**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 
 **FORM
        10-QSB/A**
 (Mark
          One)
 x
                **QUARTERLY
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934**
  For
                    the quarterly period ended:
                September 30,
                    2004
  OR
  o
                **TRANSITION
                    REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE
                    ACT**
  For
                    the transition period from:
                
                to
 
 Commission
                    file number:
                001-32161
 VendingData
                  Corporation(Exact
                  name of small business issuer as specified in its
                  charter)Nevada
              
              91-1696010(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)6830
                  Spencer Street, Las Vegas, Nevada 89119(Address
                  of principal executive offices)(702)
                  733-7195(Issuer’s
                  telephone number)(Former
                  name, former address and former fiscal year, if changed since last
                  report)Check
                    whether the issuer (1) filed all reports required to be filed
                    by Section
                    13 or 15(d) of the Exchange Act during the past 12 months (or
                    for such
                    shorter period that the registrant was required to file such
                    reports), and
                    (2) has been subject to such filing requirements for the past
                    90
                    days. Yes  xNo 
                    o**APPLICABLE
                  ONLY TO CORPORATE ISSUERS**State
                    the number of shares outstanding of each
                    of the issuer’s classes of common equity, as of the latestpracticable
                    date:17,198,198shares
                    of common stock, $.001 par value, as ofSeptember
                    30, 2004Transitional
                  Small Business Disclosure Format (check one): Yes  oNo 
                  x
  **EXPLANATORY
            NOTE**
  VendingData
            Corporation is filing this Amendment No. 1 to its Quarterly Report on
            Form
            10-QSB for the quarter ended September 30, 2004, to reverse
            $338,000 and $1,576,000 of revenue recognized during the three and nine
            months
            ended September 30, 2004, respectively, with respect to four contracts
            and to
            restate inventory
            as of, and cost of sales
            during the three and nine months ended, September 30, 2004 by $304,000
            and
            $287,880, respectively, to make other resulting adjustments to its financial
            statements. The effect of the restatements was to increase previously
            reported
            net loss by $1,863,727 and $642,155 ($0.10 and $0.03 per share) for the
            nine
            month and three month periods ended September 30, 2004, respectively.
            These
            adjustments will not result in present or future cash expenditures. (See the
            disclosure under the heading “Restatement” in Note 1 to the financial
            statements in this Quarterly Report on Form 10-QSB/A).
  The
            Items
            in our Form 10-QSB for the quarter ended September 30, 2004, that are
            amended
            and restated are as follows: Part I: Item 1 - Financial Statements; Item
            2 -
            Management’s Discussion and Analysis of Financial Condition and Results of
            Operations; and Part II: Item 6 - Exhibits and Reports on Form 8-K.
  The
            remaining Items contained within this Amendment No. 1 to Quarterly Report
            on
            Form 10-QSB/A consist of all other Items originally contained in our
            Quarterly
            Report on Form 10-QSB for the quarter ended October 30, 2004 in the form
            filed
            on November 15, 2004. This Form 10-QSB/A does not reflect events occurring
            after
            the filing of the original Form 10-QSB, or modify or update those disclosures
            in
            any way other than as required to reflect the effects of the restatement. 
 — —
 VENDINGDATA
        CORPORATION
 
 **FORM
        10-QSB/A**
 
 **TABLE
        OF CONTENTS**
  Page**PART
                    I********- FINANCIAL INFORMATION**
                **1**ITEM
                    1.
                FINANCIAL
                    STATEMENTS
                1Balance
                    Sheets
                1Statements
                    of Operations
                2Statements
                    of Cash Flows
                3ITEM
                    2.
                MANAGEMENT’S
                    DISCUSSION AND ANALYSIS OR PLAN OF
                    OPERATIONS
                7OVERVIEW
                7CRITICAL
                  ACCOUNTING POLICIES AND ESTIMATES
                9RESULTS
                    OF OPERATIONS
                10LIQUIDITY
                    AND CAPITAL RESOURCES
                15ITEM
                    3.
                CONTROLS AND
                    PROCEDURES
                17**PART
                    II - OTHER INFORMATION**
                **18**ITEM
                    1.
                LEGAL
                    PROCEEDINGS
                18ITEM
                    2.
                CHANGES
                    IN SECURITIES
                18ITEM
                  3.
                DEFAULTS
                  UPON SENIOR SECURITIES
                19ITEM
                  4.
                SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
                20ITEM
                  5.
                OTHER
                  INFORMATION
                20ITEM
                    6.
                EXHIBITS
                    AND REPORTS ON FORM 8-K
                20
  
 — —
 
 **PART
        I - FINANCIAL INFORMATION**
  **Item
                  1.**
                **Financial
                    Statements.**
  **VENDINGDATA
        CORPORATION**
 **Balance
          Sheets**
  **September
                    30, 2004**
                
                **December
                    31,****2003****ASSETS**
                
                **(unaudited**)******Current
                    assets**:
                
                (restated)Cash
                    and cash equivalents
                
                $
                2,685,355
                
                $
                11,526,664Current
                    portion of accounts receivable, trade, net of allowance for uncollectibles
                    of $149,190 and $125,530
                
                
                2,287,729
                
                
                2,354,054Due
                    from affiliate
                
                
                40,602
                
                
                31,802Other
                    receivables
                
                
                99,212
                
                
                29,836Inventories
                
                
                5,433,918
                
                
                4,150,414Prepaid
                    expenses
                
                
                391,658
                
                
                52,02810,938,474
                
                
                18,144,798Equipment
                    rented to customers, net of accumulated depreciation of $506,727
                    and
                    $316,245
                
                
                458,217
                
                
                608,555Property
                    and equipment, net of accumulated depreciation of $2,163,868
                    and
                    $1,859,206
                
                
                931,803
                
                
                1,063,951Intangible
                    assets, net of accumulated amortization of $399,284 and
                    $288,203
                
                
                1,168,847
                
                
                1,282,088Due
                    from affiliate - non current
                
                
                118,800
                
                
                118,800Accounts
                    receivable, trade, net of current portion, less unamortized
                    discount
                
                
                1,468,394
                
                
                1,140,984Deferred
                    expenses
                
                
                624,334
                
                
                250,697Deposits
                
                
                931,058
                
                
                1,284,827Other
                    assets
                
                
                —
                
                
                265,478$
                16,639,927
                
                $
                24,160,178**LIABILITIES
                    AND STOCKHOLDERS' EQUITY****Current
                    liabilities**:Current
                    portion of leases payable
                
                $
                1,861,697
                
                $
                2,237,073Accounts
                    payable
                
                
                1,109,602
                
                
                1,727,460Accrued
                    expenses
                
                
                512,894
                
                
                824,307Deferred
                    revenues, current portion
                
                
                239,215
                
                
                171,875Short-term
                    debt
                
                
                238,250
                
                
                270,743Current
                    portion of convertible debt
                
                
                —
                
                
                2,368,077Customer
                    deposits
                
                
                196,360
                
                
                178,8054,158,018
                
                
                7,778,340Deferred
                    revenues, net of current portion
                
                
                243,175
                
                
                219,890Notes
                    payable, net of current portion
                
                
                3,250,000
                
                
                —Leases
                    payable, net of current portion
                
                
                560,133
                
                
                1,916,7238,211,326
                
                
                9,914,953**Stockholders'
                    equity**:Preferred
                    stock, $.001 par value, 10,000,000 shares authorized, no shares
                    issued and
                    outstanding
                
                
                —
                
                
                —Common
                    stock, $.001 par value, 25,000,000 shares authorized, 17,198,198
                    and
                    16,765,580 shares issued and outstanding
                
                
                17,198
                
                
                16,766Additional
                    paid-in capital
                
                
                59,760,641
                
                
                58,810,806Deficit
                
                
                (51,349,238
                )
                
                (44,582,347
                )Total
                    stockholders' equity
                
                
                8,248,601
                
                
                14,245,225Total
                    liabilities and stockholders' equity
                
                $
                16,639,927
                
                $
                24,160,178
  1
 
 **VENDINGDATA
          CORPORATION**
 **Statements
          of Operations**
  **(UNAUDITED)**
  **Three
                    Months Ended September 30,**
                
                **Nine
                    Months Ended September
                    30,****2004**
                  restated
                
                **2003**
                
                **2004**
                  restated
                
                **2003****Revenues:**Sales
                
                $
                643,866
                
                $
                2,187,003
                
                $
                2,276,395
                
                $
                5,342,670Rental
                
                
                137,002
                
                
                269,750
                
                
                509,175
                
                
                938,852Other
                
                
                42,782
                
                
                9,399
                
                
                152,317
                
                
                39,485823,650
                
                
                2,466,152
                
                
                2,937,887
                
                
                6,321,007**Operating
                    expenses:**Cost
                    of sales
                
