**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-QSB/A**


(Mark
      One)


x
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




For
                the quarterly period ended:
            June
                30, 2005




OR




**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 latest
                practicable
                  date:
              16,764,005shares
                  of common stock, $.001 par value, as of August 3,
                  2005Transitional
                  Small Business Disclosure Format (check one): Yes oNo
                  x








**EXPLANATORY
        NOTE**
 
 VendingData
        Corporation is filing this Amendment No. 1 to its Quarterly Report on Form
        10-QSB for the quarter ended June 30, 2005, to increase by $174,675 revenue
        recognized during the three months ended June 30, 2005 and to decrease by
        $96,825 revenue recognized during the six months ended June 30, 2005, with
        respect to contracts that were still in their trial period requiring the
        revenue
        recognition to be moved to the quarter immediately following, to restate
        inventory as of June 30, 2005 as a result of certain adjustments to inventory
        that took place during the 2004 fiscal year and to make other resulting
        adjustments to its financial statements. The effect of the restatements was
        to
        decrease previously reported net loss by $148,441 ($0.01 per share) for the
        three month period ended June 30, 2005 and to increase previously reported
        net
        loss by $81,389 ($0.00 per share) for the six month period ended June 30,
        2005.
        These adjustments will not result in present or future cash expenditures.
        (See
        the disclosure under the heading “Restatement” in Note 1 to the financial
        statements in this Quarterly Report on Form 10-QSB/A)
  The
        Items
        in our Form 10-QSB for the quarter ended June 30, 2005, that are amended
        and
        restated are as follows: Part I: Item 1 - Financial Statements; Item 2 -
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations; and Part II: Item 6 - Exhibits and Reports on Form 8-K.
  The
        remaining Items contained within this Amendment No. 1 to Quarterly Report
        on
        Form 10-QSB/A consist of all other Items originally contained in our Quarterly
        Report on Form 10-QSB for the quarter ended June 30, 2005 in the form filed
        on
        August 10, 2005. 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.


i







**VENDINGDATA
        CORPORATION**
 
 **FORM
        10-QSB**
 
 **TABLE
        OF CONTENTS**
 
  **Page**
 PART
                      I - FINANCIAL INFORMATION
                  
                  
                  1ITEM
                      1.
                      FINANCIAL STATEMENTS.
                  
                  
                  1Balance Sheets
                  
                  
                  1Statements of Operations
                  
                  
                  2Statements of Cash Flows
                  
                  
                  3ITEM
                      2.
                      MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
                  
                  
                  7OVERVIEW
                  
                  
                  7RESULTS OF OPERATIONS
                  
                  
                  8LIQUIDITY
                      AND CAPITAL RESOURCES
                  
                  
                  12CRITICAL
                      ACCOUNTING POLICIES AND ESTIMATES
                  
                  
                  14ITEM
                      3.
                      CONTROLS
                      AND PROCEDURES
                  
                  
                  19PART
                      II - OTHER INFORMATION
                  
                  
                  20ITEM
                      1.
                      LEGAL PROCEEDINGS
                  
                  
                  20ITEM
                      2.
                      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                      PROCEEDS
                  
                  
                  20ITEM
                      6.
                      EXHIBITS.
                  
                  
                  21


ii


**PART
      I - FINANCIAL INFORMATION**




**Item
      1. Financial Statements.**




**VENDINGDATA
      CORPORATION**


**Balance
      Sheets**




**June
                30,**
              **2005**
            
            **December
                31,**
              **2004****ASSETS**
            
            **(unaudited)**
              **restated**
            
            **restated****Current
                assets**:Cash
                and cash equivalents
            
            $
            2,821,346
            
            $
            924,802Current
                portion of accounts receivable, trade, net of allowance for
              uncollectables
                of $250,590 and $125,530
            
            
            1,474,275
            
            
            1,596,017Due
                from affiliate
            
            
            9,150
            
            
            25,000Other
                receivables
            
            
            142,539
            
            
            35,394Inventories
            
            
            7,112,854
            
            
            6,124,171Prepaid
                expenses
            
            
            113,527
            
            
            86,57511,673,691
            
            
            8,791,959Equipment
                rented to customers, net of accumulated depreciation of $687,248
              and
                $564,351
            
            
            277,697
            
            
            400,594Property
                and equipment, net of accumulated depreciation of $2,393,997 and
              $2,250,432
            
            
            867,700
            
            
            923,460Intangible
                assets, at cost, net of accumulated amortization of $516,895 and
              $438,488
            
            
            1,851,237
            
            
            1,129,644Due
                from affiliate
            
            
            90,800
            
            
            118,800Accounts
                receivable, trade, net of current portion, less unamortized
                discount
            
            
            1,152,279
            
            
            1,264,914Deferred
                expenses
            
            
            834,206
            
            
            753,030Deposits
            
            
            936,716
            
            
            980,216$
            17,684,326
            
            $
            14,362,617**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities**:Current
                portion of leases payable
            
            $
            1,189,602
            
            $
            1,941,445Accounts
                payable
            
            
            2,372,755
            
            
            1,240,676Accrued
                expenses
            
            
            829,261
            
            
            427,199Deferred
                revenues, current portion
            
            
            207,245
            
            
            239,680Short-term
                debt
            
            
            50,000
            
            
            238,250Customer
                deposits
            
            
            191,840
            
            
            193,6154,840,703
            
            
            4,280,865Long
                -term obligationsDeferred
                revenues, net of current portion
            
            
            153,250
            
            
            198,585Notes
                payable
            
            
            12,000,000
            
            
            3,250,000Leases
                payable, net of current portion
            
            
            568,437
            
            
            893,244Total
                Liabilities
            
            
            17,562,390
            
            
            8,622,694**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, 17,212,058
                and
              17,199,558
                shares issued
            
            
            17,212
            
            
            17,200Treasury
                stock 448,053 shares of common stock at cost
            
            
            (846,820
            )
            
            -Deferred
                expenses
            
            
            (1,422,136
            )
            
            -Additional
                paid in capital
            
            
            62,318,473
            
            
            59,843,272Deficit
            
            
            (59,944,793
            )
            
            (54,120,549
            )Total
                stockholders’ equity
            
            
            121,936
            
            
            5,739,923Total
                liabilities and stockholders’ equity
            
            $
            17,684,326
            
            
            14,362,617


See
      accompanying notes to financial statements.




