $575,446. T he
        decrease was due to
        reduced sales as a result of delays in getting jurisdictional approvals for
        our
        new Random Plus shuffler .
        We
        expect the manufacturing of products in China to continue to reduce cost
        of
        sales on a per unit basis through the end of this year as we identify more
        efficiencies and optimize vendors in China. These efforts should also result
        in further
        improvements to gross
        margin. The gross margin on revenue for the three months ended September
        30,
        2005, was ($39,437) or 16% less than the three months ended September 30,
        2004,
        excluding the respective inventory write downs of $2,584,290 and
        $575,446.
 
 Three
                  months ended
                Sept
                  30, 2005
              
              Three
                  months ended
                Sept
                  30, 2004
              
              Percentage
                change**Secure
                  Drop**Revenue
              
              
              8,641
              
              
              106,637
              
              
              (92
              %)Cost
                  of Sales
              
              
              230
              
              
              44,946
              
              
              (100
              %)Gross
                  Margin
              
              
              8,412
              
              
              61,691
              
              
              (86
              %)**Shuffler
                  Sales**Revenue
              
              
              38,791
              
              
              40,970
              
              
              (5
              %)Cost
                  of Sales
              
              
              19,357
              
              
              18,719
              
              
              3
              %Gross
                  Margin
              
              
              19,440
              
              
              22,251
              
              
              (13
              %)**Shuffler
                  Rentals**Revenue
              
              
              86,167
              
              
              65,977
              
              
              31
              %Cost
                  of Sales
              
              
              269,873
              
              
              75,526
              
              
              257
              %Gross
                  Margin
              
              
              (183,706
              )
              
              (9,549
              )
              
              (1,824
              %)**DeckChecker
                  Sales**Revenue
              
              
              84,420
              
              
              496,259
              
              
              (83
              %)Cost
                  of Sales
              
              
              (1,226
              )
              
              73,940
              
              
              (102
              %)Gross
                  Margin
              
              
              85,686
              
              
              422,319
              
              
              (80
              %)**DeckChecker
                  Rentals**Revenue
              
              
              73,495
              
              
              71,025
              
              
              4
              %Cost
                  of Sales
              
              
              9,229
              
              
              9,229
              
              
              –Gross
                  Margin
              
              
              64,266
              
              
              61,796
              
              
              4
              %**Other**Revenue
              
              
              27,469
              
              
              42,782
              
              
              (36
              %)Cost
                  of Sales
              
              
              (56,736
              )
              
              6,615
              
              
              (958
              %)Gross
                  Margin
              
              
              84,205
              
              
              36,167
              
              
              133
              %
  -8-
 **Table
            of Contents**
  **SecureDrop®
        Sales.** Since
        there were no system sales generated in the three months ended September
        30,
        2005, due to the Company’s decision to discontinue new installations of this
        product line, our SecureDrop® sales consisted of supply items for systems
        already in place. The decrease in our costs of SecureDrop® sales revenue
        reflects the reduced sales from the prior period. The decrease in gross margin
        percentage on SecureDrop® is attributable to the reduced sales from the prior
        period.
  **Shuffler
        Sales.** The
        decrease in revenue was due to some product returns during the three months
        ended September 30, 2005 and the delayed introduction of our new RandomPlus
        shuffler. The decrease in the cost of shuffler sales revenue was due to the fact
        that
        the PokerOneTM has a lower production cost than the Random Ejection Shuffler. Our
        cost of sales included cost of shuffler sales of $19,357 and shuffler service
        costs of $23,162 during the third quarter of 2005 compared respectively to
        $18,719 in cost of shuffler sales and $332,688 in shuffler service costs
        during
        the same period of the prior year.
  **Shuffler
        Rentals.** The 31%
        increase in shuffler rental revenue reflects resulted from the delay in
        obtaining approvals for the new version of the PokerOne and of our new shuffler
        product, the RandomPlus Ô Shuffler, as customers accepted rentals in anticipation of the availability
        of
        the new shufflers. Our cost of sales for the three months ended September
        30,
        2005 included cost of shuffler rental depreciation of $54,469 compared to
        $75,526 during the same period of the prior year.
  **DeckChecker** **TM** **Sales.** The
        decrease in Deck Checker TM sales
        resulted from reduced international sales. The increase in gross margin
        percentage resulted lowered manufacturing costs in China.  Our
        cost
        of sales for the three months ended September 30, 2005 included Deck
        Checker TM costs of
        ($1,266) compared to $73,940 during the same period of the prior
        year.
  **Deck
        Checker** **TM** **Rentals.** Deck
        Checker TM rental
        revenue was flat compared to the same period last year. Our cost of sales
        included Deck Checker TM rental
        depreciation of $9,229 during the third quarter of 2005 which was identical
        to
        the same period of the prior year.
  **Other
        Income.** The
        decrease in other revenues was due to a reduction of sale of supplies for
        various product lines. We also had sales returns and allowances of $20,002
        for
        the quarter ended September 30, 2005, compared to $0 during the same period
        of
        the prior year.
  -9-
 **Table
            of Contents**
  **General
        and Administrative Expense**
  For
        the
        three months ended September 30, 2005, our general and administrative expenses
        were $2,306,338, or 26% more than the three months ended September 30, 2004.
        The
        increase in general and administrative expenses related primarily to a $286,000
        increase in legal costs due to defense of the Shuffle Master, Inc. lawsuits,
        and
        legal/regulatory issues pertaining to former senior management, a $183,000
        increase in consulting expenses associated with the change in management
        team, a
        $18,000 increase in advertising, and a $36,000 increase in brokerage fees,
        offset by a $91,000 decrease in travel and entertainment expenses, a $34,000
        decrease in supplies, and a $10,400 decrease in salaries.
  **Research
        and Development Expense**
  For
        the
        three months ended September 30, 2005, research and development expenses
        were
        $591,807, or 69% more than the period ended September 30, 2004. The increase
        in
        research and development expenses was due to additional development on our
        shuffler products, the RandomPlusTM Shuffler and a new version of the PokerOneTM
        Shuffler.
  **Interest
        Expense**
  For
        the
        three months ended September 30, 2005, we incurred interest expenses of
        $384,665, or 104% more than the three months ended September 30, 2004. This
        increase was attributable to the additional debt service related to our
        previously outstanding 9% senior secured notes and the currently outstanding
        10%
        senior secured convertible notes. The debt service on our 10% senior secured
        convertible notes will continue until February and March 2008, at which time
        the
        principal amount is due.
  ***Comparison
        of*** **Nine
        months Ended September 30, 2005 and 2004 (as restated)**
  For
        the
        nine months ended September 30, 2005, we generated gross revenues of $2,255,871,
        or 23% less than the nine month period ended September 30, 2004. Gross revenues
        were offset by sales returns and allowances of $310,840. Specific product
        line
        results for the nine months ended September 30, 2005 compared to the nine
        months
        ended September 30, 2004 are provided below.
 