                
                857,733
                
                
                1,403,546
                
                
                2,472,313
                
                
                3,566,691Selling,
                    general and administrative
                
                
                1,832,645
                
                
                1,267,831
                
                
                4,805,598
                
                
                4,303,496Research
                    and development
                
                
                350,112
                
                
                336,910
                
                
                1,145,101
                
                
                709,770Inventory
                    write down
                
                
                575,446
                
                
                —
                
                
                575,446
                
                
                —3,615,936
                
                
                3,008,287
                
                
                8,998,458
                
                
                8,579,957Loss
                    from operations
                
                
                (2,792,286
                )
                
                (542,135
                )
                
                (6,060,571
                )
                
                (2,258,950
                )Interest
                    expense, unrelated parties
                
                
                188,261
                
                
                620,569
                
                
                682,362
                
                
                1,709,430Interest
                    expense, related parties
                
                
                9,460
                
                
                139,256
                
                
                24,523
                
                
                413,559Gain
                    on disposition of assets
                
                
                —
                
                
                —
                
                
                (567
                )
                
                —197,721
                
                
                759,825
                
                
                706,318
                
                
                2,122,989Net
                    loss
                
                $
                (2,990,007
                )
                $
                (1,301,960
                )
                $
                (6,766,889
                )
                $
                (4,381,939
                )Basic
                    and diluted loss per share
                
                $
                (0.17
                )
                $
                (0.17
                )
                $
                (0.39
                )
                $
                (0.57
                )Weighted
                    average shares outstanding
                
                
                17,198,198
                
                
                7,646,430
                
                
                17,184,127
                
                
                7,636,185
  See
          accompanying notes to financial
          statements.
  2
 **VENDINGDATA
          CORPORATION**
 **STATEMENTS
          OF CASH FLOWS**
  **(UNAUDITED)**
  **Nine
                    Months Ended September 30,****2004**
                  restated
                
                **2003****Operating
                    activities:**Net
                    cash used in operating activities
                
                $
                (8,563,227
                )
                $
                (8,897,624
                )**Investing
                    activities:**Acquisition
                    of intangible assets
                
                
                (4,900
                )
                
                (1,022,720
                )Acquisition
                    of plant and equipment
                
                
                (193,043
                )
                
                (635,990
                )Acquisition
                    of equipment produced for rental
                
                
                —
                
                
                (9,500
                )Disposition
                    of equipment produced for rental
                
                
                —
                
                
                785,600Other
                
                
                665
                
                
                705Deposits
                
                
                —
                
                
                (204,794
                )Net
                    cash used in investing activities
                
                
                (197,278
                )
                
                (1,086,699
                )**Financing
                    activities:**Proceeds
                    from sale of stock
                
                
                —
                
                
                574,420Reimbursement
                    of offering expense
                
                
                36,731
                
                
                —Proceeds
                    from leases payable
                
                
                —
                
                
                989,820Repayment
                    of leases payable
                
                
                (1,731,966
                )
                
                (2,110,205
                )Proceeds
                    from notes payable
                
                
                3,250,000
                
                
                400,000Repayment
                    of short-term debt
                
                
                (32,493
                )
                
                (384,000
                )Proceeds
                    from convertible debt
                
                
                —
                
                
                9,050,000Repayment
                    of convertible debt
                
                
                (1,603,077
                )
                
                —Net
                    cash provided by (used in) financing activities
                
                
                (80,805
                )
                
                8,520,035**Change
                    in cash and cash equivalents:**Decrease
                    in cash
                
                
                (8,841,309
                )
                
                (1,464,288
                )Cash
                    and cash equivalents at beginning of period
                
                
                11,526,664
                
                
                1,778,297Cash
                    and cash equivalents at end of period
                
                $
                2,685,355
                
                $
                314,009
 
 See
          accompanying notes to financial
          statements.
 3
  **VENDINGDATA
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO FINANCIAL STATEMENTS (UNAUDITED)**
  **Note 1—Basis
          of Presentation**
  The
          accompanying unaudited financial statements of VendingData Corporation
          (the
          "Company") have been prepared in accordance with generally accepted accounting
          principles for interim financial information and with the instructions
          incorporated in Regulation S-B of the Securities and Exchange Commission.
          Accordingly, they do not include all of the information and footnotes required
          by generally accepted accounting principles for complete financial statements.
          In the opinion of management, all adjustments (consisting of normal recurring
          adjustments and accruals) considered necessary for a fair presentation
          have been
          included.
  The
          results of operations for the periods presented are not necessarily indicative
          of the results to be expected for the full year. The accompanying financial
          statements should be read in conjunction with the Company's audited financial
          statements for the year ended December 31, 2003, as included in
          the
          Company's Annual Report on Form 10-KSB as filed with the Securities
          and
          Exchange Commission from which the accompanying balance sheet information
          as of
          that date was derived. Certain reclassifications have been made to amounts
          presented in prior periods for comparability to the current period presentation.
  **Restatement**
 
 As
          reported on our Form 8-K dated November 1, 2005 filed with the SEC, we
          concluded, after consultation with our independent auditors, that errors
          in
          revenue recognition practices and in allocation of labor and overhead costs
          to
          inventory costs require us to restate previously reported financial results
          for
          fiscal 2004. We have reversed $338,000 and $1,576,000 of revenue recognized
          during the three and nine months ended September 30, 2004, respectively,
          with
          respect to four contracts and restated inventory
          as of, and cost of sales
          during the three and nine months ended, September 30, 2004 by $304,000
          and
          $287,880, respectively to make other resulting adjustments to its financial
          statements. The effect of the restatements was to increase previously reported
          net loss by $1,863,727 and $642,155 ($0.10 and $0.03 per share) for the
          nine
          month and three month periods ended September 30, 2004, respectively. These
          adjustments will not result in present or future cash
          expenditures.
 
 **Note 2—Segments**
  The
          revenue segments identified for geographic region-based enterprise-wide
          data are
          as follows: 
  **Three
                      Months Ended September 30,**
                  
                  **Nine
                      Months Ended September, 30,****2004**
                    restated
                  
                  **2003**
                  
                  **2004**
                    restated
                  
                  **2003**United
                      States
                  
                  $
                  791,995
                  
                  $
                  1,856,432
                  
                  $
                  2,893,609
                  
                  $
                  5,636,287Asia
                  
                  
                  31,655
                  
                  
                  461,250
                  
                  
                  44,278
                  
                  
                  536,250South
                      America
                  
                  
                  —
                  
                  
                  148,470
                  
                  
                  —
                  
                  
                  148,470
  4
  The
          Company’s revenues, depreciation and operating income distribution by product
          are as follows:
  **Three
                    Months Ended**
                  **September
                    30,**
                
                **Nine
                    Months Ended**
                  September
                    30,**2004**
                  restated
                
                **2003**
                
                **2004**
                  restated
                
                **2003**RevenuesSecureDrop®
                
                $
                106,637
                
                $
                789,786
                
                $
                236,942
                
                $
                2,124,519Shuffler
                
                
                106,947
                
                
                670,409
                
                
                1,148,894
                
                
                2,932,233Deck
                    CheckerTM
                
                
                567,284
                
                
                996,558
                
                
                1,399,734
                
                
                1,224,770Other
                    revenue
                
                
                42,782
                
                
                9,399
                
                
                152,317
                
                
                39,485$
                823,650
                
                $
                2,466,152
                
                $
                2,937,887
                
                $
                6,321,007Depreciation
                    and amortizationSecureDrop®
                
                $
                0
                
                $
                0
                
                $
                0
                
                $
                0Shuffler
                
                
                55,604
                
                
                141,252
                
                
                167,386
                
                
                426,269Deck
                    CheckerTM
                
                
                9,229
                
                
                0
                
                
                23,096
                
                
                0Selling,
                    general and administrative
                
                
                142,331
                
                
                136,250
                
                
                442,663
                
                
                356,184207,164
                
                
                277,502
                
                
                633,145
                
                
                782,453Operating
                    income (loss)SecureDrop®
                    gross margin
                
                $
                61,691
                
                $
                434,550
                
                $
                23,598
                
                $
                1,105,229Shuffler
                    gross margin
                
                
                12,702
                
                
                482,853
                
                
                827,094
                
                
                2,146,459Deck
                    CheckerTMgross margin
                
                
                484,115
                
                
                742,381
                
                
                1,200,755
                
                
                880,070Other
                    cost of goods sold
                
                
                (1,168,037
                )
                
                (597,178
                )
                
                (2,161,319
                )
                
                (1,377,442
                )Selling,
                    general and administrative
                
                
                (1,832,645
                )
                
                (1,267,831
                )
                