1


**VENDINGDATA
      CORPORATION**


**Statements
      of Operations**




**(UNAUDITED)**




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2005**
              **restated**
            
            **2004**
              **restated**
            
            **2005**
              **restated**
            
            **2004**
              **Restated****Revenues:**Sales
            
            $
            1,083,609
            
            $
            1,146,378
            
            $
            1,522,844
            
            $
            1,632,529Rental
            
            
            135,439
            
            
            161,110
            
            
            256,779
            
            
            372,173Other
            
            
            31,092
            
            
            20,762
            
            
            60,439
            
            
            109,5351,250,140
            
            
            1,328,250
            
            
            1,840,062
            
            
            2,114,237Sales
                returns and allowances
            
            
            (290,838
            )
            
            
            
            
            (290,838
            )959,302
            
            
            1,328,250
            
            
            1,549,224
            
            
            2,114,237**Operating
                costs and expenses:**Cost
                of sales
            
            
            775,996
            
            
            899,701
            
            
            1,204,016
            
            
            1,614,580Selling,
                general and administrative
            
            
            2,488,907
            
            
            1,502,469
            
            
            4,865,993
            
            
            2,972,953Research
                and development
            
            
            287,680
            
            
            451,287
            
            
            477,689
            
            
            794,9893,552,583
            
            
            2,853,457
            
            
            6,547,698
            
            
            5,382,522Loss
                from operations
            
            
            (2,593,281
            )
            
            (1,525,207
            )
            
            (4,998,474
            )
            
            (3,268,285
            )Interest
                expense, unrelated parties
            
            
            491,985
            
            
            231,479
            
            
            808,807
            
            
            494,101Interest
                expense, related parties
            
            
            15,063
            
            
            540
            
            
            15,063
            
            
            15,063Gain
                (loss) on disposition of assets
            
            
            
            
            
            
            
            
            1,900
            
            
            (567
            )507,048
            
            
            232,019
            
            
            825,770
            
            
            508,597Net
                loss
            
            $
            (3,100,329
            )
            $
            (1,757,226
            )
            $
            (5,824,244
            )
            $
            (3,776,882
            )Basic
                loss per share
            
            $
            (0.18
            )
            $
            (0.10
            )
            $
            (0.34
            )
            $
            (0.22
            )Weighted
                average shares outstanding
            
            
            16,787,756
            
            
            17,187,799
            
            
            17,096,510
            
            
            17,146,750


See
      accompanying notes to financial
      statements.


2


**VENDINGDATA
      CORPORATION**


**Statements
      of Cash Flows**




**(UNAUDITED)**




**Six
                Months Ended June 30,****2005**
              **restated**
            
            
            **2004**
              **restated**Net
                cash used in operating activities$
            
            
            (4,620,558
            )
            $
            (6,180,134
            )Cash
                flows from investing activities:Acquisition
                of intangible assets
            
            
            
            
            
            (4,900
            )Acquisition
                of plant and equipment
            
            
            (878,841
            )
            
            (156,381
            )Disposition
                of equipment produced for rentalProceeds
                from sale of equipment
            
            
            4,700
            
            
            665Net
                cash used in investing activities
            
            
            (874,141
            )
            
            (160,616
            )Cash
                flows from financing activities:Reimbursement
                of offering expense
            
            
            
            
            
            36,731Proceeds
                from sale of stock
            
            
            21,875Repayment
                of leases payable
            
            
            (1,192,384
            )
            
            (1,179,656
            )Proceeds
                from debt
            
            
            8,750,000Repayment
                of debt
            
            
            (188,250
            )
            
            (32,493
            )Repayment
                of convertible debt
            
            
            
            
            
            (1,603,077
            )Net
                cash provided by (used in) financing activities
            
            
            7,391,241
            
            
            (2,778,495
            )Increase
                (decrease) in cash and cash equivalents
            
            
            1,896,542
            
            
            (9,119,245
            )Cash
                and cash equivalents at beginning of period
            
            
            924,804
            
            
            11,526,664Cash
                and cash equivalents at end of period
            
            $
            2,821,346
            
            $
            2,407,419


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 rules and regulations
      of the Securities and Exchange Commission applicable to interim financial
      information. Accordingly, they do not include all of the information and
      footnotes required by generally accepted accounting principles for complete
      financial statements. In the opinion of management, all adjustments considered
      necessary for a fair presentation have been included.




The
      results of operations for the current period presented here are not necessarily
      indicative of the results to be expected for the full year. The accompanying
      financial statements should be read in conjunction with the Company's audited
      financial statements for the year ended December 31, 2004, included
      in the
      Company's Annual Report on Form 10-KSB filed with the Securities and
      Exchange Commission 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 the three and six months ended June 30, 2005 and to restate
      inventory as of June 30, 2005 as a result of certain adjustments to inventory
      that took place during the 2004 fiscal year. We have increased by $174,675
      revenue recognized during the three months ended June 30, 2005 and decreased
      by
      $96,825 revenue recognized during the six months ended June 30, 2005, with
      respect to contracts that were still in their trial period requiring the revenue
      recognition to be moved from one quarter to the next during the three and six
      months ended, June 30, 2005, respectively, and made other resulting adjustments
      to its financial statements. The effect of the restatements was to decrease
      previously reported net loss by $148,441 ($0.01 per share) for the three month
      period ended June 30, 2005 and increase previously reported net loss by $81,389
      ($0.00 per share) for the six month periods ended June 30, 2005, respectively.
      These adjustments have not resulted and will not result in past, present or
      future cash expenditures. This Amendment No. 1 to Quarterly Report on Form
      10-QSB for the quarter ended June 30, 2005 also reflects certain restatements
      that were effected for periods as of December 31, 2004 and for the three and
      six
      months ended June 30, 2005 and 2004. Those restatements are described in amended
      periodic reports for such periods filed by the the Company concurrently with
      the
      filing of this amended report.




**Note 2—Segments**




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




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June, 30,****2005**
              **restated**
            
            **2004**
              **restated**
            
            
            **2005**
              **restated**
            
            
            **2004**
              **restated**North
                America
            
            
            
            
            $
            642,502
            
            $
            566,585
            
            $
            1,158,174
            
            $
            1,218,180Asia
            
            
            
            
            
            267,300
            
            
            11,665
            
            
            267,300
            
            
            146,057Europe
            
            
            
            
            
            49,500
            
            
            750,000
            
            
            99,000
            
            
            750,000South
                America
            
            
            
            
            
            —
            
            
            —
            
            
            24,750
            
            
            —





4


The
      Company's revenues, depreciation and operating income distributed by product
      are
      as follows:


Three
                      Months Ended
                    
                    Six
                      Months EndedJune
                      30,
                    
                    June
                      30,**2005**
                    
                    **2004**
                    
                    **2005**
                    
                    **2004****restated**
                    
                    **restated**
                    
                    **restated**
                    
                    **restated**RevenuesSecure
                        Drop®
                    
                    $
                    61,345
                    
                    $
                    83,242
                    
                    $
                    72,593
                    
                    $
                    130,305Shuffler
                    
                    
                    766,774
                    
                    
                    584,672
                    
                    
                    1,092,823
                    
                    
                    1,041,947Deck
                        CheckerTM
                    
                    
                    390,928
                    
                    
                    639,574
                    
                    
                    614,206
                    
                    
                    832,450Other
                    
                    
                    31,093
                    
                    
                    20,762
                    
                    
                    60,440
                    
                    
                    109,535Sales
                        returns and allowances
                    
                    
                    (290,838
                    )
                    
                    
                    
                    
                    (290,838
                    )$
                    959,302
                    
                    $
                    1,328,250
                    
                    $
                    1,549,224
                    
                    $
                    2,114,237Depreciation
                        and amortizationSecureDrop®
                    