 For
        the
        nine months ended September 30, 2005, our cost of sales was $4,142,161, or
        36%
        more than the six month period ended September 30, 2004.  This
        includes the impact of the inventory write down of $2,584,290. Cost of sales,
        not including the write down, for the nine months ended September 30, 2005,
        was
        $1,557,872, or 38% less than the three months ended September 30, 2004. The
        manufacturing of products in China is expected to continue to reduce cost
        of
        sales on a per unit basis through the end of this year as we identify more
        efficiencies and optimize vendors in China. These efforts should result in further
        improvements in gross
        margin.
 
 The
        gross
        margin on revenue for the nine months ended September 30, 2005 was $387,159,
        excluding the impact of the inventory write down of $2,584,290, compared
        to the
        gross margin on revenue for the year ended September 30, 2004 of $465,574
        a
        decrease in gross margin of 17%.
 Nine
                  months ended
                Sept
                  30, 2005
              
              Nine
                  months ended
                Sept
                  30, 2004
              
              Percentage
                change**Secure
                  Drop**Revenue
              
              
              81,235
              
              
              236,942
              
              
              (66
              %)Cost
                  of Sales
              
              
              7,923
              
              
              213,344
              
              
              (96
              %)Gross
                  Margin
              
              
              73,262
              
              
              23,598
              
              
              211
              %**Shuffler
                  Sales**Revenue
              
              
              1,077,230
              
              
              827,554
              
              
              30
              %Cost
                  of Sales
              
              
              198,368
              
              
              139,506
              
              
              42
              %Gross
                  Margin
              
              
              878,862
              
              
              688,048
              
              
              28
              %**Shuffler
                  Rentals**Revenue
              
              
              212,476
              
              
              321,340
              
              
              (34
              %)Cost
                  of Sales
              
              
              386,780
              
              
              182,294
              
              
              112
              %Gross
                  Margin
              
              
              (174,304
              )
              
