**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:
              March
                  31, 2005
  OR
  o
              **TRANSITION
                  REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE
                  ACT**
  For
                  the transition period from:
              
              to
 
 Commission
                  file number:
              001-32161
  VendingData
                        Corporation(Exact
                        name of small business issuer as specified in its
                        charter)Nevada
                    
                    91-1696010(State
                        or other jurisdiction of incorporation or organization)
                    
                    (I.R.S.
                        Employer Identification No.)6830
                        Spencer Street, Las Vegas, Nevada 89119(Address
                        of principal executive offices)(702)
                        733-7195(Issuer’s
                        telephone number)(Former
                        name, former address and former fiscal year, if changed since
                        last
                        report)Check
                        whether the issuer (1) filed all reports required to be filed
                        by Section
                        13 or 15(d) of the Exchange Act during the past 12 months
                        (or for such
                        shorter period that the registrant was required to file such
                        reports), and
                        (2) has been subject to such filing requirements for the
                        past 90 days. Yes
                        xNo
                        o**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:16,751,505shares
                        of common stock, $.001 par value, as ofApril
                        30, 2005
 Transitional
                      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 March 31, 2005, to reverse $271,500 of revenue
        recognized during the three months ended March 31, 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 March 31, 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
        increase previously reported net loss by $229,830 ($0.01 per share) for the
        three month period ended March 31, 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 March 31, 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 March 31, 2005, in the form filed
        on
        May 16, 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**
  **P****AGE**PART
                    I - FINANCIAL INFORMATION
                1ITEM
                    1. FINANCIAL STATEMENTS.
                1Balance
                    Sheets
                1Statements
                    of Operations
                2Statements
                    of Cash Flows
                3ITEM
                    2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                    OPERATIONS.
                7OVERVIEW
                7CRITICAL
                    ACCOUNTING POLICIES AND ESTIMATES
                7RESULTS
                    OF OPERATIONS
                9LIQUIDITY
                    AND CAPITAL RESOURCES
                12RISK
                    FACTORS
                15ITEM
                    3.CONTROLS AND PROCEDURES
                23PART
                    II - OTHER INFORMATION
                24ITEM
                    1. LEGAL PROCEEDINGS
                24ITEM
                    2. CHANGES IN SECURITIES.
                24ITEM
                    3. DEFAULTS UPON SENIOR SECURITIES.
                24ITEM
                    4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
                24ITEM
                    5. OTHER INFORMATION.
                25ITEM
                    6. EXHIBITS AND REPORTS ON FORM 8-K.
                25
 
 
 -ii-
 **PART
        I - FINANCIAL INFORMATION**
 **Item
            1. Financial** **Statements.**
 **VENDINGDATA
        CORPORATION**
 **Balance
        Sheets**
  **March
                  31,**
                **2005**
              
              **December
                  31,**
                **2004****ASSETS**
              
              **(unaudited)**
                **restated**
              
              **restated****Current
                  assets**:Cash
                  and cash equivalents
              
              $
              4,266,975
              
              $
              924,802Restricted
                  cash
              
              
              2,250,000
              
              
              —Current
                  portion of accounts receivable, trade, net of allowance for uncollectables
                  of $223,590 and $125,530
              
              
              1,228,607
              
              
              1,596,017Due
                  from affiliate
              
              
              9,150
              
              
              25,000Other
                  receivables
              
              
              182,083
              
              
              35,394Inventories
              
              
              6,530,841
              
              
              6,124,171Prepaid
                  expenses
              
              
              142,333
              
              
              86,57514,609,989
              
              
              8,791,959Equipment
                  rented to customers, net of accumulated depreciation of $623,549
                  and
                  $564,351
              
              
              341,395
              
              
              400,594Property
                  and equipment, net of accumulated depreciation of $2,323,169 and
                  $2,250,432
              
              
              847,615
              
              
              923,460Intangible
                  assets, at cost, net of accumulated amortization of $477,692 and
                  $438,488
              
              
              1,090,441
              
              
              1,129,644Due
                  from affiliate
              
              
              —
              
              
              118,800Accounts
                  receivable, trade, net of current portion, less unamortized
                  discount
              
              
              1,306,076
              
              
              1,264,914Deferred
                  expenses
              
              
              1,475,738
              
              
              753,030Deposits
              
              
              1,203,659
              
              
              980,216$
              20,874,913
              
              $
              14,362,617**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities**:Current
                  portion of leases payable
              