                    $
                    0
                    
                    $
                    0
                    
                    $
                    0
                    
                    $
                    0Shuffler
                    
                    
                    54,469
                    
                    
                    56,220
                    
                    
                    104,438
                    
                    
                    111,782Deck
                        CheckerTM
                    
                    
                    9,229
                    
                    
                    7,207
                    
                    
                    18,458
                    
                    
                    13,867Unallocated
                    
                    
                    99,310
                    
                    
                    145,592
                    
                    
                    206,409
                    
                    
                    300,332163,008
                    
                    
                    209,019
                    
                    
                    329,305
                    
                    
                    425,981Operating
                        income (loss)SeSecure
                        Drop® gross margin
                    
                    $
                    55,121
                    
                    $
                    18,813
                    
                    $
                    64,850
                    
                    $
                    (38,093
                    )Shuffler
                        gross margin
                    
                    
                    616,173
                    
                    
                    451,877
                    
                    
                    809,845
                    
                    
                    814,392Deck
                        CheckerTMgross margin
                    
                    
                    359,186
                    
                    
                    568,222
                    
                    
                    538,855
                    
                    
                    716,640Other
                        costs of good sold
                    
                    
                    (805,504
                    )
                    
                    (610,363
                    )
                    
                    (1,068,342
                    )
                    
                    (993,282
                    )Selling,
                        general, & administrative
                    
                    
                    (2,488,907
                    )
                    
                    (1,502,469
                    )
                    
                    (4,865,993
                    )
                    
                    (2,972,953
                    )Research
                        and development
                    
                    
                    (287,680
                    )
                    
                    (451,287
                    )
                    
                    (477,689
                    )
                    
                    (794,989
                    )$
                    (2,551,611
                    )
                    $
                    (1,525,207
                    )
                    $
                    (4,998,474
                    )
                    $
                    (3,268,285
                    )


**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—New
      Debt Financing**




In
      the
      six months ended June 30, 2005, the Company raised additional capital through
      private placements of 10% senior secured convertible notes in February 2005
      and
      March 2005 as follows.




On
      February 15, 2005, the Company completed a private placement of 10% senior
      secured convertible notes in the aggregate principal amount of $10,000,000
      (the
“February Senior Notes”). The Company issued the February Senior Notes in
      exchange for gross cash proceeds of $6,750,000 and the surrender of senior
      notes
      in the aggregate principal amount of $3,250,000 issued in August 2004. On March
      14, 2005, the Company completed an additional private placement of 10% senior
      secured convertible notes in the aggregate principal amount of $2,000,000 (the
      “March Senior Notes”). The March Senior Notes were issued on a *pari
      passu* basis
      with the February Senior Notes. Both the February Senior Notes and the March
      Senior Notes are secured by a first priority security  interest
      in the Company’s assets. The February Senior Notes and the March Senior Notes
      require semi-annual payments of interest only, with the principal and all unpaid
      interest due at maturity in February 2008 and March 2008, respectively. Holders
      of the February Senior Notes and the March Senior Notes have a one-time right
      to
      convert up to 50% of the then outstanding principal into shares of common stock
      at a rate $1.65 per share.




5


**Note 5—Options**




The
      Company currently has two stock option plans. The exercise price of the options
      ranges from $1.49 to $15 with a weighted average exercise price of $3.09. There
      were 3,267,622 options outstanding as of June 30, 2005.




**Note 6—Contingencies**




The
      Company is a party to certain claims, legal actions, and complaints, including
      a
      patent infringement action between the Company and one of its main competitors.
      The Company cannot predict the outcome of any such litigation or say with any
      certainty whether any such 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 the
      Company’s equipment lessors. As of the date of this report, the State of Nevada
      has not determined whether there has been a shortfall in the payment of the
      sales/use tax. The Company has sold and leased back shufflers and Deck Checkers
      over the last five years. The auditor for the State of Nevada is trying to
      determine at what level a sales/use tax needs to be collected. The Company
      now
      collects from our customers in Nevada and remits payments to the State of
      Nevada. If the State of Nevada determines that the sales of the products to
      the
      leasing companies is the level at which sales/use tax should have been
      collected, liability of the leasing companies would be passed to the Company.
      The amount of this potential liability could range from a refund of $144,000
      to
      the payment of sales/use tax with interest and penalties of up to $500,000.
      The
      Company intends to defend its position in this matter.




6


**Item
      2. Management’s Discussion and Analysis or Plan of
      Operation.** ****




**CAUTIONARY
      STATEMENT**




You
      should read the following discussion and analysis in conjunction with our
      unaudited condensed consolidated financial statements and the related notes
      thereto contained elsewhere in this report. The information contained in this
      quarterly report on form 10-QSB is not a complete description of our
      business or the risks associated with an investment in our common stock. We
      urge
      you to carefully review and consider the various disclosures made by us in
      this
      report and in our other reports filed with the Securities and Exchange
      Commission, or SEC, including our annual report on form 10-KSB for the
      year
      ended December 31, 2004 and subsequent reports on Forms 10-QSB
      and
      8-K, which discuss our business in greater detail.




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




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




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




**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.




7


**Results
      of Operations** **** ****




***Comparison
      of Three Months Ended June 30, 2005 and 2004*** **(Certain
      2005 and 2004 amounts have been restated.)**




For
      the
      three months ended June 30, 2005, we generated gross revenues of $1,250,140
      or
      5.8% less than the three months ended June 30, 2004. Gross revenue was offset
      by
      sales returns and allowances of $290,838. Specific product line results for
      the
      three months ended June 30, 2005 compared to the three months ended June 30,
      2004 are provided below.




For
      the
      three months ended June 30, 2005, our cost of sales was $775,996, or 14% less
      than the three months ended June 30, 2004. We expect the manufacturing of
      products in China to continue to reduce cost of sales on a per unit basis
      through the end of this year as we identify more efficiencies and optimize
      vendors in China. These efforts should also result in an improved gross margin.
      The gross margin on revenue for the three months ended June 30, 2005 was
      $245,243 less than the three months ended June 30, 2004 because of the decreased
      revenue for the quarter as well as a sales returns and allowances adjustment
      of
      $290,000.





Three
                months ended
              June
                30, 2005
              restated
            
            Three
                months ended
              June
                30, 2004
              restated
            
            Percentage
              change**Secure
                Drop**Revenue
            
            
            61,345
            
            
            83,242
            
            
            (26.3
            %)Cost
                of Sales
            
            
            6,224
            
            
            64,429
            
            
            (90.3
            %)Gross
                Margin
            
            
            55,121
            
            
            18,813
            
            
            193.0
            %**Shuffler
                Sales**Revenue
            
            
            696,570
            
            
            483,492
            
            
            44.0
            %Cost
                of Sales
            
            
            89,647
            
            
            81,227
            
            
            10.4
            %Gross
                Margin
            
            
            606,923
            
            
            402,265
            
            
            50.8
            %**Shuffler
                Rentals**Revenue
            
            
            70,204
            
            
            101,180
            
            
            (30.6
            %)Cost
                of Sales
            
            
            60,995
            
            
            51,568
            
            
            18.2
            %Gross
                Margin
            
            
            9,209
            
            
            49,612
            
            
            (81.4
            %)**DeckChecker
                Sales**Revenue
            
            
            325,693
            
            
            579,644
            
            
            (43.8
            %)Cost
                of Sales
            
            
            22,513
            
            
            64,145
            
            
            (64.9
            %)Gross
                Margin
            
            
            303,180
            
            
            515,499
            
            
            (41.1
            %)**DeckChecker
                Rentals**Revenue
            
            
            65,235
            
            
            59,930
            
            
            8.9
            %Cost
                of Sales
            
            
            9,229
            
            
            7,207
            
            
            28.1
            %Gross
                Margin
            
            
            56,006
            
            
            52,723
            
            
            6.2
            %**Other**Revenue
            
            
            31,092
            
            
            20,762
            
            
            49.8
            %Cost
                of Sales
            
            
            40,498
            
            
            (1,586
            )
            