              139,046
              
              
              (225
              %)**DeckChecker
                  Sales**Revenue
              
              
              593,056
              
              
              1,211,899
              
              
              (51
              %)Cost
                  of Sales
              
              
              58,118
              
              
              175,883
              
              
              (67
              %)Gross
                  Margin
              
              
              534,938
              
              
              1,036,016
              
              
              (48
              %)**DeckChecker
                  Rentals**Revenue
              
              
              203,965
              
              
              187,835
              
              
              9
              %Cost
                  of Sales
              
              
              27,687
              
              
              23,096
              
              
              20
              %Gross
                  Margin
              
              
              176,278
              
              
              164,739
              
              
              7
              %**Other**Revenue
              
              
              87,909
              
              
              152,317
              
              
              (42
              %)Cost
                  of Sales
              
              
              41,072
              
              
              53,067
              
              
              (23
              %)Gross
                  Margin
              
              
              46,837
              
              
              99,250
              
              
              (53
              %)
  -10-
 **Table
            of Contents**
  **SecureDrop®
        Sales.** As
        a
        result of our decision to discontinue new installations for this product
        line **** there
        were no system sales generated in the nine months ended September 30, 2005.
        Our
        SecureDrop® sales consisted of supply items for systems already in place. The
        decrease in cost of sales to $7,923 reflects the reduced sales from the prior
        period.
  **Shuffler
        Sales.** The
        increase in sales was due, in part, to increased sales efforts related to
        our
        shufflers and the addition of PokerOneTM to the product line during the nine
        months ended September 30, 2005. **** The
        increase in the cost of shuffler **** sales
        revenue was due primarily to the additional placement of shufflers during
        the
        nine months ended September 30, 2005 versus the nine months ended Sept 30,
        2004
        and included shuffler service costs of $778,353 compared to $1,019,699 in
        shuffler service costs during the same period of the prior year.
  **Shuffler
        Rentals.** The
        decrease in shuffler rental revenue reflects the reduced number of shufflers
        placed on a rental basis as a result of the conversion of rental units to
        purchased units in 2003 and the failure to place additional shuffler units
        on a
        rental basis. This failure was due, in part, to the production delays related
        to
        the introduction of new shuffler products, such as the RandomPlus Ô Shuffler. Cost of sales include shuffler rental depreciation of $159,908
        during
        the nine months ended September 30, 2005 compared to $182,294 during the
        prior
        year period
  **Deck
        Checker** **TM** **Sales.** The
        decrease in Deck Checker TM sales
        resulted primarily from reduced international sales.
  **Deck
        Checker** **TM** **Rentals** .
        The
        small increase in Deck Checker TM rental
        revenue resulted primarily from the placement of additional units. Cost of
        sales
        included rental depreciation of $27,687 during
        the nine months ended September 30, 2005 compared to $23,096 during the prior
        year period.
  **Other
        Income.** The
        decrease in other revenues is due to product returns offset by the sale of
        products that are not produced by us and sold only on a limited basis. We
        also
        had sales returns and allowances of $310,840 for the nine months ended September
        30, 2005, compared to $0 during the prior year period.
  -11-
 **Table
            of Contents**
  **General
        and Administrative Expense**
  For
        the
        nine months ended September 30, 2005, our general and administrative expenses
        were $7,172,331, or 49% more than the nine months ended September 30, 2004.
        The
        increase in general and administrative expenses related primarily to a
        $1,647,000 increase in legal and regulatory costs due to defense of the Shuffle
        Master, Inc. lawsuits and legal/regulatory issues pertaining to former senior
        management, a $525,500 increase in consulting expenses related to the management
        change in March 2005, a $49,300 increase in insurance expense, a $103,200
        increase in advisory costs, and a $543,000 increase in other expenses (including
        $140,000 bad debt expense, $158,000 non-cost of sales service related expenses,
        and $24,000 tools expense), offset by a $207,267 decrease in payroll costs,
        a
        $160,000 decrease in travel and entertainment expenses, a $28,000 decrease
        in
        supplies, and a $22,000 decrease in trade show expenses.
  **Research
        and Development Expense**
  For
        the
        nine months ended September 30, 2005, research and development expenses were
        $1,069,500, or 7% less than the nine months ended September 30, 2004.
  **Interest
        Expense**
  For
        the
        nine months ended September 30, 2005, we incurred interest expenses of
        $1,208,535 or 71% more than the nine months ended September 30, 2004. This
        increase was primarily attributable to the additional debt service related
        to
        our previously outstanding 9% senior secured notes and the currently outstanding
        10% senior secured convertible notes. The debt service on our 10% senior
        secured
        convertible notes will continue until February and March 2008 at which time
        the
        principal amount is due.
  **Liquidity
        and Capital Resources******
  As
        a
        result of our operating loss, our working capital has decreased from $4,865,735
        at December 31, 2004 to $3,317,691 at September 30, 2005. On October 6, 2005,
        we
        negotiated a one year revolving credit facility in the amount of $5,000,000
        and
        carrying an interest rate of 9.0%. We believe that this financing will provide
        us sufficient capital through the first quarter of 2006. If required, we
        will
        endeavor to raise additional required funds through various financing sources,
        including additional sales of our equity and debt securities and the procurement
        of commercial debt financing. However, there can be no guarantees that such
        funds will be available on commercially reasonable terms, if at all. Our
        ability
        to obtain additional sources of capital is restricted by a provision in the
        Security Agreement relating to the credit facility and our February and March
        Senior Notes that prohibits us from incurring indebtedness through loans,
        lines
        of credit, and other forms of indebtedness, including the credit facility
        described above and our February and March Senior Notes, in excess of
        $15,000,000. Accordingly, no assurances can be given that we will successfully
        obtain liquidity sources necessary to fund our operations in the upcoming
        year.
  Net
        Cash
        Used In Investing Activities. The net cash used in investing activities reported
        for the nine months ended September 30, 2005 consisted primarily of $898,000
        from the acquisition of plant and equipment.
  Net
        Cash
        Provided By Financing Activities. Net cash provided by financing activities
        reported for the nine months ended September 30, 2005 consisted primarily
        of
        $12,000,000 provided by the issuance of 10% senior secured convertible notes
        (offset by the repayment of $3,250,000 of the 9% notes), proceeds from the
        sale
        of stock of $3,567,000, offset by the repayment of equipment leases of
        $1,743,100, and acquisition of treasury stock of $846,820.
  -12-
 **Table
            of Contents**
  **Sources
        of Capital**
  During
        the periods ended in 2004 and 2003, 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
        $1,743,057 for the nine months ended Sept ember 30, 2005
        and repaid $1,731,966 for the nine months ended Sept ember 30,
        2004. As of Sept ember 30,
        2005, we had outstanding equipment financing of $1,250,184. 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.
  During
        the nine months ended Sept ember 30,
        2005, we raised additional capital through private placements of 10% senior
        secured convertible notes in February 2005 (the “February Senior Notes”) and
        March 2005 (the “March Senior Notes” and together with the February Senior
        Notes, the “Senior Notes”).
  ·
              On
                  February 15, 2005, we completed a private placement of the February
                  Senior
                  Notes, which mature on February 15, 2008. The February Senior Notes
                  are
                  secured by a first priority security interest in our assets. The
                  February
                  Senior Notes require semi-annual payments of interest only on August
                  1 and
                  February 1 of each year, with the principal and any unpaid interest
                  due at
                  February 15, 2008. Any prepayments of the February Senior Notes
                  made prior
                  to February 2007 require the payments of premiums that decline
                  each year.
                  Holders of the February Senior Notes have a one-time right to convert