                (4,805,598
                )
                
                (4,303,496
                )Research
                    and development
                
                
                (350,112
                )
                
                (336,910
                )
                
                (1,145,101
                )
                
                (709,770
                )$
                (2,792,286
                )
                $
                (542,135
                )
                $
                (6,060,571
                )
                $
                (2,258,950
                )
 
 **Note 3—Loss
          per Share (Basic and Diluted)**
  The
          basic
          loss per share is computed by dividing the net loss for the period by the
          weighted average number of common shares outstanding for the period. Loss
          per
          share is unchanged on a diluted basis since the assumed exercise of common
          stock
          equivalents would have an anti-dilutive effect due to the existence of
          operating
          losses.
  **Note 4—Debt**
  The
          company retired $2,368,077 of convertible debt during the nine months ended
          September 30, 2004 with cash payments and conversions to common stock.
  In
          the
          quarter ended September 30, 2004, the Company borrowed $3,250,000 in the
          form of
          senior notes with non-detachable warrants at a 9% interest rate. Interest
          is to
          be paid semi-annually in arrears, and the principal is due August 15,
          2007.
  **Note 5—Options**
  The
          Company currently has two stock option plans pursuant to which it is authorized
          to issue options to purchase 3,000,000 shares and 300,000 shares, respectively.
          No stock-based employee compensation expense for stock options was reflected
          in
          net income for years prior to 2003, as all stock options granted under
          those
          plans had an exercise price equal to or greater than the fair market value
          of
          the underlying common stock on the date of grant. Stock-based compensation
          recorded for the quarter ended September 30, 2004 and for the nine months
          ended
          September 30, 2004 was $30,081 and $44,752, respectively. There were a
          total of
          2,079,380 options outstanding as of September 30, 2004 with an exercise
          price range between $1.75 and $15.00 and a weighted average exercise price
          of
          $3.52. All stock options have terms not exceeding 10 years.
  5
  **Note 6—Liquidity
          Issues**
  The
          Company’s ability to maintain adequate liquidity is dependent upon the success
          of management’s plans to address and overcome prior operating losses. Management
          is updating its 2004 operating plan to increase its sales by expanding
          its
          product line and improving its sales efforts both domestically and
          internationally. Management has also adopted a program to reduce operating
          costs
          through the transfer of manufacturing operations to China and restructuring
          its
          service functions to reduce labor and rental expense. Management focused
          on
          financial condition and liquidity improvements through its capital raising
          efforts in 2003 along with substantial debt reduction and debt conversion.
          Through the nine months ended September 30, 2004, the Company remained
          reliant
          upon capital from external sources in order to sustain its operations.
          The
          Company believes that it has sufficient liquidity to support its operations
          until the first quarter of 2005 and that it will be able to secure additional
          debt or equity capital to meet its needs in 2005. The Company’s efforts to
          secure additional financing sources are being impacted by the outcome of
          the
          November 29, 2004 hearing on the preliminary injunction sought by a competitor.
          An adverse outcome of that hearing would likely impact the cost of and
          availability of additional financing to the Company. See Part II - Other
          Information, Item 1, Legal Proceedings.
  **Note 7—Trade
          Receivables From Major Customers**
  As
          of and
          during the nine months ended September 30, 2004, approximately 2.7% of
          trade
          receivables and 5.0 % of total sales and, as of and during the year ended
          December 31, 2003, approximately 17.6% of trade receivables and
          13.3% of
          total sales were concentrated in the Nevada gaming industry among five
          customers
          under common ownership. The Company's future operations could be affected
          by
          adverse changes in the financial condition of, or the Company's relationships
          with, the commonly owned Nevada gaming customers, or economic, competitive
          and
          political conditions in our customers' respective local areas or the gaming
          industry, in general.
  The
          Company manages its concentrations of credit risk by evaluating the
          creditworthiness of customers before credit is extended and monitoring
          it
          thereafter. The maximum losses that the Company would incur if a customer
          failed
          to pay amounts owed would be limited to the recorded receivables after
          any
          allowances provided.
  **Note 8—Contingencies**
  The
          Company is a party to certain claims, legal actions, and complaints, including
          a
          patent infringement action between the Company and one of its main competitors.
          The Company cannot predict the likely outcome of any such litigation or
          whether
          any such substantial litigation would have a material adverse effect on
          its
          business as presently conducted or as anticipated.
  In
          early
          February 2004, the State of Nevada initiated a sales/use tax audit of Central
          Leasing and Madison Leasing, companies through which the Company has obtained
          lease financing. As of this filing the State of Nevada has not made a
          determination if there has been a shortfall in the payment of the sales/use
          tax.
          The Company has sold and leased back shufflers and Deck CheckersTM over the last
          five years. The auditor for the State of Nevada is trying to determine
          at what
          level a sales/use tax needs to be collected. The Company now collects from
          our
          customers in Nevada and remits payments to the State of Nevada. If the
          State of
          Nevada determines that the sales of the products to the leasing companies
          is the
          level at which sales/use tax should have been collected, liability of the
          leasing companies would be passed to the Company. The amount of this potential
          liability could range from a refund of $230,000 to the payment of sales/use
          tax
          with interest and penalties of up to $500,000. The Company intends to defend
          its
          position in this matter.
  The
          Company is currently involved in litigation
          involving allegations that its products infringe upon the patents of a
          competitor. For additional information, see Part II - Other Information,
          Item
          1., Legal Proceedings.
  6
  **Item
                    2.**
                  **Management’s
                      Discussion and Analysis or Plan of
                      Operations.**
  **Statement
          on Forward-Looking Information**
  Certain
          information included herein contains statements that may be considered
          forward-looking statements within the meaning of Section 27A of the Securities
          Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
          such as
          statements relating to plans for product development, product placement,
          capital
          spending and financing sources. Such forward-looking information involves
          important risks and uncertainties that could significantly affect anticipated
          results in the future and, accordingly, such results may differ from those
          expressed in any forward-looking statements made herein. These risks,
          uncertainties and other factors include, but are not limited to, those
          relating
          to our liquidity requirements, our ability to locate necessary sources
          of
          capital to sustain our operations, the continued growth of the gaming industry,
          the success of our product development activities, the acceptance of our
          products in the marketplace, vigorous competition in the gaming industry,
          our
          dependence on existing management, changes in gaming laws and regulations
          (including actions affecting licensing), our leverage and debt service
          (including sensitivity to fluctuations in interest rates) and domestic
          or global
          economic conditions.
  For
          additional discussion of the risks, uncertainties and other factors that
          may
          adversely affect our operations, our product acceptance, our competitiveness
          in
          the marketplace and our common stock, please see the section entitled,
“Risk
          Factors,” in our Annual Report on Form 10-KSB, as filed with the Securities and
          Exchange Commission on March 30, 2004.
  **Overview**
  Our
          strategy is to develop cost-effective niche products for the global gaming
          industry. We focus on products that increase the security, productivity
          and
          profitability of casino operations. Our strategy involves marketing certain
          of
          our products for sale or lease, depending on the product, the geographic
          location of the customer and other factors. We rely on our internal sales
          staff
          and distributor relationships for the sale and rental of our products.
          Although
          we anticipate significant sales development and revenue growth, there is
          no
          assurance that we will generate sufficient revenue, cash flow or profit
          to
          sustain our operations.
  During
          the nine months ended September 30, 2004, we have focused on certain steps
          designed to improve our long-term operations and growth. These steps included
          the following:
  ·
                We
                    transferred the Deck CheckerTM technology from a third party vendor in
                    Auckland, New Zealand to our China manufacturing
                    facility.
  ·
                We
                    substantially completed the development of our PokerOneTM shuffler and
                    began preliminary production in our China facility beginning
                    in May
                    2004.
  ·
                We
                    leased and commenced operations in six additional buildings in
                    our China
                    facility.
  ·
                We
                    transferred research and development for all our table game products
                    to
                    China.
  ·
                We
                    commenced the manufacture of our Deck CheckerTM in our China
                    facility.
  ·
                We
                    substantially completed the development of our new RandomPlusTM
                    shuffler.
  7
  While
          we
          have focused on these significant improvements, our sales have been adversely
          impacted by several factors, including:
  ·
                The
                    effect of pending corporate mergers of major gaming customers
                    on the
                    progression of sales of our SecureDropTM
                    products.
  ·
                Longer
                    than anticipated approval times from gaming regulatory labs for
                    our Deck
                    CheckerTM and PokerOneTM shuffler
                    products.
  ·
                The
                    amount of time and resources that have been spent to transfer
                    significant
                    components of our operations to
                    China.
  ·
                The
                    periods of redundant functions while the transfer of manufacturing
                    and
                    research/development to China has been
                    underway.
  ·
                Delays
                    in completion of our RandomPlusTM