            (2,654
            %)Gross
                Margin
            
            
            (9,406
            )
            
            22,348
            
            
            142
            %






**SecureDrop®
      Sales.** Since
      there were no system sales generated in the three months ended June 30, 2005,
      due to the Company’s decision to discontinue new installations of this product
      line, our SecureDrop® sales consisted of supply items for systems already in
      place. The decrease in our costs of SecureDrop® sales revenue reflects the
      reduced sales from the prior period. The increase in gross margin percentage
      on
      SecureDrop® is attributable to the higher fixed costs associated with the
      installation of new systems compared to the sale of supply parts during the
      three months ended June 30, 2005.




8


**Shuffler
      Sales.** The
      increase in revenue was due to the product line addition of the PokerOneTM
      shuffler. The decrease in the cost of shuffler **** sales
      revenue was due to the introduction of the PokerOneTM line of shufflers during
      the three months ended June 30, 2005 versus the three months ended June 30,
      2004. The PokerOneTM has a lower production cost than the Random Ejection
      Shuffler. Our cost of sales included cost of shuffler sales of $89,647.




**Shuffler
      Rentals.** The
      slight decrease in shuffler rental revenue reflects the transition of shufflers
      placed on a rental basis as a result of the conversion of rental units to
      purchased units in 2003. Our cost of sales for the three months ended June
      30,
      2005 included cost of shuffler rental depreciation of $54,469.




**Deck
      Checker** **TM** **Sales.** The
      decrease in Deck Checker TM sales
      resulted primarily from reduced sales. The decrease in gross margin percentage
      resulted from the overall sales decrease during the quarter. Our cost of sales
      for the three months ended June 30, 2005 included Deck Checker TM costs of
      $22,513.




**Deck
      Checker** **TM** **Rentals.** The
      increase in Deck Checker TM rental
      revenue resulted primarily from the placement of additional units during the
      quarter ended June 30, 2005. Our cost of sales included Deck Checker TM rental
      depreciation of $9,229




**Other
      Income.** The
      increase in other revenues was due to sale of supplies for Secure
      Drop **®** and
      DeckChecker TM .
      We also
      had sales returns and allowances of $290,838 and service costs of $516,310
      for
      the quarter ended June 30, 2005.




**General
      and Administrative Expense**




For
      the
      three months ended June 30, 2005, our general and administrative expenses were
      $2,488,907, or 66% more than the three months ended June 30, 2004. The increase
      in general and administrative expenses related primarily to a $810,800 increase
      in legal costs due to defense of the Shuffle Master, Inc. lawsuits, and
      legal/regulatory issues pertaining to former senior management, a $221,600
      increase in consulting expenses associated with the change in management team,
      a
      $41,700 increase in salaries primarily attributable to the expensing of stock
      options, a $40,800 increase in finance fees, a $18,400 increase in supplies,
      a
      $17,200 increase in insurance expenses, offset by a $71,500 decrease in travel
      and entertainment expenses, a $37,200 decrease in depreciation, a$19,200
      decrease in repair and maintenance expenses, a $13,500 decrease in trade show
      expenses.




**Research
      and Development Expense**




For
      the
      three months ended June 30, 2005, research and development expenses were
      $287,680, or 36.3% less than the period ended June 30, 2004. The decrease in
      research and development expenses was due to the substantial completion of
      the
      development on our new shuffler products, the RandomPlusTM Shuffler and the Poker
      OneTM Shuffler, a reduction of our engineering staff in the United States and the
      transfer of many engineering functions to our China operations.




**Interest
      Expense**




For
      the
      three months ended June 30, 2005, we incurred interest expenses of $507,048,
      or
      118.5% more than the three months ended June 30, 2004. This increase was
      primarily attributable to the additional debt service related to our previously
      outstanding 9% senior secured notes and the currently outstanding 10% senior
      secured convertible notes. The debt service on our 10% senior secured
      convertible notes will continue until February and March 2008, at which time
      the
      principal amount is due.




9


**Net
      Loss**




For
      the
      three months ended June 30, 2005, we had a net loss of $3,100,329, or 76% more
      than the three months ended June 30, 2004. Basic loss per share was $0.18 for
      the three months ended June 30, 2005, compared to $0.10 for the three months
      ended June 30, 2004. The increase in net loss and the increase in the basic
      net
      loss per share were primarily due to a $245,244 decrease in gross margin, a
      $986,438 increase in general and administrative expenses and a $275,029 increase
      in interest expenses, offset by a $163,607 decrease in research and development
      expenses.




***Comparison
      of Six Months Ended June 30, 2005 and 2004*** **(Certain
      2005 and 2004 amounts have been restated.)**




For
      the
      six months ended June 30, 2005, we generated gross revenues of $1,840,062,
      or
      13% less than the six month period ended June 30, 2004. Gross revenues were
      offset by sales returns and allowances of $290,838. Specific product line
      results for the six months ended June 30, 2005 compared to the six months ended
      June 30, 2004 are provided below.




For
      the
      six months ended June 30, 2005, our cost of sales was $1,204,016, or 25% less
      than the six month period ended June 30, 2004.  The
      manufacturing of products in China is expected to continue to reduce cost of
      sales on a per unit basis through the end of this year as we identify more
      efficiencies and optimize vendors in China. These efforts should result in
      an
      improved gross margin.




The
      gross
      margin on revenue for the six months ended June 30, 2005 was $345,208, or 22%,
      compared to the gross margin on revenue for the year ended June 30, 2004 of
      $499,657, or 24%. The decrease in gross margin of $154,449 from the six months
      ended June 30, 2004 to the six months ended June 30, 2005 reflects the decreased
      revenue.