                  up
                  to 50% of the then outstanding principal of the February Senior
                  Notes into
                  shares of our common stock, $.001 par value, at a rate $1.65 per
                  share.
                  Through the private placement we issued an aggregate of $10,000,000
                  in
                  February Senior Notes, in return for exchanged notes in the aggregate
                  principal amount of $3,250,000 and gross cash proceeds of
                  $6,750,000.
  ·
              On
                  March 14, 2005, we completed an additional $2 million private placement
                  of
                  the March Senior Notes, which mature on March 14, 2008.Notes. The
                  March
                  Senior Notes were issued on a*pari
                  passu*basis with the February Senior Notes and, as a result, are secured
                  by a
                  first priority security interest in our assets. The March Senior
                  Notes
                  require semi-annual payments of interest only on September 1 and
                  March 1
                  of each year, with the principal and any unpaid interest due at
                  March 15,
                  2008. Any prepayments of the March Senior Notes made prior to March
                  2007
                  require the payments of premiums that decline each year. Holders
                  of the
                  March Senior Notes have a one-time right to convert up to 50% of
                  the then
                  outstanding principal of the March Senior Notes into shares of
                  our common
                  stock, $.001 par value, at a conversion price of $1.65 per
                  share.
  A
        portion
        of the proceeds raised through these private placements was subject to the
        following conditions.
  ·
              One
                  third (1/3) of the total proceeds held in escrow shall be released
                  to us
                  upon the execution of a distributor agreement with TCS or an affiliate
                  thereof and the sale and service outside the United States of 100
                  units of
                  our RandomPlus ShufflerTM and the PokerOneTM shuffler, where such events
                  must occur no later than June 30,
                  2005;
  ·
              One-third
                  (1/3) of the total proceeds held in escrow shall be released to
                  us upon
                  the hiring of a North American manager of operations or Chief Operating
                  Officer, where such person shall be hired no later than June 30,
                  2005;
                  and
  ·
              One-third
                  (1/3) of the total proceeds held in escrow shall be released to
                  us upon
                  the approval of our RandomPlusTM shuffler by Gaming Laboratories
                  International and the Nevada State Gaming Control Board and the
                  placement
                  of 100 units of our RandomPlusTM shuffler in North America, where such
                  approvals and shuffler placement must occur no later than June
                  30,
                  2005.
   -13-
 **Table
            of Contents**
  By
        June
        30, 2005, we satisfied the first and the second escrow conditions and received
        a
        waiver from the holders of the Senior Notes with respect to the third condition.
        Accordingly, we have access to the all of the proceeds received through the
        private placement of the Senior Notes.
  **Critical
        Accounting****Policies****and Estimates**
  The
        following is a summary of what management believes are the critical accounting
        policies related to operations. The application of these policies, in some
        cases, requires management to make subjective judgments and estimates regarding
        the effect of matters that are inherently uncertain. See Note 1, "Description
        of
        Business and Significant Accounting Policies," to financial statements included
        in our annual report on Form 10KSB for a more detailed discussion of our
        accounting policies. Except as described below, we do not employ any critical
        accounting policies selected from among available alternatives or that require
        the exercise of significant management judgment.,
  ***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.
  ***Revenue
        Recognition.***
  We
        recognize revenue from the sale of our shuffler and Deck CheckerTM products upon
        shipment against valid customer contracts or purchase orders. Sales are
        recognized immediately when shufflers that are rented are converted to purchases
        depending on the creditworthiness and payment history of the casino company
        since payment terms are from 20 to 48 months. We recognize revenue from our
        sales to independent distributors at the time that the distributor takes
        possession of our product and title transfers to the buyer. Before discontinuing
        to offer this product line, we recognized revenue from the sale of our
        SecureDrop® 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 sale. The extended warranty
        and
        maintenance components that are part of long term sales contracts are unbundled
        and recognized as deferred revenue amortized over the remaining life of the
        sales agreement after the initial 90−day warranty as required by the Emerging
        Issues Task Force Issue No. 00−21, *Revenue
        Arrangements with Multiple Deliverables* .
        The
        useful life of our shufflers and Deck CheckersTM is five years with proper
        maintenance; the life can be extended with the replacement of component parts.
        If the customer does not possess the required creditworthiness or an established
        payment history with us, we would then book the revenue as an installment
        sale
        and recognize it over time as payments are received. Revenue from shuffler
        rentals is recorded at the first of each month in accordance with rental
        contract terms. All rental contracts are cancelable upon 30−day written notice
        by the customer. Maintenance expense for rental units is recorded in the
        period
        it is incurred. Although sales are made with a right to return it is usually
        associated with unacceptable performance - sales returns and allowances are
        recorded after returned goods are received and inspected. We provide currently
        for estimated warranty repair costs associated with sales contracts. Although
        there are no extended warranties offered for our products, we do provide
        for
        maintenance contracts that are billed and recognized on a monthly
        basis.
  -14-
 **Table
            of Contents**
  ***Intangible
        Assets.***
  We
        currently amortize our intangible assets (patent and technology rights) on
        a
        straight-line basis over estimated useful lives of 10 years. Management believes
        that the useful life of patents and technology rights equals the full term
        of
        the patent.
  ***Recent
        Accounting Pronouncements.***
  In
        December, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 123 (Revised 2004), *Share
        Based Payment* (“SFAS
        123R”). SFAS 123R requires certain changes in the way compensation cost related
        to share based employee compensation transactions is recognized in the financial
        statements as compared to SFAS No. 123, *Accounting
        for Stock-Based Compensation* .
        The
        provisions of SFAS 123R are effective for the Company as of the first interim
        period that begins after December 15, 2005. Accordingly, we expect to implement
        the revised standard in the first quarter of fiscal year 2006, unless we
        decide
        to adopt it earlier. Since the company adopted SFAS No. 123 effective as
        of
        January 1, 2003, the effect of adopting SFAS 123R is not expected to be
        material.
  In
        December 2004, the FASB issued SFAS No. 153 *,
        Exchanges of Nonmonetary Assets, an*  *Amendment
        of APB Opinion No. 29, Accounting for Nonmonetary Transactions* (“SFAS
        153”). The amendments made by SFAS 153 are based on the principle that exchanges
        of nonmonetary assets should be measured based on the fair value of the assets
        exchanged. Further, the amendments eliminate the narrow exception for
        nonmonetary exchanges of similar productive assets and replace it with a
        broader
        exception for exchanges of nonmonetary assets that do not have commercial
        substance. The Statement is effective for nonmonetary asset exchanges occurring
        in fiscal periods beginning after June 15, 2005. We do not expect to enter
        into
        any transactions in the foreseeable future that would be affected by adopting
        SFAS 153.
  In
        May
        2005, the Financial Accounting Standards Board (FASB) issued Statement of
        Financial Accounting Standards (SFAS) No. 154 *,
        Accounting Changes and Error Corrections, a Replacement of*  *APB
        Opinion No. 20 and SFAS No. 3* . SFAS  No . 154 replaces
        APB Opinion No. 20, *Accounting*  *Changes* and SFAS
        No 3, *Reporting
        Accounting Changes in Interim Financial Statements* and
        changes the requirement for the accounting for and reporting of a change
        in
        accounting principles. SFAS No. 154 applies to all voluntary changes in
        accounting principles. It also applies to changes required by an accounting
        pronouncement in the unusual instance that the pronouncement does not include
        specific transition provisions. When a pronouncement includes specific
        transition provisions, those provisions should be followed. The provisions
        of
        SFAS No. 154 will be effective for accounting changes made in fiscal year
        beginning after December 15, 2005. We
        have
        no present expectation to make any accounting changes in the foreseeable
        future
        that would be subject to SFAS No. 154.
 