                    shuffler.
  ·
                The
                    development of two additional specialty games for the Macau market
                    which
                    was the beta site for our PokerOneTM
                    shuffler.
  **Financial
          Condition**
  Total
          assets decreased from $24,160,178 to $16,639,927 between December 31, 2003
          and
          September 30, 2004, a decrease of $7,520,251 or 45%. The decrease in total
          assets was due primarily to the $8,841,309 decrease in cash, offset, in
          part, by
          a $1,283,504 increase in inventories, a $1,590,816 increase in trade accounts
          receivable and a $339,630 increase in prepaid expenses. The decrease in
          cash was
          due to continuing negative operating cash flows and debt reduction. The
          primary
          reason for the increase in trade receivables were the sale of Deck CheckersTM on
          extended payment terms. Through the use of cash to increase our inventories
          of
          Deck CheckerTM units and shufflers, including the PokerOneTM Shuffler, we
          recognized a net $1,283,504 increase in inventories between December 31,
          2003 and September 30, 2004. The net increase in inventories includes
          a
          reserve of $575,446 for obsolete inventories recorded during the three
          months
          ended September 30, 2004. The increased reserve related primarily to our
          inventories of the Random Ejection ShufflerTM and SecureDrop®
          systems.
  Total
          liabilities decreased by $1,703,627, or 17.2%, from $9,914,953 to $8,211,326
          between December 31, 2003 and September 30, 2004. The decrease
          in
          total liabilities was due primarily to a $375,376 decrease in the current
          portion of our leases payable, a $617,858 decrease in our accounts payable,
          the
          elimination of our short-term debt of $2,368,077 through repayment and
          conversions into common stock and a $1,356,590 decrease in the non-current
          portion of our leases payable, offset, in part, by the issuance of long-term
          notes in the original principal amount of $3,250,000. The decrease in our
          accounts payable between December 31, 2003 and September 30,
          2004 was
          due primarily due to the final $500,000 payment for the intellectual property
          rights for the Deck CheckerTM and the payment of certain outstanding payables
          with funds received from the public offering in December of 2003. The decreases
          in our leases payable, both current and non-current, was due to the repayment
          of
          debt owed on certain equipment leases.
  During
          the three months ended September 30, 2004, our management conducted a review
          of
          our inventory and determined that there is some impairment of our inventory
          of
          Random Ejection ShufflersTM held for rental purposes, as well as related labor
          and overhead held in inventory. Additionally, our management determined
          that our
          inventory contained certain obsolete parts related to the SecureDrop® Hard Count
          System. In view of these findings, our management established a reserve
          in the
          amount of $575,446, which was recorded as a charge to cost of goods sold
          during
          the three months ended September 30, 2004. Upon commencement of sales of
          the
          RandomPlusTM shuffler, our management will review our Random Ejection ShufflerTM
          inventory in the future and believes that there is a possibility that additional
          reserves estimated to be in the range between $700,000 and $1,200,000 may
          be
          required. The provisioning of reserves for obsolete inventory will be based
          primarily on our estimated forecast of product demand and related manufacturing
          requirements.
  8
  **Critical
          Accounting Policies and Estimates**
  The
          following is a summary of what our management believes are the critical
          accounting policies related to our operations. The application of these
          policies, in some cases, requires our management to make subjective judgments
          regarding the effect of matters that are inherently uncertain.
  The
          preparation of financial statements in conformity with generally accepted
          accounting principles requires our management to make estimates and assumptions
          that affect reported amounts and disclosures, some of which may require
          revision
          in future periods. Actual results could differ from these estimates. The
          following is a summary of what our management believes are the critical
          accounting policies related to our operations. The application of these
          policies, in some cases, requires our management to make subjective judgments
          and estimates regarding the effect of matters that are inherently uncertain.
  ***Allowance
          for Doubtful Accounts.***
  In
          connection with the preparation of our financial statements, management
          reviews
          and evaluates the collectibility of our trade receivables and adjusts our
          allowance for estimated uncollectible accounts as deemed necessary in the
          circumstances. These estimates have the potential for critically affecting
          the
          determination of results of operations for any given period. Factors considered
          by management in making such estimates and adjustments include any
          concentrations among customers, changes in our relationships therewith,
          payment
          history and the apparent financial condition thereof.
  ***Revenue
          Recognition***
  We
          recognize revenue from the sale of our products upon installation and functional
          testing at customer locations because that is when the customer’s obligation
          becomes fixed and certain pursuant to our standard contracts for the sale
          of
          units of the SecureDrop® System, shufflers and Deck CheckersTM. Sales are
          recognized immediately when shufflers that are rented are converted to
          purchases
          depending on the creditworthiness and payment history of the casino company
          since payment terms are from 20 to 48 months. The extended warranty and
          maintenance components that are part of long term sales contracts are unbundled
          and recognized as deferred revenue amortized over the remaining life of
          the
          sales agreement after the initial 90-day warranty as required by the *Emerging
          Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple
          Deliverables* .
          The
          useful life of our shufflers and Deck CheckersTM is five years with proper
          maintenance; this life can be extended with the replacement of component
          parts.
          If a customer does not possess the required creditworthiness or an established
          payment history with us, we would then treat this revenue as an installment
          sale
          and recognize the associated revenues over time as payments are received.
          Revenue from shuffler rentals is recorded at the first of each month in
          accordance with rental contract terms. All rental contracts are cancelable
          upon
          30-day written notice by the customer. Maintenance expense for rental units
          is
          recorded in the period it is incurred. Although sales are not generally
          made
          with a right to return, upon occasion, usually associated with the performance
          warranty, sales returns and allowances are recorded after returned goods
          are
          received and inspected. We provide currently for estimated warranty repair
          costs
          associated with sales contracts. Although there are no extended warranties
          offered for our products, we do provide for maintenance contracts that
          are
          billed and recognized on a monthly basis.
  9
  ***Intangible
          Assets***
  We
          have
          acquired patent rights for various products since 2001 and acquired the
          patent
          rights for the Deck CheckerTM for $1,004,900 in the third quarter of 2003. We
          have estimated an economic useful life of 10 years for the Deck CheckerTM
          patents. We currently amortize our intangible assets which are related
          to these
          patents on a straight-line basis over the estimated useful lives of 10
          years.
  **Results
          of Operations**
  ***Comparison
          of Three Months Ended September 30, 2004 and 2003***
  **Revenue**
  For
          the
          three months ended September 30, 2004, total revenues decreased from $2,466,152
          to $823,650, compared to the three months ended September 30, 2003, a decrease
          of $1,642,502 or 67%. The decrease in total revenues was due primarily
          to
          decreases in our SecureDrop® and our shuffler revenue. We believe that the
          decreases in revenue were due, in part, to the allocation of resources
          to
          transfer of certain operations to our China facilities, the longer than
          anticipated approval times for our new products from gaming regulatory
          laboratories, the
          continued development and testing of our new shuffler products, the
          pending merger transactions involving major U.S. casino operators that
          have
          delayed negotiations involving our SecureDrop® products and the delays in
          discussions with potential international customers.
  **Deck
          CheckerTM.** Revenue
          related to the sale and rental of our Deck Checker TM product
          decreased 43% compared to the three months ended September 30, 2003. We
          expect
          Deck Checker TM revenue
          to grow as the number of jurisdictions where we can sell the product increases
          coupled with increased industry acceptance of the product.
  **SecureDrop®.** Our
          SecureDrop® revenue decreased by 87% during the three months ended September 30,
          2004 in comparison to the three months ended September 30, 2003. Although
          we
          currently have proposals outstanding for new contracts that may impact
          revenue
          in the fourth quarter of 2004, due to the uncertainties related to the
          ultimate
          likelihood and timing of the award of these contracts, we believe that
          we will
          continue to experience significant fluctuations in SecureDrop® revenue through
          the end of 2004 and into 2005.
  **Shufflers.** During
          2003, we made a strategic decision to offer our customers the choice to
          either
          continue renting or to purchase our shufflers for the same monthly payments
          through long-term sales agreements that range from 24-48 months. This decision
          was based on competitive forces in the marketplace and the anticipated
          introduction of our next generation shufflers in 2004. As result of this
          strategic decision, we recorded shuffler sale revenue in the three months
          ended
          September 30, 2003 that we were not able to replace in the three months
          ended
          September 30, 2004, resulting in a reduction in the number of shufflers
          currently outstanding on a rental basis. Accordingly, we experienced a
          60%
          decrease in shuffler sales revenue and a 47% decrease in shuffler rental
          revenue
          during the three months ended September 30, 2004 in comparison to the three
          months ended September 30, 2003. Furthermore, due to the continued development
          and testing of our new RandomPlus Ô and
          PokerOneTM shufflers, as well as delays in obtaining required regulatory
          approvals, we were also not able to replace either shuffler sales revenue
          or
          rental revenue with revenue from these new shuffler products during the
          three
          months ended September 30, 2004.
  10
  **Other
          Revenues.** Our
          other revenues for the three months ended September 30, 2004 were flat
          compared
          to the three months ended September 30, 2003.
  **Cost
          of Sales**
  For
          the
          three months ended September 30, 2004, our cost of sales increased
          to
          $1,433,179, compared to $1,403,546 for the three months ended September
          30,
          2003, an increase of $29,633 or 2%. The cost of sales for the three months
          ended