Six
                  months ended
                June
                  30, 2005
                restated
              
              Six
                  months ended
                June
                  30, 2004
                Restated
              
              Percentage
                  change**Secure
                  Drop**Revenue
              
              
              72,593
              
              
              130,305
              
              
              (44.3
              %)Cost
                  of Sales
              
              
              7,743
              
              
              168,398
              
              
              (95.4
              %)Gross
                  Margin
              
              
              64,850
              
              
              (38,093
              )
              
              (270.2
              %)**Shuffler
                  Sales**Revenue
              
              
              966,514
              
              
              786,584
              
              
              22.9
              %Cost
                  of Sales
              
              
              166,072
              
              
              120,787
              
              
              37.5
              %Gross
                  Margin
              
              
              800,442
              
              
              665,797
              
              
              20.2
              %**Shuffler
                  Rentals**Revenue
              
              
              126,309
              
              
              255,363
              
              
              (50.5
              %)Cost
                  of Sales
              
              
              116,907
              
              
              106,768
              
              
              9.5
              %Gross
                  Margin
              
              
              9,402
              
              
              148,595
              
              
              (93.7
              %)**DeckChecker
                  Sales**Revenue
              
              
              483,736
              
              
              715,640
              
              
              (32.4
              %)Cost
                  of Sales
              
              
              56,893
              
              
              101,943
              
              
              (44.2
              %)Gross
                  Margin
              
              
              426,843
              
              
              613,697
              
              
              (30.4
              %)**DeckChecker
                  Rentals**
   10
  Revenue
              
              
              130,470
              
              
              116,810
              
              
              11.7
              %Cost
                  of Sales
              
              
              18,458
              
              
              13,867
              
              
              33.1
              %Gross
                  Margin
              
              
              112,012
              
              
              102,943
              
              
              8.8
              %**Other**Revenue
              
              
              60,439
              
              
              109,535
              
              
              (44.8
              %)Cost
                  of Sales
              
              
              40,485
              
              
              46,452
              
              
              (12.8
              %)Gross
                  Margin
              
              
              19,954
              
              
              63,083
              
              
              (68.4
              %)





**SecureDrop®
      Sales.** As
      a
      result of our decision to discontinue new installations for this product
      line **** there
      were no system sales generated in the six months ended June 30, 2005. Our
      SecureDrop® sales consisted of supply items for systems already in place. The
      decrease in cost of sales to $7,743 reflects the reduced sales from the prior
      period.




**Shuffler
      Sales.** The
      increase in sales was due, in part, to increased sales efforts related to our
      shufflers and the addition of PokerOneTM to the product line during the quarter
      ended June 30, 2005. **** The
      increase in the cost of shuffler **** sales
      revenue was due primarily to the additional placement of shufflers during the
      six months ended June 30, 2005 versus the six months ended June 30,
      2004.




**Shuffler
      Rentals.** The
      decrease in shuffler rental revenue reflects the transition of shufflers placed
      on a rental basis as a result of the conversion of rental units to purchased
      units in 2003. Cost of sales include shuffler rental depreciation of
      $104,438.




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




**Deck
      Checker** **TM** **Rentals** .
      The
      increase in Deck Checker TM rental
      revenue resulted primarily from the placement of additional units. Cost of
      sales
      included rental depreciation of $18,458.




**Other
      Income.** The
      decrease in other revenues is due to product returns offset by the sale of
      products that are not produced by us and sold only on a limited basis. We also
      had sales returns and allowances of $290,838 and included service costs of
      $755,191 for the quarter ending June 30, 2005.




**General
      and Administrative Expense**




For
      the
      six months ended June 30, 2005, our general and administrative expenses were
      $4,865,993, or 64% more than the six months ended June 30, 2004 The increase
      in
      general and administrative expenses related primarily to a $1,361,200 increase
      in legal and regulatory costs due to defense of the Shuffle Master, Inc.
      lawsuits and legal/regulatory issues pertaining to former senior management,
      a
      $342,800 increase in consulting expenses related to the management change in
      March, a $487,100 increase in other expenses, a $38,500 increase in insurance,
      and a $67,000 increase in finance fees, offset by a $197,000 decrease in payroll
      costs, a $91,600 decrease in depreciation, a $68,700 decrease in travel and
      entertainment expenses, a $28,700 decrease in trade show expenses, and a $10,000
      decrease in rent expenses.




**Research
      and Development Expense**




For
      the
      six months ended June 30, 2005, research and development expenses were $477,689,
      or 40% less than the six months ended June 30, 2004. The decrease in research
      and development expenses was due to the substantial completion of the
      development on our new shuffler products, the RandomPlusTM Shuffler and the Poker
      OneTM Shuffler, a reduction of our engineering staff in the United States and the
      transfer of many engineering functions to our China operations.




11


**Interest
      Expense**




For
      the
      six months ended June 30, 2005, we incurred interest expenses of $823,870 or
      61.8% more than the six months ended June 30, 2004. This increase was primarily
      attributable to the additional debt service related to our previously
      outstanding 9% senior secured notes and the currently outstanding 10% senior
      secured convertible notes. The debt service on our 10% senior secured
      convertible notes will continue until February and March 2008 at which time
      the
      principal amount is due.




**Liquidity
      and Capital Resources** ****




As
      a
      result of the proceeds from our private placement of senior notes, offset by
      our
      operating loss, our working capital has increased from $4,511,094 at December
      31, 2004 to $6,832,988 at June 30, 2005. However, our working capital is
      decreasing due to ongoing losses. Based on presently known commitments and
      plans, we believe that we will require approximately $3 million of additional
      capital to fund our operations and required expenditures through the fourth
      quarter of 2005. We will endeavor to raise additional required funds through
      various financing sources, including additional sales of our equity and debt
      securities and the procurement of commercial debt financing. However, there
      can
      be no guarantees that such funds will be available on commercially reasonable
      terms, if at all. Our ability to seek additional sources of capital is
      restricted by a covenant related to our 10% senior secured convertible notes
      that prohibits us from incurring indebtedness through loans, lines of credit
      and
      other forms of indebtedness, including equipment financing, in excess of
      $15,000,000. Accordingly, no assurances can be given that we will successfully
      obtain liquidity sources necessary to fund our operations in the upcoming
      year.




Net
      Cash
      Used in Operating Activities. For the six months ended June 30, 2005, the net
      cash used in operating activities was $4,620,558, compared to $6,180,134 for
      the
      six months ended June 30, 2004, a decrease of $1,559,576, or 25.2%. The net
      cash
      used in operating activities resulted from a net loss of $5,824,244, a decrease
      of deferred interest of $115,734, non-cash compensation expense of $367,456,
      loss on disposition of equipment of $1,900, a decrease in accounts receivable
      of
      $137,551 an increase in other receivables of $63,295, an increase in inventory
      of $973,247, an increase in prepaid expenses of $26,951, an increase in deferred
      expenses of $264,251, an increase in vendor deposits of $43,510, an increase
      in
      accounts payable of $1,132,078, an increase in accrued expenses of $402,064,
      a
      decrease in deferred revenue of $77,770, a decrease in customer deposits of
      $1,775, and depreciation of $329,304.




Net
      Cash
      Used In Investing Activities. For the six months ended June 30, 2005, we used
      net cash in investing activities of $874,141 compared to $160,616 for the six
      months ended June 30, 2004. The net cash used in investing activities during
      the
      six months ended June 30, 2005 consisted of $878,800 from the acquisition of
      plant and equipment, and $4,700 from disposition of equipment.




Net
      Cash
      Provided By Financing Activities. For the six months ended June 30, 2005, our
      financing activities provided net cash of $7,391,241, whereas, for the six
      months ended June 30, 2004, our financing activities used net cash of
      $2,778,495. The net cash provided by financing activities during the six months
      ended June 30, 2005 consisted of $8,750,000 provided by the issuance of 10%
      senior secured convertible notes, offset by the repayment of equipment leases
      of
      $1,192,384 and repayment of short term debt of $188,250.




**Sources
      of Capital**




During
      the years ended December 31, 2004 and 2003, our sources of capital included
      a
      public stock offering, equipment financing from a third party, short-term notes
      from stockholders, convertible debentures and other private sources of
      capital.