              $
              1,666,125
              
              $
              1,941,445Accounts
                  payable
              
              
              1,578,712
              
              
              1,240,676Accrued
                  expenses
              
              
              606,632
              
              
              427,199Deferred
                  revenues, current portion
              
              
              244,210
              
              
              239,680Short-term
                  debt
              
              
              238,250
              
              
              238,250Customer
                  deposits
              
              
              192,240
              
              
              193,6154,526,169
              
              
              4,280,865Deferred
                  revenues, net of current portion
              
              
              183,574
              
              
              198,585Notes
                  payable, net of current portion
              
              
              12,000,000
              
              
              3,250,000Leases
                  payable, net of current portion
              
              
              650,750
              
              
              893,24417,360,493
              
              
              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, 17,199,558
                  shares
                  and 17,199,558 shares issued and outstanding
              
              
              17,200
              
              
              17,200Additional
                  paid-in capital
              
              
              60,341,683
              
              
              59,843,272Deficit
              
              
              (56,844,463
              )
              
              (54,120,549
              )3,514,420
              
              
              5,739,923$
              20,874,913
              
              $
              14,362,617
  See
          accompanying notes to financial statements.
 -1-
 **VENDINGDATA
        CORPORATION**
 **Statements
        of Operations**
  **(UNAUDITED)**
  **Three
                  Months Ended March 31,****2005**
                **restated**
              
              **2004**
                **restated****Revenues**:Sales
              
              $
              439,235
              
              $
              486,151Rental
              
              
              121,340
              
              
              211,063Other
              
              
              29,347
              
              
              88,773589,922
              
              
              785,987**Operating
                  expenses:**Cost
                  of sales
              
              
              428,020
              
              
              714,879Selling,
                  general and administrative
              
              
              2,377,086
              
              
              1,470,484Research
                  and development
              
              
              190,009
              
              
              343,7022,995,115
              
              
              2,529,065Loss
                  from operations
              
              
              (2,405,193
              )
              
              (1,743,078
              )Interest
                  expense, unrelated parties
              
              
              316,822
              
              
              262,622Interest
                  expense, related parties
              
              
              
              
              
              14,523(Gain)
                  loss on disposition of assets
              
              
              1,900
              
              
              (567
              )Total
                  interest expense, net
              
              
              318,722
              
              
              276,578Net
                  loss
              
              $
              (2,723,915
              )
              $
              (2,019,656
              )Basic
                  loss per share
              
              $
              (0.16
              )
              $
              (0.12
              )Weighted
                  average shares outstanding
              
              
              17,199,558
              
              
              17,105,700
  See
          accompanying notes to financial statements.
 -2-
 **VENDINGDATA
        CORPORATION**
 **Statements
        of Cash Flows**
  **(UNAUDITED)**
  **Three
                  Months Ended March 31,****2005**
                **restated**
              
              **2004**
                **restated**Net
                  cash used in operating activities
              
              $
              (2,585,971
              )
              $
              (3,415,833
              )Cash
                  flows from investing activities:Acquisition
                  of plant and equipment
              
              
              1,350
              
              
              (76,790
              )Disposition
                  of equipment produced for rental
              
              
              —
              
              
              183Proceeds
                  from sale of equipment
              
              
              4,700
              
              
              665Net
                  cash used in investing activities
              
              
              6,050
              
              
              (75,942
              )Cash
                  flows from financing activities:Reimbursement
                  of offering costs
              
              
              —
              
              
              36,731Repayment
                  of leases payable
              
              
              (577,908
              )
              
              (603,610
              )Repayment
                  of short-term debt
              
              
              —
              
              
              (34,393
              )Proceeds
                  from convertible debt
              
              
              8,750,000
              
              
              —Repayment
                  of convertible debt
              
              
              —
              
              
              (1,603,077
              )Net
                  cash provided by (used in) financing activities
              
              
              8,172,092
              
              
              (2,204,349
              )Increase
                  (decrease) in cash and cash equivalents
              
              
              5,592,171
              
              
              (5,696,124
              )Cash
                  and cash equivalents at beginning of period
              