          September 30, 2004 includes a $575,446
          reserve for obsolete
          inventories. Although
          our revenue during the three months ended September 30, 2004 decreased,
          our
          costs of sales during the three months ended September 30, 2004 increased
          primarily due to the aforementioned $575,446 inventory reserve. The gross
          margin
          on revenue for the three months ended September 30, 2004 was a negative
          $609,529, or a negative 74%. This compares to a gross margin percentage
          of
          $1,062,606, or 43%, for the three months ended September 30, 2003. The
          decrease
          in gross margin and gross margin percentage from the same period of the
          prior
          year reflects the establishment
          of a $575,446
          reserve for obsolete
          inventories ,
          the
          sale of rented shufflers with low depreciated book values during the three
          months ended September 30, 2003, and the costs incurred during 2004 as
          we
          transitioned our manufacturing from Las Vegas to China. As this transition
          is
          completed, we expect improvement in our gross margins in the remainder
          of 2004
          and 2005. However, as previously noted, management will continue to evaluate
          the
          transition of certain of our products, such as the Random Ejection ShufflerTM,
          which is anticipated to be replaced by the RandomPlusTM shuffler, to determine
          whether future periods should include additional inventory
          reserves.
  **Deck
          CheckerTM.** The Deck
          Checker TM  cost
          of
          goods sold decreased
          by 171,008, or 67%, during the three months ended September 30, 2004. The
          decrease was due primarily to a decrease in our Deck Checker TM revenue.
          The gross margin percentage on revenue from Deck Checker TM sales
          revenue was 15% during the three months ended September 30, 2004, compared
          to
          27% during the three months ended September 30, 2003. The decrease in gross
          margin percentage was due to fewer sales of Deck Checkers TM as
          distributors sell inventory received during the first half of 2004. By
          manufacturing of Deck Checkers TM at our
          China facility, we anticipate lower costs per unit and an increase in gross
          margin percentage.
  **SecureDrop®.** Our
          SecureDrop® **** cost
          of
          goods sold decreased by 86% during the quarter ended September 30, 2004.
          The
          decrease is directly related to the decrease in SecureDrop® sales during the
          same period. The gross margin percentage on revenue from SecureDrop® **** sales
          revenue was 58% in the three months ended September 30, 2004 compared
          to a
          gross margin percentage of 55% for the three months ended September 30,
          2003.
  **Shufflers.** Our
          shuffler **** cost
          of
          goods sold for the three months ended September 30, 2004 increased by 1%
          compared to the three months ended September 30, 2003. The gross
          margin
          percentage on revenue from shuffler **** sales
          revenue was 54% in the three months ended September 30, 2004 compared
          to
          90% for the three months ended September 30, 2003. The conversion
          of
          existing rental shufflers with low book values due to depreciation to purchases
          resulted in an increased gross margin percentage during the three months
          ended
          September 30, 2003.
  The
          cost
          of sales and resultant gross margins cited above for the individual products
          described herein primarily include only material costs. Associated direct
          labor
          and overhead expenses are reported only in aggregate and have not been
          allocated
          to individual products. The allocation of such direct labor and overhead
          expenses to individual products would have the effect of reducing the gross
          margin percentages for our products.
  11
  **Selling,
          General and Administrative Expense**
  For
          the
          three months ended September 30, 2004, our selling, general and
          administrative expenses were $1,832,645, an increase of $564,814, or 45%,
          from
          $1,267,831 for the three months ended September 30, 2003. The increase
          in
          selling, general and administrative expenses related primarily to increases
          in
          salaries, consulting and accounting expenses, travel and entertainment
          expenses,
          legal and regulatory expenses and other expenses, offset, in part, by decreases
          in trade show expenses and rent expenses. Included in these expenses was
          a
          $293,383 increase in legal and regulatory expenses due the increased
          investigatory and related gaming compliance costs, the increased costs
          associated with our financing activities, and the costs associated with
          our
          intellectual property litigation.
  **Research
          and Development Expense**
  For
          the
          three months ended September 30, 2004, research and development
          expenses
          were $350,112, a decrease of $13,202, or 4%, from $336,910 for the three
          months
          ended September 30, 2003. Although research and development has
          been a
          significant cost, we anticipate that these costs may decrease in the future
          as a
          percentage of revenue as more of our research and development functions
          are
          being moved to our China facility.
  **Interest
          Expense**
  For
          the
          three months ended September 30, 2004, we incurred interest expenses
          of
          $197,721, compared to $759,825 for the three months ended September 30,
          2003, a decrease of $562,104 or 74.0%. This decrease was primarily attributable
          to the reduced debt service as a result of a decrease in our outstanding
          indebtedness and the retirement and conversion of $20,331,995 convertible
          debt
          in December 2003 and during the three months ended March 31, 2004.
  **Net
          Loss**
  For
          the
          three months ended September 30, 2004, we had a net loss of $2,990,007
          compared
          to a net loss of $1,301,960 for the three months ended September 30, 2003,
          an
          increase of $1,668,047, or 130%. The increase in net loss was primarily
          due to
          decreases in revenue and increases in operating expenses, including inventory
          reserves for obsolete inventory, offset, in part, by decreases in interest
          expenses. Basic loss per share was $0.17 for the three months ended
          September 30, 2004, compared to $0.17 for the three months ended
          September 30, 2003. Although we experienced increased losses during
          the
          three months ended September 30, 2004, the unchanged basic loss per share
          for
          the three months ended September 30, 2004 was due to the increased
          number
          of weighted average shares outstanding during the three months ended
          September 30, 2004 in light of our public offering of common stock
          in
          December 2003 and the conversion of debt into shares of common stock in
          December
          2003 and in the three months ended March 31, 2004.
  ***Comparison
          of Nine Months Ended September 30, 2004 and 2003***
  **Revenue**
  For
          the
          nine months ended September 30, 2004, our revenues were $2,937,887, compared
          to
          $6,321,007 for the nine months ended September 30, 2003, a decrease of
          $3,383,120, or 54%. The decrease was due primarily to decreases in SecureDropTM
          revenue and shuffler revenue, offset, in part, by increases in Deck
          Checker TM revenue.
          We believe that the decreases in revenue were due, in part, to the allocation
          of
          resources to transfer of certain operations to our China facilities, the
          longer
          than anticipated approval times for our new products from gaming regulatory
          laboratories, the continued development and testing of our new shuffler
          products, the pending merger transactions involving U.S. major casino operators
          that have delayed negotiations involving our SecureDrop® products and the delays
          in discussions with potential international customers.
  12
  **Deck
          CheckerTM.** Revenue
          related to the sale and rental of our Deck Checker TM product
          increased 14% for the nine months ended September 30, 2004 compared to
          the nine
          months ended September 30, 2003. The increase in Deck CheckerTM revenue in 2004
          was due to the introduction of the Deck CheckerTM in the second quarter of 2003.
          We expect Deck Checker TM revenue
          to grow as the number of jurisdictions where we can sell the product increases
          coupled with increased industry acceptance of the product.
  **SecureDrop®.** Our
          SecureDrop® revenue decreased by 89% during the nine months ended September 30,
          2004 in comparison to the nine months ended September 30, 2003. The decrease
          was
          due to the major installations of SecureDrop® products at properties operated by
          Caesars Entertainment Inc. during the nine months ended September 30, 2003
          and
          the absence of sufficient sales to replace the revenue generated by these
          installations. Although we are currently have proposals outstanding for
          new
          contracts that may impact revenue in the fourth quarter of 2004, due to
          the
          uncertainties related to the ultimate likelihood and timing of the award
          of
          these contracts, we believe that we will continue to experience significant
          fluctuations in SecureDrop® revenue through the end of 2004 and into 2005.
  **Shufflers.** During
          2003, we made a strategic decision to offer our customers the choice to
          either
          continue renting or to purchase our shufflers for the same monthly payments
          through long-term sales agreements that range from 24-48 months. This decision
          was based on competitive forces in the marketplace and the anticipated
          introduction of our next generation shufflers in 2004. As result of this
          strategic decision, we recorded shuffler sale revenue in the nine months
          ended
          September 30, 2003 that we were not able to replace in the nine months
          ended
          September 30, 2004 and reduced the number of shufflers placed on a rental
          basis.
          Accordingly, we experienced a 60% decrease in shuffler sales revenue and
          a 62%
          decrease in shuffler rental revenue during the nine months ended September
          30,
          2004 in comparison to the nine months ended September 30, 2003. Furthermore,
          due
          to the continued development and testing of our new RandomPlus Ô and
          PokerOneTM shufflers, as well as delays in obtaining required regulatory
          approvals, we were also not able to replace either shuffler sales revenue
          or
          rental revenue with revenue from these new shuffler products during the
          nine
          months ended September 30, 2004.
  **Other
          Revenues.** Our
          other revenues for the nine months ended September 30, 2004 increased by
          286%
          compared to the nine months ended September 30, 2003 due to increases
          in
          the sale of supplies for SecureDrop® and the Deck CheckerTM. The upward trend
          will continue for these consumables as we increase the installed base,
          particularly Deck CheckerTM.
  **Cost
          of Sales**
  For
          the
          nine months ended September 30, 2004, our cost of sales was $3,047,759,
          compared
          to $3,566,691 for the nine months ended September 30, 2003, a decrease
          of
          $518,932, or 15%. The cost of sales for the nine months ended September 30,
          2004 includes a $575,446 reserve for obsolete inventories recorded in the
          three
          months ended September 30, 2004. Although our revenue during the three
          months
          ended September 30, 2004 decreased significantly, our costs of sales during
          the
          three months ended September 30, 2004 did not decrease proportionally primarily