 **Risk
        Factors**
  ***We
        may*** ***require*** ***additional funding in the future to continue to operate our business.*** We
        had
        working capital of $3,317,691 as of September 30, 2005, however our working
        capital continues  to
        deteriorate due to  ongoing
        losses. In our previously filed 10-QSB for the period through June 30, 2005,
        we
        disclosed that we required approximately $3 million of additional capital
        to
        fund our operations and required expenditures through the fourth quarter
        of
        2005. On October 6, 2005, we negotiated a one year borrowing facility in
        the
        amount of $5,000,000 and carrying an interest rate of 9.0%. We believe that
        this
        financing will provide us sufficient capital through the first quarter of
        2006.
        The providers of the credit facility have a one time option to terminate
        the
        credit agreement on November 15, 2005. The lenders have not indicated an
        intention to terminate the credit agreement on November 15 th ,
        but
        have requested that the Company extend the election date to December 1, 2005.
        If
        required, we will endeavor to raise additional required funds through various
        financing sources, including additional sales of our equity and debt securities
        and the procurement of commercial debt financing. However, there can be no
        guarantees that such funds will be available on commercially reasonable terms,
        if at all. Our ability to seek additional sources of capital is restricted
        by a
        covenant related to our February and March Senior Notes that prohibits us
        from
        incurring indebtedness through loans, lines of credit, and other forms of
        indebtedness, including the credit facility described above and our February
        and
        March Senior Notes, in excess of $15,000,000. Accordingly, no assurances
        can be
        given that we will successfully obtain liquidity sources necessary to fund
        our
        operations in the upcoming year. Our inability to obtain additional capital
        as
        and when needed may materially adversely affect our ability to continue our
        present level of operations.
  -15-
 **Table
            of Contents**
  ***We
        have a history of significant operating losses and anticipate continued
        operating losses for at least the near term.*** For
        the
        nine months ended Sept ember 30, 2005
        and the years ended December 31, 2004 and 2003, we have incurred net
        losses
        of $11,649,394, $7,149,194 and $7,812,089, respectively, and our operations
        have
        used $8,918,329, $10,660,133 and
        $11,526,665 of cash,
        respectively. As of Sept ember 30,
        2005, December 31, 2004 and December 31, 2003, we had accumulated
        deficits
        of $65,592,839, $53,743,174 and $44,58 2,347 ,
        respectively. Based on our presently known commitments and plans, we believe
        that we have sufficient funding through the first quarter of 2006. If we
        are
        unable to generate additional funds from operational cash flow we will be
        required to locate additional sources of capital from private or public
        placements of debt or equity, or from institutional or other lending sources.
        If
        our revenues do not increase very substantially, or if our spending levels
        exceed our expectations, we will not become profitable. Revenues may not
        grow in
        the future, and we may not generate sufficient revenues for profitability.
        If we
        become profitable, we may not be able to sustain profitable operations.
  We
        may be
        unable to generate sufficient demand for our products. If we fail to generate
        sufficient demand for our products, we may be unable to sustain operations
        or
        generate a return to investors. Until January 2000, we were in the development
        stage and derived minimal revenues from our products. Currently we are an
        operating company that continues to develop new products. Since January 2000,
        our activities have been limited to analyzing and consulting with persons
        in the
        gaming industry, developing and manufacturing new products, establishing
        distribution networks for our products, marketing our products to the gaming
        industry, and commencing product sales. During such time, we have derived
        only
        limited revenues, which have been insufficient to sustain our operations.
        We may
        not generate sufficient revenue to sustain our operations. No independent
        organization has conducted market research providing management with independent
        assurance from which to estimate potential demand for our products. The overall
        market may not be receptive to our products, and we may not successfully
        compete
        in the target market for our products.
  ***Our
        leased shufflers are more susceptible to replacement by
        customers.*** All of
        our leased shufflers are placed with customers under short-term lease
        arrangements, which, unlike long-term leases or permanent sales of our products,
        can easily be terminated by a 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.
  -16-
 **Table
            of Contents**
  ***We
        may be unable to adequately protect our intellectual property
        right*** .
        Our
        success depends upon maintaining the confidentiality and proprietary nature
        of
        our intellectual property rights. Our ability to compete may be damaged,
        and our
        revenues may be reduced if we are unable to protect our intellectual property
        rights adequately. To protect these rights, we rely principally on a combination
        of:
  ·
              contractual
                  arrangements providing for non-disclosure and prohibitions on
                  use;
  ·
              patents
                  and pending patent applications;
  ·
              trade
                  secret, copyright and trademark laws;
                  and
  ·
              certain
                  built-in technical product
                  features.
  Patent,
        trade secret, copyright and trademark laws provide limited protection. The
        protections provided by laws governing intellectual property rights do not
        prevent our competitors from developing, independently, products similar
        or
        superior to our products and technologies. In addition, effective protection
        of
        copyrights, trade secrets, trademarks, and other proprietary rights may be
        unavailable or limited in certain foreign countries. We may be unaware of
        certain non-publicly available patent applications, which, if issued as patents,
        could relate to our services and products as currently designed or as we
        may
        modify them in the future. Legal or regulatory proceedings to enforce our
        patents, trademarks or copyrights could be costly, time consuming, and could
        divert the attention of management and technical personnel.
  ***Adverse
        results in current litigation could result in substantial monetary damages
        and
        impacts on the manufacture and sale of certain of our shuffler
        products*** .
        Shuffle
        Master, our principal competitor in the shuffler market, filed two lawsuits
        against us for patent infringement. The first suit has been settled (see
        Part II
        - Item 1. Legal Proceedings). The second lawsuit has thus far resulted in
        a
        positive result. On September 26th, United States Magistrate Judge Lawrence
        R.
        Leavitt issued a Report and Recommendation siding with VendingDataTM's position
        in a patent infringement case brought by Shuffle Master, Inc.(NASDAQ: SHFL)
        in
        United States District Court of Nevada. Shuffle Master initiated the action
        claiming that VendingDataTM's PokerOneTM automatic shuffler infringed one of