              
              924,804
              
              
              11,526,664Cash
                  and cash equivalents at end of period
              
              $
              6,516,975
              
              $
              5,830,540
  See
          accompanying notes to financial statements.
  -3-
 **VENDINGDATA
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS (UNAUDITED)**
  **Note 1—Basis
        of Presentation**
  The
        accompanying unaudited financial statements of VendingData Corporation (the
        "Company") have been prepared in accordance with generally accepted accounting
        principles for interim financial information and with the instructions
        incorporated in Regulation S-B of the Securities and Exchange Commission.
        Accordingly, they do not include all of the information and footnotes required
        by generally accepted accounting principles for complete financial statements.
        In the opinion of management, all adjustments considered necessary for a
        fair
        presentation have been included.
  The
        results of operations for the current period presented are not necessarily
        indicative of the results to be expected for the full year. The accompanying
        financial statements should be read in conjunction with the Company's audited
        financial statements for the year ended December 31, 2004, as included
        in
        the Company's Annual Report on Form 10-KSB as filed with the Securities
        and
        Exchange Commission from which the accompanying balance sheet information
        as of
        that date was derived. Certain reclassifications have been made to amounts
        presented in prior periods for comparability to the current period presentation.
  **Restatement**
  As
        reported on our Form 8-K dated November 1, 2005 filed with the SEC, we
        concluded, after consultation with our independent auditors, that errors
        in
        revenue recognition practices and in allocation of labor and overhead costs
        to
        inventory costs require us to restate previously reported financial results
        for
        fiscal 2004 and the three months ended March 31, 2005 and to restate inventory
        as of March 31, 2005 as a result of certain adjustments to inventory that
        took
        place during the 2004 fiscal year. We have reversed $271,500 of revenue
        recognized during the three months ended March 31, 2005, with respect to
        recognizing revenue on contracts that were still in their trial period requiring
        the revenue recognition to be moved from one quarter to the next and restated
        cost of sales during the three months ended March 31, 2005, by $41,670 and
        made
        other resulting adjustments to its financial statements. The effect of the
        restatements was to increase previously reported net loss by $229,830 ($0.01
        per
        share) for the three month period ended March 31, 2005. 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
        March 31, 2005 also reflects certain restatements that were effected for
        periods
        as of December 31, 2004 and for the three months ended March 31, 2005 and
        2004.
        Those restatements are described in amended periodic reports for such periods
        filed by 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**
                **March 31,****2005**
                **restated**
              
              **2004**
                **restated**United
                  States
              
              $
              515,672
              
              $
              537,653Asia
              
              
              —
              
              
              38,334Europe
              
              
              49,500
              
              
              210,000South
                  America
              
              
              24,750
              
              
              —
 
 -4-
 The
        Company's revenues, depreciation and operating income distributed by product
        are
        as follows:
  **Three
                        Months Ended****March
                        31, 2005**
                      **restated**
                    
                    **March
                        31, 2004**
                      **restated**RevenuesSecure
                        Drop®
                    
                    $
                    11,248
                    
                    $
                    47,063Shuffler
                    
                    
                    326,049
                    
                    
                    457,275Deck
                        CheckerTM
                    
                    
                    223,278
                    
                    
                    192,876Other
                    
                    
                    29,347
                    
                    
                    88,773$
                    589,922
                    
                    $
                    785,987Depreciation
                        and amortizationSecure
                        Drop®
                    
                    $
                    —
                    
                    $
                    —Shuffler
                    
                    
                    49,969
                    
                    
                    55,200Deck
                        CheckerTM
                    
                    
                    9,229
                    
                    
                    6,660Unallocated
                    
                    
                    107,098
                    
                    
                    162,594$
                    166,296
                    
                    $
                    224,454Operating
                        income (loss)Secure
                        Drop® gross margin
                    
                    $
                    9,729
                    
                    $
                    (56,906
                    )Shuffler
                        gross margin
                    
                    
                    226,342
                    
                    
                    362,515Deck
                        CheckerTMgross margin
                    
                    
                    188,669
                    
                    
                    148,418Other
                        cost of goods sold
                    
                    
                    (262,838
                    )
                    
                    (382,919
                    )Selling,
                        general & administrative
                    
                    
                    (2,377,086
                    )
                    
                    (1,470,484
                    )Research
                        and development
                    
                    
                    (190,009
                    )
                    
                    (343,702
                    )$
                    (2,405,193
                    )
                    $
                    (1,743,078
                    )
 
  **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
        three months ended March 31, 2005, the Company raised additional capital
        through
        private placements of 10% senior secured convertible notes in February 2005
        and
        March 2005.
  On
        February 15, 2005, the Company completed a private placement of 10% senior
        secured convertible notes (the “February Senior Notes”). Through this private
        placement the Company issued February Senior Notes in the aggregate principal
        amount of $10,000,000 in exchange for the surrender of senior notes in the
        aggregate principal amount of $3,250,000 issued in August 2004 and gross
        cash
        proceeds of $6,750,000. On March 14, 2005, the Company completed an additional
        private placement of 10% senior secured convertible notes (the “March Senior
        Notes”), where the Company issued March Senior Notes in the aggregate principal
        amount of $2,000,000. 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 February Senior Notes and the March Senior Notes require
        semi-annual payments of interest only, with the principal and any unpaid
        interest due at maturity. 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. No stock-based employee
        compensation expense for stock options was reflected in net income for years
        prior to 2003, as all stock options granted under those plans had an exercise
        price equal to or greater than the fair market value of the underlying common
        stock on the date of grant. The exercise price range is between $1.49 and
        $15
        with a weighted average exercise price of $3.09. There were 2,574,222 options
        outstanding as of March 31, 2005.
 