12


With
      respect to our equipment financing where we have sold and leased back most
      of
      our furniture, equipment, tooling and shufflers held for rent, we have repaid
      $1,179,656 for the six months ended June 30, 2004 and repaid $1,192,384 for
      the
      six months ended June 30, 2005. As of June 30, 2005, we had outstanding
      equipment financing of $1,758,039. These equipment leases have terms of 36
      to 39
      months and were not recorded as sales because each of the leases included a
      mandatory buy-back provision.




During
      the six months ended June 30, 2005, we raised additional capital through private
      placements of 10% senior secured convertible notes in February 2005 (the
“February Senior Notes”) and March 2005 (the “March Senior Notes” and together
      with the February Senior Notes, the “Senior Notes”).




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




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




A
      portion
      of the proceeds raised through these private placements was subject to the
      following conditions.




·
            One
                third (1/3) of the total proceeds held in escrow shall be released
                to us
                upon the execution of a distributor agreement with TCS or an affiliate
                thereof and the sale and service outside the United States of 100
                units of
                our RandomPlus ShufflerTM and the PokerOneTM shuffler, where such events
                must occur no later than June 30,
                2005;




·
            One-third
                (1/3) of the total proceeds held in escrow shall be released to us
                upon
                the hiring of a North American manager of operations or Chief Operating
                Officer, where such person shall be hired no later than June 30,
                2005;
                and




·
            One-third
                (1/3) of the total proceeds held in escrow shall be released to us
                upon
                the approval of our RandomPlusTM shuffler by Gaming Laboratories
                International and the Nevada State Gaming Control Board and the placement
                of 100 units of our RandomPlusTM shuffler in North America, where such
                approvals and shuffler placement must occur no later than June 30,
                2005.




13


By
      the
      June 30, 2005 deadline, we satisfied the first and the second escrow conditions
      and received a waiver from the holders of the Senior Notes with respect to
      the
      third condition. Accordingly, we have access to the all of the proceeds received
      through the private placement of the Senior Notes.




**Off
      Balance Sheet Arrangements**




We
      do not
      have any off balance sheet arrangements.




**Critical
      Accounting** **Policies** **and Estimates**




The
      following is a summary of what management believes are the critical accounting
      policies related to operations. The application of these policies, in some
      cases, requires management to make subjective judgments and estimates regarding
      the effect of matters that are inherently uncertain. See Note 1, "Description
      of
      Business and Significant Accounting Policies," to financial statements included
      in our annual report on Form 10KSB for a more detailed discussion of our
      accounting policies. Except as described below, we do not employ any critical
      accounting policies selected from among available alternatives or that require
      the exercise of significant management judgment.,




***Allowance
      for Doubtful Accounts.***




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




***Revenue
      Recognition.***




We
      recognize revenue from the sale of our shuffler and Deck CheckerTM products upon
      shipment against valid customer contracts or purchase orders. Sales are
      recognized immediately when shufflers that are rented are converted to purchases
      depending on the creditworthiness and payment history of the casino company
      since payment terms are from 20 to 48 months. We recognize revenue from our
      sales to independent distributors at the time that the distributor takes
      possession of our product. We recognize revenue from the sale of our SecureDrop®
      products upon installation and functional testing at customer locations because
      that is when the customer's obligation becomes fixed and certain pursuant to
      our
      standard contracts for sale. The extended warranty and maintenance components
      that are part of long term sales contracts are unbundled and recognized as
      deferred revenue amortized over the remaining life of the sales agreement after
      the initial 90−day warranty as required by the Emerging Issues Task Force Issue
      No. 00−21, Revenue Arrangements with Multiple Deliverables. The useful life of
      our shufflers and Deck CheckersTM is five years with proper maintenance; the life
      can be extended with the replacement of component parts. If the customer does
      not possess the required creditworthiness or an established payment history
      with
      us, we would then book the revenue as an installment sale and recognize it
      over
      time as payments are received. Revenue from shuffler rentals is recorded at
      the
      first of each month in accordance with rental contract terms. All rental
      contracts are cancelable upon 30−day written notice by the customer. Maintenance
      expense for rental units is recorded in the period it is incurred. Although
      sales are 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.




14


***Intangible
      Assets.***




We
      currently amortize our intangible assets (patent and technology rights) on
      a
      straight-line basis over estimated useful lives of 10 years. Management believes
      that the useful life of patents and technology rights equals the full term
      of
      the patent.




***Recent
      Accounting Pronouncements.***




In
      December, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 123 (Revised 2004), *Share
      Based Payment* (“SFAS
      123R”). SFAS 123R requires certain changes in the way compensation cost related
      to share based employee compensation transactions is recognized in the financial
      statements as compared to SFAS No. 123, *Accounting
      for Stock-Based Compensation* .
      The
      provisions of SFAS 123R are effective for the company as of the first interim
      period that begins after December 15, 2005. Accordingly, we will implement
      the
      revised standard in the first quarter of fiscal year 2006, unless we decide
      to
      adopt it earlier. Since the company adopted SFAS No. 123 effective as of January
      1, 2003, the effect of adopting SFAS 123R is not expected to be
      material.




In
      December 2004, the FASB issued SFAS No. 153 *,
      Exchanges of Nonmonetary Assets, an*  *Amendment
      of APB Opinion No. 29, Accounting for Nonmonetary Transactions* (“SFAS
      153”). The amendments made by SFAS 153 are based on the principle that exchanges
      of nonmonetary assets should be measured based on the fair value of the assets
      exchanged. Further, the amendments eliminate the narrow exception for
      nonmonetary exchanges of similar productive assets and replace it with a broader
      exception for exchanges of nonmonetary assets that do not have commercial
      substance. The Statement is effective for nonmonetary asset exchanges occurring
      in fiscal periods beginning after June 15, 2005. We do not expect to enter
      into
      any transactions that would be affected by adopting SFAS 153.




In
      May
      2005, the Financial Accounting Standards Board (FASB) issued Statement of
      Financial Accounting Standards (SFAS) No. 154 *,
      Accounting Changes and Error Corrections, a Replacement of*  *APB
      Opinion No. 20 and SFAS No. 3* . SFAS No. 154replaces
      APB Opinion No. 20,*Accounting**Changes*and SFAS
      No 3,*Reporting
      Accounting Changes in Interim Financial Statements*and
      changes the requirement for the accounting for and reporting of a change in
      accounting principles. SFAS No. 154 applies to all voluntary changes in
      accounting principles. It also applies to changes required by an accounting
      pronouncement in the unusual instance that the pronouncement does not include
      specific transition provisions. When a pronouncement includes specific
      transition provisions, those provisions should be followed. The provisions
      of
      SFAS No. 154 will be effective for accounting changes made in fiscal year
      beginning after December 15, 2005.We
      have
      not completed our evaluation or determined the impact of adopting SFAS No.
      154,
      which may be material to our results of operations in the first quarter of
      fiscal year 2006 and thereafter.