        Shuffle Master's patents. Judge Leavitt, however, determined that Shuffle
        Master's reading of its patent was too broad. Specifically, Judge Leavitt
        recommended that the District Court adopt VendingDataTM's view that the term
        "set" as used in Claim 20 of Shuffle Master’s ‘684 patent means at least one or
        more hands of cards within the apparatus, and not to any number of cards.
        Shuffle Master was seeking 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, and believe that the positive
        Markman
        hearing is a step toward resolving this matter, litigation of this nature
        is a
        drain on our cash resources and our management’s time. Although Shuffle Master
        has asserted patent infringement claims and we believe we have reasonable
        defenses to the same, we cannot determine whether we will ultimately prevail
        in
        the lawsuit, nor whether damages, if awarded, would significantly impact
        our
        ability to continue to manufacture and sell particular products within the
        United States and its territories. If we do not prevail, we will be unable
        to
        sell the PokerOneTM shuffler products in the United States unless we change
        certain components used in the shuffler or obtain appropriate licenses from
        Shuffle Master to use the playing card shuffler apparatus. The preliminary
        injunction that Shuffle Master obtained against us in  November
        2004 prevented us from selling our PokerOneTM Shuffler in the United States.
        An appellate court stayed the injunction in March 2005. 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.
  -17-
 **Table
            of Contents**
  ***It
        is possible that our future products will be the subject of future patent
        litigation if the products are sold and installed in the United States and,
        if
        commenced, could subject us to continuing litigation costs and risks.*** Other
        than the allegations made by Shuffle Master discussed above, we are not aware
        of
        any claims or basis for our current products infringing on the proprietary
        rights of third parties. To the extent that we introduce new products that
        incorporate the same or similar technology, it is likely that Shuffle Master
        will bring one or more claims against us seeking damages, injunctive or other
        equitable relief, or both. We cannot predict the outcome of any present or
        future litigation that may occur.
  If
        our
        future products incorporate technology that infringes the proprietary rights
        of
        third parties and we do not secure licenses from them, we could be liable
        for
        substantial damages that would cause a material reduction in revenues and
        impair
        our prospects for achieving growth and profitability.
  In
        furtherance of the development of our services or products, we may need to
        acquire licenses for intellectual property to avoid infringement of third
        party
        rights or claims of infringement. These licenses may not be available on
        commercially reasonable terms, if at all. Claims for infringement, if made,
        could damage our business prospects, our results of operations and financial
        condition, whether or not the claims have merit, by:
  ·
                consuming
                    substantial time and financial resources required to defend against
                    them;
  ·
                diverting
                    the attention of management from growing our business and managing
                    operations;
  ·
                resulting
                    in costly litigation; and
  ·
                disrupting
                    product sales and shipments.
  If
        any
        third party prevails in an action against us for infringement of its proprietary
        rights, we could be required to pay damages and either enter into costly
        licensing arrangements or redesign our products so as to exclude the infringing
        technology. As a result, we would incur substantial costs and delays in product
        development, sales and shipments, our revenues may decline substantially
        and we
        may not be able to achieve the growth required for us to achieve profitability
  ***We
        rely*** **on
        distributors in international markets, and our limited sales experience in
        foreign countries could cause us to lose sales.** Substantially
        all sales of our products outside the 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.
  On
        January 21, 2005, we entered into an exclusive five-year agreement with TCS
        to
        market and distribute our shuffler products outside of the United States.
        However, if TCS is unable to place our shuffler products outside of the United
        States, our liquidity will be adversely affected. In July 2005 we entered
        into a
        contract with Simon Herbert to serve as our Vice President of International
        Sales. Mr. Simon is a 25 year senior gaming industry executive who is credited
        with building several multi-million dollar operations. Most notably, Mr.
        Herbert
        served as CEO of TCS Group. Mr. Herbert will oversee VendingData's global
        sales
        effort, including international markets and distribution channel management
  ***Our
        management holds a controlling interest in our common stock, giving our
        management the power to control all matters submitted to our stockholders.*** As
        of
        September 30, 2005, our executive officers and members of our board beneficially
        own approximately 8,440,014 shares of common stock, or approximately 49.8%
        of
        the outstanding shares of our common stock,. Accordingly, these stockholders
        have the power to control all matters requiring approval by our stockholders,
        including the election of directors and approval of mergers and other
        significant corporate transactions. This concentration of ownership may make
        it
        more difficult for non management stockholders to effect substantial changes
        in
        our company, and also has the effect of delaying, preventing or expediting,
        as
        the case may be, a change in control of our company.
  -18-
 **Table
            of Contents**
  **Item
                  3.**
              **Controls
                  and Procedures******
  (a) *Evaluation
        of Disclosure Controls.* We
        evaluated the effectiveness of our disclosure controls and procedures as
        of the
        end of the nine months ended Sept ember 30,
        2005. This evaluation was done with the participation of Mark R. Newburg,
        our current
        President and Chief Executive Officer and Treasurer, and Arnaldo F. Galassi, our Chief Financial
        Officer, and Libby Lamm, our Controller. Disclosure controls and procedures
        are
        controls and other procedures that are designed to ensure that information
        required to be disclosed by us in the reports that we file or submit under
        the
        Exchange Act is recorded, processed, summarized and reported within the time
        periods specified in the SEC’s rules and forms. Disclosure controls and
        procedures include, without limitation, controls and procedures designed
        to
        ensure that information required to be disclosed by us in the reports that
        we
        file under the Exchange Act is accumulated and communicated to our management,
        as appropriate to allow timely decisions regarding required
        disclosure.
  Based
        on
        this evaluation, we concluded that, subject to the limitations noted above,
        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.  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. The circumstances underlying the restatements also indicate
        that
        our disclosure controls and procedures during 2004 were at times deficient,
        primarily 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.
 