 **Note 6—Liquidity
        Issues**
  The
        Company’s ability to maintain adequate liquidity may be dependent upon the
        success of management’s plans to address and overcome prior operating losses.
        Management has developed and refined its 2005 operating plan to make efforts
        to
        increase its sales domestically and internationally, including by expanding
        its
        product line. Increased sales in the year ended December 31, 2004,
        show
        evidence of improved acceptance of the Company’s product line. Management has
        adopted a program to reduce operating costs through the transfer of
        manufacturing operations to China and by restructuring service functions
        to
        reduce labor and rental expense. Management has focused on financial condition
        and liquidity improvements also through its capital-raising efforts in the
        three
        months ended March 31, 2005, including debt conversion, resulting in an improved
        cash position at March 31, 2005. As a result of anticipated sales improvements
        and operating cost initiatives, management believes that the Company is likely
        to begin to generate positive operating cash flow in late 2005. In addition,
        the
        Company has received a one-year commitment ending March 2006 for a $3.0 million
        lease line of credit.
  **Note 7—Contingencies**
  The
        Company is a party to certain claims, legal actions, and complaints, including
        a
        patent infringement action between the Company and one of its main competitors.
        The Company cannot predict the likely outcome of any such litigation or whether
        any such substantial litigation would have a material adverse effect on its
        business as presently conducted or as anticipated.
  In
        early
        February 2004, the State of Nevada initiated a sales/use tax audit of the
        Company’s, equipment lessors. As of this filing the State of Nevada has not made
        a determination if there has been a shortfall in the payment of the sales/use
        tax. The Company has sold and leased back shufflers and Deck 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
        Operations.** ****
  **Statement
        on Forward-Looking Information**
  Certain
        information included herein contains statements that may be considered
        forward-looking statements within the meaning of Section 27A of the Securities
        Act and Section 21E of the Exchange Act, such as statements relating to plans
        for product development, product placement, capital spending and financing
        sources. Such forward-looking information involves important risks and
        uncertainties that could significantly affect anticipated results in the
        future
        and, accordingly, such results may differ from those expressed in any
        forward-looking statements made herein. Such risks, uncertainties and other
        important factors include, among others: our liquidity requirements, our
        ability
        to locate necessary sources of capital to sustain our operations, adverse
        rulings or other developments in pending or future litigation, the continued
        growth of the gaming industry, the success of our product development
        activities, the acceptance of our products in the marketplace, vigorous
        competition in the gaming industry, our dependence on existing management,
        changes in gaming laws and regulations (including actions affecting licensing),
        regulatory and jurisdictional issues involving us or our products specifically,
        our leverage and debt service (including sensitivity to fluctuations in interest
        rates), domestic or global economic conditions and the risks and factors
        described from time to time in our reports filed with the Securities and
        Exchange Commission.
  **Overview**
  Our
        strategy is to develop cost-effective niche products for the global gaming
        industry. We focus on products that increase the security, productivity and
        profitability of casino operations. Our strategy involves marketing certain
        of
        our products for sale or lease, depending on the product, the geographic
        location of the customer and other factors. We rely on our internal sales
        staff
        and distributor relationships for the sale and rental of our products. Although
        we anticipate significant sales development and revenue growth, there is
        no
        assurance that we will generate sufficient revenue, cash flow or profit to
        sustain our operations.
  **Critical
        Accounting Policies and Estimates**
  The
        following is a summary of what our management believes are the critical
        accounting policies related to our operations. The application of these