**Risk
      Factors**




***We*** ***require*** ***additional funding in the future to continue to operate our business.*** We
      had
      working capital of $6,832,988 as of June 30, 2005, however our working capital
      continues  to
      deteriorate due to  ongoing
      losses. Based on presently known commitments and plans, we believe that we
      will
      require a minimum of $3 million of additional capital to fund our operations
      and
      required expenditures through the fourth quarter of 2005. We will endeavor
      to
      raise additional required funds through various financing sources, including
      additional sales of our equity and debt securities and the procurement of
      commercial debt financing. However, there can be no guarantees that such funds
      will be available on commercially reasonable terms, if at all. Our ability
      to
      seek additional sources of capital is restricted by a covenant related to our
      10% senior secured convertible notes that prohibits us from incurring
      indebtedness through loans, lines of credit and other forms of indebtedness,
      including equipment financing, in excess of $15,000,000. Accordingly, no
      assurances can be given that we will successfully obtain liquidity sources
      necessary to fund our operations in the upcoming year. Our inability to obtain
      additional capital as and when needed may materially adversely affect our
      ability to continue our present level of operations.




15


***We
      have a history of significant operating losses and anticipate continued
      operating losses for the foreseeable future.*** For the
      six months ended June 30, 2005 and the years ended December 31, 2004
      and
      2003, we have incurred net losses of $5,824,244, $9,538,200 and $7,812,089,
      respectively, and our operations have used $4,620,557, $10,660,133 and
      $ 11,731,750
      of cash, respectively. As of June 30, 2005, December 31, 2004 and December
      31, 2003, we had accumulated deficits of $59,944,793, $54,120,549 and
      $44,58 2,347 ,
      respectively. Based on our presently known commitments and plans, we believe
      that we will require a minimum of $3 million of additional capital to fund
      our
      operations and required expenditures through the fourth quarter of 2005. If
      we
      are unable to generate these funds from operational cash flow we will be
      required to locate additional sources of capital from private or public
      placements of debt or equity, or from institutional or other lending sources.
      If
      our revenues do not increase very substantially, or if our spending levels
      exceed our expectations, we will not become profitable. Revenues may not grow
      in
      the future, and we may not generate sufficient revenues for profitability.
      If we
      become profitable, we may not be able to sustain profitable operations.




***We
      require stockholder approval to increase our authorized shares to ensure a
      sufficient number of shares are available for the conversion of the March Senior
      Notes.*** As of
      July 1, 2005, we have 25,000,000 shares of common stock authorized and
      16,764,005 shares of common stock outstanding. In addition, as of July 1, 2005,
      we have issued stock options to purchase 3,267,622 shares of common stock,
      warrants to purchase 2,543,053 shares of common stock and February Senior Notes
      convertible into 3,636,363 shares of common stock. Due to the shares outstanding
      and shares reserved as of July 1, 2005, we do not have a sufficient number
      of
      authorized shares remaining to cover the shares issuable upon the conversion
      of
      the March Senior Notes, if at all. Our board of directors has authorized an
      amendment to our articles of incorporation to increase our total authorized
      number of shares. However, our stockholders must also approve the amendment
      to
      our articles of incorporation. Although we expect our stockholders to approve
      the amendment, there is no guarantee of such a result. If the stockholders
      do
      not approve of the amendment, we will be in breach under the terms of the March
      Senior Notes.




***We
      may be unable to generate sufficient demand for our
      products.*** **** If
      we
      fail to generate sufficient demand for our products, we may be unable to sustain
      operations or generate a return to investors. Until January 2000, we were in
      the
      development stage and derived minimal revenues from our products. Currently
      we
      are an operating company that continues to develop new products. Since January
      2000, our activities have been limited to analyzing and consulting with persons
      in the gaming industry, developing and manufacturing new products, establishing
      distribution networks for our products, marketing our products to the gaming
      industry, and commencing product sales. During such time, we have derived only
      limited revenues, which have been insufficient to sustain our operations. We
      may
      not generate sufficient revenue to sustain our operations. No independent
      organization has conducted market research providing management with independent
      assurance from which to estimate potential demand for our products. The overall
      market may not be receptive to our products, and we may not successfully compete
      in the target market for our products. ****




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




16


***We
      may be required to record a charge to sales returns and allowances related
      to
      our lease agreements and purchase contracts.*** Due
      to
      the competitive environment in which we operate, we have agreed to extended
      payment terms in a significant number of our leasing agreements and purchase
      contracts that permit the customer to return our products at any time with
      no
      further monetary obligation to us. If we have recorded all of the revenue that
      would have been received from the relevant leasing agreement or purchase
      contract, and the product is returned to us, we will then be required to record
      a charge against sales returns and allowances. As a result, our operating
      results for the relevant period in which the charge is taken will be adversely
      impacted.




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




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




·
            patents
                and pending patent applications;




·
            trade
                secret, copyright and trademark laws;
                and




·
            certain
                built-in technical product
                features.




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




***Adverse
      results in current litigation could result in substantial monetary damages
      and
      impacts on the manufacture and sale of certain of our shuffler
      products*** .
      Shuffle
      Master, our principal competitor in the shuffler market, filed two lawsuits
      against us for patent infringement. The first suit has been settled (see Part
      II
      - Item 1. Legal Proceedings). The second lawsuit alleges that our PokerOneTM
      Shuffler violates one of its patents concerning the card moving mechanism.
      Shuffle Master seeks treble damages, which, if awarded, could result in us
      owing
      it substantial sums of money, and, if large enough, could have a material
      adverse effect on our liquidity and our ability to conduct operations. Although
      we believe our position to be meritorious, litigation of this nature is a drain
      on our cash resources and our management’s time. Although Shuffle Master has
      asserted patent infringement claims and we believe we have reasonable defenses
      to the same, we cannot determine whether we will prevail in the lawsuit, nor
      whether damages, if awarded, would significantly impact our ability to continue
      to manufacture and sell particular products within the United States and its
      territories. If we do not prevail, we will be unable to sell the PokerOneTM
      shuffler products in the United States unless we change certain components
      used
      in the shuffler or obtain appropriate licenses from Shuffle Master to use the
      playing card shuffler apparatus. The preliminary
      injunction that Shuffle Master obtained against us in  November
      2004 prevented us from selling our PokerOneTM Shuffler in the United States.
      An appellate court stayed the injunction in March 2005. Similarly, we cannot
      determine whether Shuffle Master will assert other litigation claims based
      upon
      other patents it may currently or in the future own, nor can we determine the
      likely outcome of any such litigation or whether any such substantial litigation
      would have a material adverse effect on our business as presently conducted
      or
      as anticipated.




17


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




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




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




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




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




·
            resulting
                in costly litigation; and




·
            disrupting
                product sales and shipments.




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




***We
      rely*** **on
      distributors in international markets, and our limited sales experience in
      foreign countries could cause us to lose sales.** Substantially
      all sales of our products outside the United States are achieved through
      distributor relationships. We believe the distributors that we have engaged
      are
      experienced and reputable; however, if we are unable to manage these
      relationships, our ability to generate revenue and profits in the non-U.S.
      market may be adversely affected. To the extent that we engage in direct sales
      outside the United States, we have limited sales experience and history in
      foreign markets. On January 21, 2005, we entered into an exclusive five-year
      agreement with TCS to market and distribute our shuffler products outside of
      the
      United States. However, if TCS is unable to place our shuffler products outside
      of the United States, our liquidity will be adversely affected. In July 2005
      we
      entered into a contract with Simon Herbert to serve as our Vice President of
      International Sales. Mr. Simon is a 25 year senior gaming industry executive
      who
      is credited with building several multi-million dollar operations. Most notably,
      Mr. Herbert served as CEO of TCS Group. Mr. Herbert will oversee VendingData's
      international distribution partnerships.