 Our
        management does not expect that our disclosure controls and procedures or
        our
        internal controls over financial reporting will prevent all error and all
        fraud.
        A control system, no matter how well conceived and operated, can provide
        only
        reasonable, but not absolute, assurance that the objectives of a control
        system
        are met. Further, any control system reflects limitations on resources, and
        the
        benefits of a control system must be considered relative to its costs. Because
        of the inherent limitations in all control systems, no evaluation of controls
        can provide absolute assurance that all control issues and instances of fraud,
        if any, have been detected. These inherent limitations include the realities
        that judgments in decision-making can be faulty and that breakdowns can occur
        because of simple error or mistake. (See (b), below.)Additionally, controls
        can
        be circumvented by the individual acts of some persons, by collusion of two
        or
        more people, or by management override of a control. The design of a control
        system is also based upon certain assumptions about the likelihood of future
        events, there can be no assurance that any design will succeed in achieving
        its
        stated goals under all potential future conditions; over time, controls may
        become inadequate because of changes in conditions, or the degree of compliance
        with the policies or procedures may deteriorate. Because of the inherent
        limitations in a cost-effective control system, misstatements due to error
        or
        fraud may occur and may not be detected.
  (b) *Changes
        in Disclosure Controls and Procedures.*  There
        were no changes in our internal controls over financial reporting that occurred
        during the three months ended September 30, 2005 that have materially affected,
        or are reasonably likely to materially affect, our internal controls over
        financial reporting.
   -19-
 **Table
            of Contents**
  **PART
        II - OTHER INFORMATION**
  **Item
                1.**
              **Legal
                  Proceedings**
  On
        July
        12, 2005, we entered into a Settlement Agreement with Shuffle Master, Inc.,
        with
        respect to the legal proceeding filed on March 27, 2002, by Shuffle Master,
        Inc., against us in the United States District Court, District of Nevada
        (Case
        No. CV-S-02-0438-JCM-PAL). The complaint alleged, among other things, claims
        for
        patent infringement relating to two of Shuffle Master’s patents and requested
        treble damages and an injunction enjoining us from infringing on such patents.
        The Shuffle Master patents at issue are United States Patent Numbers 6,325,373
        and 6,068,258, regarding registering use of a playing card shuffler apparatus
        and the displaying of the use on a display. We had denied the claims and
        asserted counterclaims against Shuffle Master. The trial date for this matter
        was set for July 25, 2005.
 