        policies, in some cases, requires management to make subjective judgments
        and
        estimates regarding the effect of matters that are inherently uncertain.
        See
        Note 1, "Description of Business and Significant Accounting Policies," to
        financial statements included in this annual report for a more detailed
        discussion of our accounting policies. Except as described below, we do not
        employ any critical accounting policies selected from among available
        alternatives or that require the exercise of significant management judgment
        to
        apply, and we believe none of our estimates are so highly uncertain or
        susceptible to change as to present a significant risk of a material impact
        on
        our financial condition or operating performance.
  ***Allowance
        for Doubtful Accounts.***
  In
        connection with the preparation of our financial statements, management reviews
        and evaluates the collectibility of our trade receivables and adjusts our
        allowance for estimated uncollectible accounts as deemed necessary in the
        circumstances. These estimates have the potential for critically affecting
        the
        determination of results of operations for any given period. Factors considered
        by management in making such estimates and adjustments include any
        concentrations among customers, changes in our relationships therewith, payment
        history and the apparent financial condition thereof.
  -7-
 ***Revenue
        Recognition.***
  We
        recognize revenue from the sale of our 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 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.
  ***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
        that compensation cost related to share based employee compensation transactions
        be recognized in the financial statements. Share based employee compensation
        transactions within the scope of SFAS 123R include stock options, restricted
        stock plans, performance based awards, stock appreciation rights and employee
        share purchase plans. The provisions of SFAS 123R are effective 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 adopt it earlier.
  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.
  -8-
 Financial
        Condition(Certain
        2005 and 2004 amounts have been restated.)
  During
        the three months ended March 31, 2005, total assets increased by $6,512,296
        from
        $14,362,617 at December 31, 2004 to $20,874,913 at March 31,
        2005. The
        increase in total assets was due primarily to the $5,592,173 increase in
        cash
        (including restricted cash) as a result of the proceeds received through
        our
        private placement of senior secured convertible notes in February 2005 and
        March
        2005. During the three months ended March 31, 2005, we experienced a $326,248
        decrease in accounts receivable (trade) from $2,860,931 at December 31,
        2004 to $2,534,683 at March 31, 2005, a $146,689 increase in other receivables
        from $35,394 at December 31, 2004 to $182,083 at March 31, 2005 and a $405,910
        increase in inventories from $6,124,171 at December 31, 2004 to $6,530,081
        at March 31, 2005.
  Total
        liabilities have increased from $8,622,694 at December 31, 2004 to
        $17,360,494 at March 31, 2005. The $8,737,800 increase in total liabilities
        resulted primarily from the issuance of senior secured convertible notes
        in
        February 2005 and March 2005 in the aggregate principal amount of $12,000,000,
        including the exchange of previously outstanding senior notes in the aggregate
        principal amount of $3,250,000. In addition, during the three months ended
        March
        31, 2005, our accounts payable increased by $338,036 from $1,240,676 at
        December 31, 2004 to $1,578,712 at March 31, 2005 as a result of the
        receipt of additional parts inventory related to our RandomPlusTM
        shuffler.
  **Results
        of Operations** **** ****
  ***Comparison
        of Three Months Ended March 31, 2005 and 2004*** **(Certain
        2005 and 2004 amounts have been restated.)**
  **Revenue**
  For
        the
        three months ended March 31, 2005, we generated total revenues of $589,922,
        compared to $785,987 for the three months ended March 31, 2004, a decrease
        of
        $196,065, or 25%. Our revenues for the three months ended March 31, 2005
        consisted of SecureDrop® sales of $11,248, shuffler rentals of $56,105, shuffler
        sales of $269,944, Deck Checker TM rentals
        of $65,235, Deck Checker TM sales of
        $158,043 and miscellaneous other revenues of $29,347. The decrease in revenue
        was due to a decrease in SecureDrop® sales of $35,815, a decrease in shuffler