          due to the aforementioned $575,446 inventory reserve recorded
          during the three months ended September 30, 2004. The gross margin on revenue
          for the nine months ended September 30, 2004 was ($109,873), or (3%), compared
          to the gross margin on revenue for the nine months ended September 30,
          2003 of
          $2,754,316, or 44%. The decrease in gross margin and gross margin percentage
          from the nine months ended September 30, 2003 to the nine months ended
          September
          30, 2004 reflects a decrease in revenues and an increase in costs of sales
          during the period, including the $575,446 increase in inventory reserves .
          However, as previously noted, management will continue to evaluate the
          transition of certain of our products, such as the Random Ejection ShufflerTM,
          which is anticipated to be replaced by the RandomPlusTM shuffler, to determine
          whether future periods should include additional inventory
          reserves.
  13
  **Deck
          CheckerTM.** The Deck
          Checker TM cost of
          goods sold decreased by $145,721, or 42%. The increase was due primarily
          to the
          increase in Deck Checker TM revenue
          during the nine months ended September 30, 2004. The gross margin percentage
          on
          revenue from Deck Checker TM revenue
          was 74% during the three months ended September 30, 2004, compared to 8%
          during
          the three months ended September 30, 2003. The increase in gross margin
          percentage was due to the increased sale of Deck Checkers TM manufactured at our China facility during the nine months ended September
          30,
          2004 versus the sale of Deck Checkers TM purchased from a third party manufacturer during the nine months ended
          September
          30, 2003. During the nine months ended September 30, 2004, we sold the
          remaining
          Deck Checkers TM purchased from this third party manufacturer. By manufacturing Deck
          Checkers TM at our
          China facility, we anticipate lower costs per unit and an increase in gross
          margin percentage.
  **SecureDrop®.** Our
          SecureDrop® **** cost
          of
          goods sold decreased by 79% during the nine months ended September 30,
          2004. The
          decrease is directly related to the decrease in SecureDrop® revenue during the
          same period. The gross margin percentage on revenue from SecureDrop® **** sales
          revenue was 10% in the nine months ended September 30, 2004 compared
          to a
          gross margin percentage of 52% for the nine months ended September 30,
          2003.
  **Shufflers.** Our
          shuffler **** cost
          of
          goods sold for the nine months ended September 30, 2004 decreased by 59%
          compared to the nine months ended September 30, 2003. The decrease
          in our
          shuffler **** cost
          of
          goods sold was due to the decreased sale of shuffler **** units
          during the nine months ended September 30, 2004. The gross margin
          percentage on revenue from shuffler **** sales
          revenue was 17% in the nine months ended September 30, 2004 compared
          to 17%
          for the three months ended September 30, 2003.
  The
          cost
          of sales and resultant gross margins cited above for the individual products
          described herein primarily include only material costs. Associated direct
          labor
          and overhead expenses are reported only in aggregate and have not been
          allocated
          to individual products. The allocation of such direct labor and overhead
          expenses to individual products would have the effect of reducing the gross
          margin percentages for our products.
  **Selling,
          General and Administrative Expenses**
  For
          the
          nine months ended September 30, 2004, our selling, general and administrative
          expenses were $4,805,598, compared to $4,303,496 for the nine months ended
          September 30, 2003, an increase of $502,102, or 12%. The increase in salaries,
          consulting and accounting expenses, travel and entertainment expenses,
          trade
          show expenses, repairs and maintenance, legal and regulatory expenses,
          insurance
          costs, depreciation expense and finance fees, offset, in part, by decreases
          in
          advertising expenses, rent, supply costs and other expenses.
  **Research
          and Development Expense**
  For
          the
          nine months ended September 30, 2004, our research and development expenses
          were
          $1,145,101, compared to $709,770 for the nine months ended September 30,
          2003,
          an increase of $435,331, or 60%. The increase was due to expenses incurred
          as a
          result of our continued development efforts on the RandomPlus TM and
          PokerOne TM shufflers.
  14
  **Interest
          Expense**
  For
          the
          nine months ended September 30, 2004, we incurred interest expense of $706,885,
          compared to $2,122,989 for the nine months ended September 30, 2003, a
          decrease
          of $1,416,104 or 66.7%. This decrease was primarily attributable to the
          reduced
          debt service resulting from the substantial decrease in our outstanding
          indebtedness and the retirement and conversion into shares of common stock
          of
          $20,331,995 convertible debt in December 2003 and in the three months ended
          March 31, 2004.
  **Net
          Loss**
  For
          the
          nine months ended September 30, 2004, we had a net loss of $ 6,766,889 ,
          compared to a net loss of $4,381,939 for the nine months ended September
          30,
          2003, an increase of $ 2,384,950 ,
          or 54%.
          The increase in net loss was primarily due to decreases in revenue and
          increases
          in operating expenses, including inventory reserves for obsolete inventory,
          offset, in part, by decreases in interest expenses. Basic loss per share
          was
          $0.39 for the nine months ended September 30, 2004, compared to $0.57 for
          the
          nine months ended September 30, 2003. Although we experienced increased
          losses
          during the nine months ended September 30, 2004, the relative decrease
          in basic
          loss per share for the nine months ended September 30, 2004 was
          due to the
          increased number of weighted average shares outstanding during the nine
          months
          ended September 30, 2004 in light of our public offering of common
          stock in
          December 2003 and the conversion of debt into shares of common stock in
          December
          2003 and in the three months ended March 31, 2004.
  **Liquidity
          and Capital Resources**
  Because
          of our continued efforts to transition from a development stage company
          to an
          operating company, we have generated substantial cash flow deficits from
          operations, including net cash used in operating activities of $8,563,226
          and
          $8,897,624 for the nine months ended September 30, 2004 and 2003,
          respectively. As a result, in order to fund our development and operating
          activities, we have historically relied upon cash from our financing activities,
          including $23,047,432 in net cash provided by our financing activities
          during
          the twelve months ended December 31, 2003. During the nine months ended
          September 30, 2004, our operating activities used net cash of $8,563,226,
          our
          investing activities used net cash of $197,278 and our financing activities
          used
          net cash of $80,805. The net cash used in our financing activities consisted
          of
          the repayment of $3,367,536 in leases payable, short-term debt and convertible
          debt and proceeds of $3,250,000 from a private placement of notes.
  Due
          to
          the net cash used in our operating activities, we have been substantially
          dependent on cash from financing activities to fund our development and
          operating activities. We will continue to require cash from financing activities
          for our current operating needs until our operations generate sufficient
          cash
          flow to provide for such cash requirements. Our management believes that
          we will
          continue to be dependent upon our financing activities to sustain our operations
          in the near term.
  **Sources
          of Capital**
  In
          addition to our cash on hand and the cash to be generated from our operations,
          we anticipate relying upon private and institutional sources of debt and
          equity.
          During the years ended December 31, 2003 and 2002, our sources of capital
          included common stock offerings, equipment financing from a third party,
          short-term notes from stockholders, convertible debentures and other private
          sources of capital.
  With
          respect to common stock offerings, we received proceeds of $25,415,504,
          $0 and
          $4,169,092 during the years ended December 31, 2003, 2002 and 2001,
          respectively.
  15
  With
          respect to equipment financing, we have sold and leased back most of our
          furniture, equipment, tooling and shufflers held for rent. During the years
          ended December 31, 2003, 2002 and 2001, we received proceeds of $989,820,
          $2,988,385 and $1,335,306, respectively, from equipment financing. During
          the
          years ended December 31, 2003, 2002 and 2001, we repaid equipment financing
          of
          $2,754,607, $2,823,331 and $1,824,118, respectively. As of September 30,
          2004, we had outstanding equipment financing of $2,421,830. These equipment
          leases have terms of 36 to 39 months and were not recorded as sales because
          each
          of the leases included a mandatory buy-back provision.
  With
          respect to short-term notes from stockholders, we received proceeds of
          $700,000,
          $2,264,871 and $4,029,402 during the years ended December 31, 2003, 2002
          and
          2001, respectively. Conversely, we repaid short-term notes from stockholders
          in
          the amounts of $1,310,000, $650,000 and $563,400 during the years ended
          December
          31, 2003, 2002 and 2001, respectively. As of September 30, 2004,
          we had
          outstanding short-term loans in the aggregate amount of $238,250. Prior
          to 2003,
          we were substantially dependent on short-term loans from our principal
          stockholder and other directors. Despite such reliance, neither our principal
          stockholder nor our directors are obligated to provide additional financing
          to
          us, and our principal stockholder and directors are free to decline to
          fund
          additional financings to us at any time. In such event and in the absence
          of
          other third party financing sources, we would most likely have substantial
          difficulty in raising additional financings.
  With
          respect to convertible debentures, we received proceeds of $11,050,000,
          $4,903,076 and $0 from the placement of convertible debentures during the
          years
          ended December 31, 2003, 2002 and 2001, respectively. Conversely,
          we have
          repaid convertible debentures in the amounts of $11,019,285, $0 and $0
          during
          the years ended December 31, 2003, 2002 and 2001, respectively. We have
          completely retired the convertible debentures during the three months ended
          March 31, 2004.
  **Outlook**
  Our
          ability to maintain adequate liquidity is substantially dependent upon
          the
          success of management’s plans to address and overcome prior operating losses.
          Management is updating its 2004 operating plan to increase our sales by
          expanding our product line and improving our sales efforts both domestically
          and
          internationally. Although we have continued to generate revenue from our
          products during the year ended December 31, 2003 and the nine months ended
          September 30, 2004, we continue to struggle with the placement of our products
          throughout the gaming industry. We believe that certain 2004 potential
          sales
          that would have generated cash were delayed, in part, due to pending merger