 Pursuant
        to the Settlement Agreement, the parties have agreed to dismiss their claims
        and
        counter-claims in the particular action and Shuffle Master has agreed not
        to
        bring any claims against us for the infringement of the above-referenced
        patents
        for past or future use of the technology, with the exception of matters
        involving infringement of the following aspects of Patent No. 6,325,373:
        (i) a
        method of recovering from a card jam in an automatic card shuffler, as further
        described in Claim 6 of Patent No. 6,325,373; and (ii) an automatic card
        shuffler with a card moving mechanism to clear card jams, as further described
        in Claim 7 of Patent No. 6,325,373. In return, we will make settlement payments
        to Shuffle Master in the amount of $400,000 payable on or before July 14,
        2005,
        and $400,000 which is due on or before May 14, 2006.
 
 The
        Settlement Agreement extends only to the matters described above relating
        to
        Patent Numbers 6,325,373 and 6,068,258, and does not extend to the legal
        proceeding filed on October 5, 2004, by Shuffle Master, Inc., against us
        in the
        United States District Court, District of Nevada (Case No.
        CV-S-04-1373-JCM-LRL). Those litigation proceedings continue and are not
        affected by the Settlement Agreement.
  The
        second lawsuit alleges that our PokerOneTM Shuffler violates a Shuffle Master
        patent concerning the card moving mechanism. Shuffle Master seeks treble
        damages. The second lawsuit has thus far resulted in a positive result. On
        September 26th, United States Magistrate Judge Lawrence R. Leavitt issued
        a
        Report and Recommendation siding with VendingDataTM's position in a patent
        infringement case brought by Shuffle Master, Inc.(NASDAQ: SHFL) in United
        States
        District Court of Nevada. Shuffle Master initiated the action claiming that
        VendingDataTM's PokerOneTM automatic shuffler infringed one of Shuffle Master's
        patents. Judge Leavitt, however, determined that Shuffle Master's reading
        of its
        patent was too broad. Specifically, Judge Leavitt recommended that the District
        Court adopt VendingDataTM's view that the term "set" as used in Claim 20 of
        Shuffle Master’s ‘684 patent means at least one or more hands of cards within
        the apparatus, and not to any number of cards. However, if we do not ultimately
        prevail, we will be unable to sell the PokerOneTM shuffler products in the United
        States unless we change certain components used in the shuffler or obtain
        appropriate licenses from Shuffle Master to use the playing card shuffler
        apparatus. The preliminary injunction that Shuffle Master obtained against
        us in
        November 2004 prevented us from selling our PokerOneTM Shuffler in the United
        States. An appellate court stayed the injunction in March 2005.
  On
        June
        2, 2005, we received a summons and complaint in connection with an automobile
        accident involving a former employee of the company. The claim was filed
        in the
        Superior Court of California, County of San Francisco, and the amount of
        the
        lawsuit is in excess of $2 million. We have responded to the complaint and
        referred the case to our insurance carrier.
  -20-
 **Table
            of Contents**
  **Item
                4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**
  Our
        Annual Meeting of Stockholders was held on August 23, 2005. The following
        individuals were elected at the Annual Meeting to serve as directors of
        VendingData Corporation for terms expiring at our next Annual Meeting of
        Stockholders or until their successors are elected and qualified. Shares
        voted
        in favor of these directors and shares withheld were as follows:
  Name
              
              Shares voted
                FOR
              
              Shares
                Withheld
              
              Shares
                AbstainingMark
                  R. Newburg
              
              
              15,461,067
              
              
              43,620
              
              
              0James
                  E. Crabbe
              
              
              15,461,467
              
              
              43,220
              
              
              0Ronald
                  O. Keil
              
              
              15,460,667
              
              
              44,020
              
              
              0Bob
                  L. Smith
              
              
              15,462,967
              
              
              41,720
              
              
              0
  Shareholders
        approved an amendment to our articles of incorporation to increase our authorized
        shares of common stock from 25,000,000 shares to 50,000,000 ,
        with
        shares voted as follows:
 Shares
                  voted FOR
              
              
              15,460,7533Shares
                  against
              
              
              34,434Shares
                  abstaining
              
              
              9,500
  Shareholders
        approved the issuance of our 10% senior secured convertible notes
        due 2008,
        with shares voted as follows:
 Shares
                  voted FOR
              
              
              10,294,422Shares
                  against
              
              
              42,547Shares
                  abstaining
              
              
              27,468
  Shareholders
        approved of an amendment to our 1999 stock option plan, with shares voted
        as
        follows:
 Shares
                  voted FOR
              
              
              9,008,318Shares
                  against
              
              
              1,346,594Shares
                  abstaining
              
              
              9,525
   -21-
 **Table
            of Contents**
  **Item
                6.**
              **Exhibits.**
 Exhibits.
 
 10.1
                Credit
                    Agreement dated October 5, 2005 among VendingData Corporation,
                    Lampe
                    Conway & Co., LLC and Triage Capital Management
                    L.P
  10.2
              Amendment
                  dated October 6, 2005 to the Security Agreement dated as of March,
                  2005by
                  and among VendingData Corporationand Premier Trust, Inc.
  10.3
              Form
                  of Warrant
  10.4
              Employment
                  Agreement dated September 29, 2005 betweenVendingData
                  Corporation and Mark Newburg
  10.5
              Employment
                  Agreement dated September 29, 2005 betweenVendingData
                  Corporation and Arnaldo Galassi
  31.1
              Certifications
                  Pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.
  32.1
                  Certification
                      of Principal Executive Officer and Principal Financial Officer
                      pursuant to
                      Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
                      1350).
    -22-
 **Table
            of Contents**
  **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: November
                14, 2005
              By:
              /s/ Mark
                R. NewburgMark R. NewburgIts:
              President,
                  Chief Executive Officer and Treasurer(Principal Executive Officer)
  Date: November
                  14, 2005
                By:
                /s/ Arnaldo
                  F. GalassiArnaldo F. GalassiIts:
                Chief
                    Financial Officer and Secretary(Principal
                  Financial Officer)
   -23-