        rentals of $98,078, a decrease in shuffler sales of $33,148, and a decrease
        in
        miscellaneous other sales of $59,426, offset by an increase in Deck CheckerTM
        sales of $22,047 and an increase in Deck CheckerTM rentals of $8,355.
  **Revenues
        - SecureDrop® Sales.** For
        the
        three months ended March 31, 2005, we generated revenue related to
        the sale
        of our SecureDrop® products of $11,248, compared to $47,063 for the three months
        ended March 31, 2004, a decrease of $35,815, or 76%. Since there were
        no
        system sales generated in the three months ended March 31, 2005, our SecureDrop®
        sales consisted of supply items for systems already in place.
  **Revenues
        - Shuffler Sales.** For
        the
        three months ended March 31, 2005, we generated revenue related to
        the sale
        of our shufflers of $269,944, compared to $303,092 for the three months ended
        March 31, 2004, a decrease of $33,148, or 11%. The decrease was due,
        in
        part, to decreased sales efforts related to our shufflers.
  **Revenue
        - Shuffler Rentals.** For the
        three months ended March 31, 2005, we generated revenue related to
        the
        rental of our shufflers of $56,105, compared to $154,183 for the three months
        ended March 31, 2004, a decrease of $98,078, or 64%. The decrease
        in
        shuffler rental revenue reflects the reduced number of shufflers placed on
        a
        rental basis as a result of the conversion of rental units to purchased units
        in
        2003 and the failure to place additional shuffler units on a rental basis.
        This
        failure was due, in part, to the delays related to the introduction of new
        shuffler products, such as the RandomPlus Ô Shuffler.
  -9-
 **Revenue
        - Deck Checker****TM****Sales.**
        For the three months ended March 31, 2005, we generated revenue related
        to
        the sale of our Deck CheckersTM of $158,043, compared to $135,996 for
        the three months ended March 31, 2004, an increase of $22,047,
        or 16%.
        The slight increase in Deck CheckerTM sales resulted from placement
        of additional units in the US.
  **Revenue
        - Deck Checker** **TM** **Rentals.** For the
        three months ended March 31, 2005, we generated revenue related to
        the
        rental of our Deck Checkers TM of
        $65,235, compared to $56,880 for the three months ended March 31,
        2004, an
        increase of $8,355, or 15%. The increase in Deck Checker TM rental
        revenue resulted primarily from the placement of additional units.
  **Revenue
        - Other Income.** For
        the
        three months ended March 31, 2005, we generated other revenues of
        $29,347,
        compared to income of $88,773 for the three months ended March 31,
        2004, a
        decrease of $59,426, or 67%. The decrease in other revenues is due primarily
        to
        the sale of products that are not produced by us and sold only on a limited
        basis.
  **Cost
        of Sales**
  For
        the
        three months ended March 31, 2005, our cost of sales was $428,020,
        compared
        to $714,879 for the three months ended March 31, 2004, a decrease
        of
        $286,859, or 40%. Our cost of sales for the three months ended March 31,
        2005 included cost of SecureDrop® sales of $1,519, cost of shuffler sales of
        $43,755, shuffler rental depreciation of $49,969, service costs of $238,881,
        other shuffler cost of $5,983, Deck Checker TM costs of
        $25,380, Deck Checker TM rental
        depreciation of $9,229, other manufacturing costs of $57,380, warranty costs
        of
        ($4,063) and other expenses of ($13). The manufacturing of products in China
        will continue the trend of reducing cost of sales on a per unit basis. The
        gross
        margin on revenue for the three months ended March 31, 2005 was $161,902,
        or 27%, compared to the gross margin on revenue for the year ended
        March 31, 2004 of $71,108, or 9%. The increase in gross margin of
        $90,794
        for the three months ended March 31, 2005 from the three months ended
        March 31, 2005 reflects the improved manufacturing process.
  **Cost
        of Sales - SecureDrop** ® **Sales.** Our cost
        of SecureDrop® **** sales
        revenue was $1,519 for the three months ended March 31, 2005 compared
        to
        $103,969 for the three months ended March 31, 2004, representing a
        decrease
        of $102,450, or 99%. The decrease in our costs of SecureDrop® sales revenue
        reflects the reduced sales from the prior period. The gross margin percentage
        on
        revenue from SecureDrop® **** sales
        revenue was 87% in the three months ended March 31, 2005 compared
        to (121%)