          transactions involving major U.S. casino operators that have delayed
          negotiations involving our SecureDrop® products as well as delays in discussions
          with potential international customers. The degree of market acceptance
          for our
          products will depend upon a variety of factors, including the effectiveness
          and
          reliability of our products, the continued approvals for our products from
          gaming jurisdictions, the success of our marketing and distribution strategies
          and the level of customer satisfaction. In addition to our sales initiatives,
          our management has adopted efforts to reduce operating costs through the
          transfer of manufacturing operations to China and restructuring our service
          functions.
  Until
          we
          can generate sufficient cash from operations to support our business, we
          will
          need to raise additional cash from private placements of debt or equity
          or from
          lease financing sources. **** In
          the
          event that such sources are insufficient or unavailable, we will need to
          seek
          cash from public or private placements of debt or equity, institutional
          or other
          lending sources, sell certain assets or change operating plans to accommodate
          such liquidity issues. No assurances can be given that we will successfully
          obtain liquidity sources necessary to fund our operations in the upcoming
          year.
          If we continue to generate significant losses from our operations and we
          are not
          able to located additional sources of liquidity, we may be unable to continue
          as
          a going concern. Through the nine months ended September 30, 2004, we remained
          reliant upon capital from external sources in order to sustain its operations.
          We believe that we have sufficient liquidity to support our operations
          until the
          first quarter of 2005 and that we will be able to secure additional debt
          or
          equity capital to meet our needs in 2005. Although at a cost higher than
          other
          sources, we have access to up to $3,000,000 in lease financing as a potential
          source of liquidity should we need to draw on it. Our efforts to secure
          additional financing sources are also being impacted by the outcome of
          the
          November 29, 2004 hearing on the preliminary injunction sought by a competitor.
          An adverse outcome of that hearing would likely impact the cost of and
          availability of additional financing to us. See Part II - Other Information,
          Item 1. Legal Proceedings, below.
  16
 **Item
                      3.**
                    **Controls
                        and Procedures**
 *Evaluation
          of Disclosure Controls.* In our
          quarterly report on Form 10-QSB for the period ended September 30, 2004
          filed by
          us with the SEC on November 15, 2004 (“Original Quarterly Report”), we disclosed
          that we evaluated the effectiveness of our disclosure controls and procedures
          as
          of the end of the three months ended September 30, 2004. Disclosure controls
          and
          procedures are controls and other procedures that are designed to ensure
          that
          information required to be disclosed by us in the reports that we file
          or submit
          under the Exchange Act is recorded, processed, summarized and reported
          within
          the time periods specified in the SEC’s rules and forms. Disclosure controls and
          procedures include, without limitation, controls and procedures designed
          to
          ensure that information required to be disclosed by us in the reports that
          we
          file under the Exchange Act is accumulated and communicated to our management,
          as appropriate to allow timely decisions regarding required
          disclosure.
  In
          the
          Original Quarterly Report, we disclosed that based on the evaluation conducted
          as of September 30, 2004, we concluded that, subject to certain limitations
          noted in the Original Quarterly Report, our disclosure controls and procedures
          are effective to ensure that information we are required to disclose in
          reports
          that we file or submit under the Exchange Act is recorded, processed,
          summarized, and reported within the time periods specified in the SEC’s rules
          and forms. In connection with analysis that led up to the restatements
          set forth
          in this Amendment No. 1 to the Original Quarterly Report, we concluded
          that the
          circumstances underlying the restatements indicate that our disclosure
          controls
          and procedures as of and for the three months ended September 30, 2004
          were
          deficient in respect of certain actions by former senior management to
          override
          established financial controls and procedures. We believe that all such
          deficiencies were corrected prior to September 30, 2005.
  *Changes
          in Internal Control Over Financial Reporting.* In the
          Original Quarterly Report, we disclosed that although there have been no
          significant changes in internal controls or in other factors that could
          significantly affect these controls subsequent to September 30, 2004, we
          are
          continuously evaluating means of enhancing our internal controls. In this
          regard, in October 2004 we engaged Philip F. Otto as an independent consultant
          to provide financial advisory and related services, including a review
          our
          financial systems, a review of our corporate governance procedures and
          the
          preparation of business plans, financial models, and presentations. Most
          recently, Mr. Otto has provided financial, strategic and merger and acquisition
          advisory services to technology companies. Mr. Otto has also recently served
          as
          Chief Financial Officer, Chief Executive Officer and director of MedioStream,
          Inc, managing its operations in both Silicon Valley and Shanghai. From
          1992
          to1997, Mr. Otto was chairman and chief executive officer of NASDAQ-listed
          California Microwave, Inc.
  17
  **PART
          II - OTHER INFORMATION**
 **Item
                      1.**
                    **Legal
                        Proceedings.**
  On
          March 27, 2002, Shuffle Master, Inc., or Shuffle Master,
          filed a
          complaint (Case No. CV-S-02-0438-JCM-PAL) against VendingData in
          the United
          States District Court, District of Nevada. The amended complaint alleges,
          among
          other things, claims for patent infringement and requests treble damages,
          an
          injunction enjoining us from infringing on two of Shuffle Master’s patents, an
          accounting of our gains and profits that resulted from the alleged infringement,
          and for interest, costs and attorneys’ fees. The Shuffle Master patents that are
          at issue in the litigation concern registering use of a playing card shuffler
          apparatus and the displaying of the use on a display. We have filed our
          answer,
          counterclaims, and amended counterclaims against Shuffle Master. In the
          answer,
          we deny Shuffle Master’s allegation of patent infringement and request that
          Shuffle Master’s complaint be dismissed. We also seek, in our amended
          counterclaim, a declaration that we do not infringe Shuffle Master’s patents and
          that Shuffle Master’s patents and certain of its related claims are invalid. We
          further assert counterclaims against Shuffle Master for breach of contract
          and
          violation of the Uniform Trade Secrets Act. On May 20, 2002, the
          United
          States District Court, District of Nevada denied Shuffle Master’s motion for
          preliminary injunction against us. Discovery in this litigation is now
          closed.
          On May 28, 2003, we filed a motion for summary judgment. The hearing
          on
          this motion for summary judgment was taken off calendar pending a ruling
          from
          the Court regarding claim construction to determine the scope and definition
          of
          the patent claims at issue. On March 31, 2004, the Magistrate Judge issued
          an
          order with regard to claim interpretation, to which we have filed written
          objections. On June 25, 2004, the District Court affirmed the Magistrate
          Judge's
          order. On August 24, 2004, we renewed our motion for summary judgment to
          invalidate Shuffle Master’s patents, United States Patent Nos. 6,325,373
          (“‘373”) and 6,068,258 (“‘258”), which cover card moving mechanisms that
          regulate use of the shuffler apparatus. On October 14, 2004, the District
          Court
          issued an order denying the motion for summary judgment for failure to
          submit
          admissible evidence in support of the motion for summary judgment. We filed
          a
          motion for clarification and reconsideration of the Court’s order on November 5,
          2004 in order to have the underlying merits of our motion for summary judgment
          considered. No decision has yet been reached on this motion.
  On
          October 5, 2004, Shuffle Master filed another patent infringement action
          against
          us in the United States District Court, District of Nevada (Case
          No. CV-S-04-1373-JCM-LRL). Shuffle Master alleges that the use,
          importation
          and offering for sale of the PokerOneTM shuffler infringes Shuffle Master’s
          United States Patent No. 6,655,684. On October 25, 2004, we filed our answer
          and
          counterclaim that denies Shuffle Master’s allegations of patent infringement and
          requests that the Court enter a declaratory judgment of non-infringement.
          The
          United States Patent and Trademark Office, on March 14, 2004, issued to
          us
          patent number 490,481 for the PokerOneTM shuffler. We are offering the PokerOneTM
          for sale in the United States consistent with the patent issued by the
          United
          States Patent and Trademark Office. On October 14, 2004 Shuffle Master
          filed a
          Motion for Preliminary Injunction seeking to enjoin us from selling the
          PokerOneTM shuffler in the United States during the pendency of its second
          lawsuit. A court hearing on the preliminary injunction request will be
          held on
          November 29, 2004.
 **Item
                      2.**
                    **Changes
                        in Securities.**
 **Common
          Stock Offering.** On
          December 18, 2003, we completed a public offering of 5,500,000 shares of
          our
          common stock. The placement agent for the offering was Philadelphia Brokerage
          Corporation. Our shares of common stock sold in the offering were registered
          under the Securities Act in a Registration Statement on Form SB-2, as amended
          (File No. 333-109115), or the Registration Statement. The Securities and
          Exchange Commission declared the Registration Statement effective on December
          11, 2003.
  18
  The
          public offering price was $5.00 per share for an aggregate sales price
          of
          $27,500,000. We paid commissions of $1,925,000 to our placement agent,
          a
          non-accountable expense allowance of $25,000 to our placement agent and
          offering
          expenses of approximately $750,000. None of the expenses related to the
          initial
          public offering were paid directly or indirectly to any of our directors,
          officers, general partners or their associates, or to any persons owning
          10% or
          more of any class of our equity securities, or to any of our affiliates.
          We
          received net proceeds from the public offering of approximately $24,800,000
          after deducting the underwriting discounts and commissions and the offering
          expenses.
  From
          the
          effective date of the Registration Statement through the nine months ended
          September 30, 2004, we have used all of the $24,800,000 of net proceeds
          from the
          public offering as follows:
  **Use
                    of Proceeds to Date**
                