***Our
      management holds a controlling interest in our common stock, giving our
      management the power to control all matters submitted to our stockholders.*** As
      of
      July 1, 2005, our executive officers and members of our board beneficially
      own
      approximately 8,099,563 shares of common stock, or approximately 34.8% of the
      outstanding shares of our common stock, assuming exercise or conversion of
      all
      options, warrants and convertible debentures held by our executive officers
      and
      members of our board that are exercisable within 60 days of July 1, 2005.
      Accordingly, these stockholders have the power to control all matters requiring
      approval by our stockholders, including the election of directors and approval
      of mergers and other significant corporate transactions. This concentration
      of
      ownership may make it more difficult for non management stockholders to effect
      substantial changes in our company, and also has the effect of delaying,
      preventing or expediting, as the case may be, a change in control of our
      company.




18


**Item
                3.**
            **Controls
                and Procedures******




(a) *Evaluation
      of Disclosure Controls.* In our
      quarterly report on Form 10-QSB for the period ended June 30, 2005 filed by
      us
      with the SEC on August 10, 2005 (“Original Quarterly Report”),  we
      evaluated the effectiveness of our disclosure controls and procedures as of
      the
      end of the six months ended June 30, 2005. Disclosure controls and procedures
      are controls and other procedures that are designed to ensure that information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the SEC’s rules and forms. Disclosure controls and
      procedures include, without limitation, controls and procedures designed to
      ensure that information required to be disclosed by us in the reports that
      we
      file under the Exchange Act is accumulated and communicated to our management,
      as appropriate to allow timely decisions regarding required
      disclosure.




In
      the
      Original Quarterly Report, we disclosed that based on the evaluation conducted
      as of June 30, 2005, we concluded that, subject to certain limitations noted
      in
      the Original Quarterly Report, our disclosure controls and procedures are
      effective to ensure that information we are required to disclose in reports
      that
      we file or submit under the Exchange Act is recorded, processed, summarized,
      and
      reported within the time periods specified in the SEC’s rules and forms. In
      connection with analysis that led up to the restatements set forth in this
      Amendment No. 1 to the Original Quarterly Report, we concluded that the
      circumstances underlying the restatements indicate that our disclosure controls
      and procedures as of and for the three months ended June 30, 2005 were deficient
      in respect of certain actions by former senior management to override
      established financial controls and procedures. We believe that all such
      deficiencies were corrected prior to September 30, 2005.




(b) *Changes
      in Disclosure Controls and Procedures.* In the
      Original Quarterly Report we disclosed that there
      were no changes in our internal controls over financial reporting that occurred
      during the three months ended June 30, 2005 that have materially affected,
      or
      are reasonably likely to materially affect, our internal controls over financial
      reporting.




19


**PART
      II - OTHER INFORMATION**




**Item
      1. Legal Proceedings** ****




On
      July
      12, 2005, we entered into a Settlement Agreement with Shuffle Master, Inc.,
      with
      respect to the legal proceeding filed on March 27, 2002, by Shuffle Master,
      Inc., against us in the United States District Court, District of Nevada (Case
      No. CV-S-02-0438-JCM-PAL). The complaint alleged, among other things, claims
      for
      patent infringement relating to two of Shuffle Master’s patents and requested
      treble damages and an injunction enjoining us from infringing on such patents.
      The Shuffle Master patents at issue are United States Patent Numbers 6,325,373
      and 6,068,258, regarding registering use of a playing card shuffler apparatus
      and the displaying of the use on a display. We had denied the claims and
      asserted counterclaims against Shuffle Master. The trial date for this matter
      was set for July 25, 2005.




Pursuant
      to the Settlement Agreement, the parties have agreed to dismiss their claims
      and
      counter-claims in the particular action and Shuffle Master has agreed not to
      bring any claims against us for the infringement of the above-referenced patents
      for past or future use of the technology, with the exception of matters
      involving infringement of the following aspects of Patent No. 6,325,373: (i)
      a
      method of recovering from a card jam in an automatic card shuffler, as further
      described in Claim 6 of Patent No. 6,325,373; and (ii) an automatic card
      shuffler with a card moving mechanism to clear card jams, as further described
      in Claim 7 of Patent No. 6,325,373. In return, we will make settlement payments
      to Shuffle Master in the amount of $400,000 payable on or before July 14, 2005,
      and $400,000 which is due on or before May 14, 2006.




The
      Settlement Agreement extends only to the matters described above relating to
      Patent Numbers 6,325,373 and 6,068,258, and does not extend to the legal
      proceeding filed on October 5, 2004, by Shuffle Master, Inc., against us in
      the
      United States District Court, District of Nevada (Case No.
      CV-S-04-1373-JCM-LRL). Those litigation proceedings continue and are not
      affected by the Settlement Agreement.




The
      second lawsuit alleges that our PokerOneTM Shuffler violates a Shuffle Master
      patent concerning the card moving mechanism. Shuffle Master seeks treble
      damages. If we do not prevail, we will be unable to sell the PokerOneTM shuffler
      products in the United States unless we change certain components used in the
      shuffler or obtain appropriate licenses from Shuffle Master to use the playing
      card shuffler apparatus. The preliminary injunction that Shuffle Master obtained
      against us in November 2004 prevented us from selling our PokerOneTM Shuffler in
      the United States. An appellate court stayed the injunction in March 2005.




On
      June
      2, 2005, we received a summons and complaint in connection with an automobile
      accident involving a former employee of the company. The claim was filed in
      the
      Superior Court of California, County of San Francisco, and the amount of the
      lawsuit is in excess of $2 million. We have responded to the complaint and
      referred the case to our insurance carrier.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**




During
      the quarter ended June 30, 2005, we received $21,875 from three warrant holders
      who exercised warrants and received 12,500 shares.




Pursuant
      to a repurchase agreement dated April 8, 2005, we repurchased 448,053 shares
      of
      common stock from certain investors for which the Company issued warrants
      allowing the investors to purchase an equal number of shares of our common
      stock
      at $0.01 per share. The warrants vest on April 8, 2006 and expire on April
      8,
      2010. We will hold the common stock as treasury shares. No payment was made
      to
      any parties as a result of this repurchase agreement.





20




**Item
      6. Exhibits.**




Exhibits .




10.1
            Settlement
                Agreement dated July 12, 2005 between VendingData Corporation and
                Shuffle
                Master, Inc*




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 Principal Executive Officer and Principal 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 Quarterly Report on Form 10-QSB for the
      quarter ended June 30, 2005 filed with the SEC on August 10,
      2005


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:
            December
                9, 2005
            By:
            /s/
                Mark R. NewburgMark
                R. NewburgIts:
            President,
                Chief Executive Officer and Treasurer (Principal Executive
                Officer)Date:
            December
                9, 2005
            By:
            /s/
                Arnaldo F. GalassiArnaldo
                F. GalassiIts:
            Chief
                Financial Officer and Secretary (Principal Financial
                Officer)







22