        for the three months ended March 31, 2004. The increase in gross margin
        percentage on SecureDrop® is attributable to the fixed costs associated with
        installation combined with the sale of supply parts during the three months
        ended March 31, 2005.
  **Cost
        of Sales - Shuffler Sales.** Our cost
        of shuffler **** sales
        revenue was $43,755 for the three months ended March 31, 2005 compared
        to
        $39,560 for the three months ended March 31, 2004, representing an
        increase
        of $4,195, or 11%. The increase in the cost of shuffler **** sales
        revenue was due primarily to the additional placement of shufflers during
        the
        three months ended March 31, 2005 versus the three months ended March 31,
        2004.
        The gross margin percentage on revenue from shuffler **** sales
        revenue was 84% in the three months ended March 31, 2005 compared
        to 87% in
        the three months ended March 31, 2004.
  **Cost
        of Sales - Deck Checker** **TM** **Sales.** Our
        cost
        of Deck Checker TM sales
        revenue was $25,380 for the quarter ended March 31, 2005, compared
        to
        $37,798 for the quarter ended March 31, 2004, a decrease of $12,418. The
        gross
        margin percentage on revenue from Deck Checker TM sales
        revenue was 84% for the quarter ended March 31, 2005 compared to 72% for
        the
        quarter ended March 31, 2004. The increase in gross margin percentage resulted
        from the sale of lower cost Deck CheckersTM produced in our China facility.
  -10-
 **General
        and Administrative Expense**
  For
        the
        three months ended March 31, 2005, our general and administrative
        expenses
        were $2,377,086, compared to $1,470,484 for the three months ended
        March 31, 2004, an increase of $906,602, or 62%. The increase in general
        and administrative expenses related primarily to a $550,400 increase in legal
        and regulatory costs, a $121,200 increase in consulting and accounting expense,
        a $2,800 increase in travel and entertainment expenses, a $98,400 increase
        in
        rent expense due mainly to our expansion in China, a $21,300 increase in
        insurance, a $122,300 increase in finance fees, a $11,400 increase in repairs
        and maintenance, and a $300,400 increase in other expenses, offset by a $54,300
        decrease in depreciation, a $238,600 decrease in payroll cost, a $15,200
        decrease in trade show expenses, and a $12,200 decrease in supplies.
  Our
        general and administrative expenses for the three months ended March 31,
        2005 consisted of the following: salaries and related costs of $548,000;
        consulting and accounting services of $222,500; advertising and marketing
        costs
        of $4,700; travel and entertainment costs of $183,000; gaming industry show
        costs of $25,900; rent of $149,300; repairs and maintenance expense of $25,300;
        supplies of $13,100; legal and regulatory expenses of $748,300; insurance
        expenses of $48,900; depreciation and amortization of $107,100; finance fees
        of
        $122,300 and other expenses of $178,600.
  **Research
        and Development Expense**
  For
        the
        three months ended March 31, 2005, research and development expenses
        were
        $190,000, compared to $343,700 for the three months ended March 31,
        2004, a
        decrease of $153,693, or 44.7%. 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 March 31, 2005, we incurred interest expenses of
        $316,800, compared to $277,100 for the three months ended March 31,
        2004,
        an increase of $39,700, or 14%. 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.
  **Net
        Loss**
  For
        the
        three months ended March 31, 2005, we had a net loss of $2,723,915,
        compared to a net loss of $2,019,656 for the three months ended March 31,
        2004, an increase of $704,259, or 35%. Basic loss per share was $0.16 for
        the
        three months ended March 31, 2005, compared to $0.12 for the three
        months
        ended March 31, 2004. The increase in net loss and the increase in
        the
        basic net loss per share were primarily due to a $196,100 decrease in revenues,
        a $906,600 increase in general and administrative expenses and a $39,700
        increase in interest expenses, offset by an $153,700 decrease in research
        and
        development expenses.
  -11-
 **Liquidity
        and Capital Resources** ****
  As
        a
        result of our operating loss and our use of cash, our net working capital
        has
        increased from $4,511,094 at December 31, 2004 to $10,083,820 at March 31,
        2005,
        as shown in the table below:
  **March
                  31,**
                **2005**
              