                
                **Amount**Retirement
                    of loan from Mellon Bank HBV SPV, LLC
                
                $
                2,775,000Retirement
                    of loan from Triage Capital Management LP
                
                
                850,000Retirement
                    of loan from Triage Offshore Fund, Ltd.
                
                
                1,000,000Retirement
                    of loan from LC Capital Master Fund, Ltd.
                
                
                1,000,000Retirement
                    of a portion of 10% convertible senior notes
                
                
                7,100,000Repayment
                    of convertible senior notes
                
                
                1,600,000Lease
                    payments
                
                
                1,200,000Funding
                    to increase product inventory
                
                
                1,500,000Purchase
                    of fixed assets
                
                
                160,000Payment
                    of operating expenses
                
                
                7,615,000**Total**
                
                **$**
                **24,800,000**
 
 **Debt
          Private Placement.** On
          September 21, 2004, we received debt financing in the amount of $3,250,000
          through a private placement of senior notes and warrants. Philadelphia
          Brokerage
          Corporation, the placement agent for the private placement, received a
          4%
          commission totaling $130,000. The private placement consisted of units,
          where
          each unit consisted of a 9% senior note in the original principal amount
          of
          $25,000 and a warrant to purchase 1,500 shares of our common stock. We
          sold 130
          units representing 9% senior notes in the original principal amount of
          $3,250,000 and warrants to purchase 195,000 shares of our common stock.
          The
          warrants have an exercise price of $5.00 per share and must be exercised
          before
          August 15, 2009. The private placement terminated November 1, 2004.
  The
          proposed uses for the private placement proceeds are for product build
          kits,
          tooling and manufacturing, product development and working capital. The
          units
          were not registered pursuant to the Securities Act but were offered pursuant
          to
          the exemption from registration provided by Rule 506 of Regulation D of
          the
          Securities Act.
 **Item
                      3.**
                    **Defaults
                        Upon Senior
                        Securities.**
 Not
          applicable.
  19
 **Item
                      4.**
                    **Submission
                        of Matters to a Vote of Security
                        Holders.**
  On
          October 5, 2004, we held our Annual Meeting of Stockholders at which the
          following matters were voted on and approved by our stockholders:
 1.
                  Election
                      of four directors for terms expiring in
                      2005:
  **For**
                
                
                **Against/Withheld**Steven
                    J. Blad
                
                
                13,773,289
                
                
                2,029,600James
                    E. Crabbe
                
                
                15,703,489
                
                
                99,400Ronald
                    O. Keil
                
                
                15,704,289
                
                
                98,600Bob
                    L. Smith
                
                
                15,704,289
                
                
                98,600
 
 2.
                Amendment
                    to our 1999 Directors’ Stock Option Plan increasing the number of shares
                    reserved thereunder from 20,000 shares to 300,000 shares:
  For
                
                11,110,877Against
                
                416,244Abstain
                
                12,814
 
 3.
                Amendment
                    to our 1999 Stock Option Plan increasing the number of shares
                    reserved
                    thereunder from 2,000,000 shares to 3,000,000 shares:
  For
                
                11,112,077Against
                
                424,444Abstain
                
                3,414
 
 4.
                Ratification
                    of the appointment of Piercy Bowler Taylor & Kern, as our independent
                    auditors, for the fiscal year ending December 31,
                    2004:
  For
                
                15,706,389Against
                
                91,500Abstain
                
                5,000
 **Item
                      5.**
                    **Other
                        Information.**
 Not
          applicable.
 **Item
                      6.**
                    **Exhibits
                        and Reports on Form
                        8-K.**
 (a)
                Exhibits.
  10.1
                Form
                    of Promissory Note for 2004 Note
                    Placement*
  10.2
                Form
                    of Warrant for 2004 Note Placement*
  10.3
                Form
                    of Security Agreement for 2004 Note
                    Placement*
  31.1
                Certifications
                    Pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002.
  31.2
                Certifications
                    Pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002.
  32.1
                Certification
                    of President and Chief Financial Officer Pursuant to Section
                    906 of the
                    Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
                    1350).
  *
          Previously filed as an exhibit to our Quarterly Report on Form 10-QSB for
          the
          period ended September 30, 2004 filed with the SEC on November 15,
          2004
  20
 
 (b)
                Reports
                    on Form 8-K.
  During
          the three months ended September 30, 2004, we filed the following:
  ·
                Current
                    Report on Form 8-K filed on August 9, 2004 reporting the issuance
                    of a
                    press release announcing our financial results for the period
                    ended June
                    30, 2004;
  ·
                Current
                    Report on Form 8-K filed on September 22, 2004 disclosing materials
                    provided at the Merriman Curhan Ford Investor Summit 2004 on
                    Tuesday,
                    September 21, 2004; and
  ·
                Current
                    Report on Form 8-K filed on September 24, 2004 reporting the
                    receipt of
                    debt financing in the original principal amount of $3,250,000
                    and the
                    issuance of warrants to purchase an aggregate of 195,000 shares
                    of our
                    common stock.
  21
  **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. Newburg
 Its:
                    President,
                        Chief Executive Officer andTreasurer
                        (Principal Executive Officer)Date: November
                      14, 2005
                    By:
                    /s/ Arnaldo
                      F. GalassiArnaldo
                        F. Galassi
 Its:
                    Chief
                        Financial Officer andSecretary
                        (Principal Financial Officer)
  22