              **December
                  31,**
                **2004****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              4,266,975
              
              $
              924,802Restricted
                  cash
              
              
              2,250,000
              
              
              —Current
                  portion of accounts receivable, trade, net of allowance for uncollectibles
                  of $223,590 and $125,530
              
              
              1,228,607
              
              
              1,596,017Due
                  from affiliate
              
              
              9,150
              
              
              25,000Other
                  receivables
              
              
              182,083
              
              
              35,394Inventories
              
              
              6,530,841
              
              
              6,124,171Prepaid
                  expenses
              
              
              142,333
              
              
              86,575Total
                  current assets
              
              
              14,609,989
              
              
              8,791,959Current
                  portion of leases payable
              
              $
              1,666,125
              
              
              1,941,445Accounts
                  payable
              
              
              1,578,712
              
              
              1,240,676Accrued
                  expenses
              
              
              606,632
              
              
              427,199Deferred
                  revenues, current portion
              
              
              244,210
              
              
              239,680Short-term
                  debt
              
              
              238,250
              
              
              238,250Current
                  portion of convertible debt
              
              
              —
              
              
              —Customer
                  deposits
              
              
              192,240
              
              
              193,615Total
                  current liabilities
              
              
              4,526,169
              
              
              4,280,865Net
                  working capital
              
              $
              10,083,820
              
              $
              4,511,094
 
 Net
        Cash
        Provided in Operating Activities. For the three months ended March 31, 2005,
        the
        net cash provided in operating activities was $2,585,971, compared to $3,415,833
        for the three months ended March 31, 2004, a decrease of $829,862, or 24.2%.
        The
        net cash provided in operating activities resulted from a net loss of
        $2,723,915, a decrease of deferred interest of $60,093, non-cash compensation
        expense of $92,077, loss on disposition of equipment of $1,900, a decrease
        in
        accounts receivable of $326,247, an increase in other receivables of $12,039,
        an
        increase in inventory of $406,669, an increase in prepaid expenses of $55,758,
        an increase in deferred expenses of $316,375, an increase in vendor deposits
        of
        $233,443, an increase in accounts payable of $338,035, an increase in accrued
        expenses of $179,435, a decrease in deferred revenue of $10,480, a decrease
        in
        customer deposits of $1,375, and depreciation of $166,296.
  Net
        Cash
        Used In Investing Activities. For the three months ended March 31, 2005,
        we used
        net cash in investing activities of $6,050 compared to $75,942 for the three
        months ended March 31, 2004. The net cash used in investing activities during
        the three months ended March 31, 2005 consisted of $1,350 from acquisition
        of
        plant and equipment and $4,700 from sale of plant nd equipment. .
  Net
        Cash
        Provided By Financing Activities. For the three months ended March 31, 2005,
        our
        financing activities provided net cash of $8,172,092, whereas, for the three
        months ended March 31, 2004, our financing activities used net cash of
        $2,204,349. The net cash provided by financing activities during the three
        months ended March 31, 2005 consisted of $8,750,000 provided by the issuance
        of
        10% senior secured convertible notes, offset by the repayment of equipment
        leases of $577,908.
  -12-
 **Sources
        of Capital**
  Should
        our cash on hand plus cash from operations be insufficient during future
        periods, we anticipate relying upon private and institutional sources of
        debt
        and equity, and we may seek public, private and institutional sources of
        capital
        for working capital purposes. During the years ended December 31, 2004 and
        2003,
        our sources of capital included a public stock offering, equipment financing
        from a third party, short-term notes from stockholders, convertible debentures
        and other private sources of capital.
  With
        respect to our equipment financing where we have sold and leased back most
        of
        our furniture, equipment, tooling and shufflers held for rent, we have repaid
        $603,610 for the three months ended March 31, 2004 and repaid $577,908 for
        the
        three months ended March 31, 2005. As of March 31, 2005, we had outstanding
        equipment financing of $2,316,874. 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 three months ended March 31, 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. 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 maturity of the February
                  Senior Notes. 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 Noted. 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
                  maturity
                  of the March Senior Notes. 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 were 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 by of a North American manager of operations or Chief
                  Operating
                  Officer, where such person shall be hired no later than June 30,
                  2005;
                  and
  -13-
  ·
              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.
  As
        of May
        13, 2005, the first and the second escrow condition above have been met.
        As to
        the third escrow condition, we need only place 100 units of our RandomPlusTM
        shuffler in North America to receive the remaining funds from the private
        placements. Once we satisfy this remaining condition, we will have access
        to the
        remaining $2,250,000.
  **Outlook**
  Our
        ability to maintain adequate liquidity is dependent upon the success of
        management's plans to address and overcome prior operating losses. Management
        has developed and refined its 2005 operating plan to increase its sales by
        expanding its product line and improving its sales efforts domestically and
        internationally. We have entered into an exclusive five-year agreement with
        TCS
        to market and distribute our shuffler products outside of the United States.
        Management has adopted efforts to reduce operating costs through the transfer
        of
        manufacturing operations to China and restructuring service functions to
        reduce
        labor and rental expense. We appointed to Mark R. Newburg to our board of
        directors. With a career that spans over 30 years, Mr. Newburg is a skilled
        global executive with experience in the gaming industry, as well as in executive
        positions in Fortune 100 companies. Management has focused on financial
        condition and liquidity improvements through its capital raising efforts
        in 2004
        and 2005 that have resulted in an improved cash position.As a result of
        anticipated sales improvements and operating cost initiatives, management
        believes that we will begin to be cash flow neutral to cash flow positive
        on an
        intermittent monthly basis by late fiscal year 2005. In Mr. Newburg's role
        as
        executive director and expected role as an officer in due course, we anticipate
        substantial changes in strategies and operating plans.
  Based
        on
        presently known commitments and plans, we believe that we will be able to
        fund
        our operations and required expenditures through the fourth quarter of 2005
        through cash on hand, cash flow from operations, and cash from private
        placements of debt or equity or from lease financing sources. In the event
        that
        such sources are insufficient or unavailable, we will need to seek cash from
        public or private placements of debt or equity, institutional or other lending
        sources, sell certain assets or change operating plans to accommodate such
        liquidity issues. 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.
  -14-
 **Risk
        Factors**
  *This
        Report contains certain forward-looking statements within the meaning of
        Section
        27A of the Securities Act and Section 21E of the Exchange Act. Such statements
        refer to events that could occur in the future and may be identified by the
        use
        of words such as “intend,”“plan,”“believe,” correlative words, and other
        expressions indicating that future events are contemplated. Such statements
        are
        subject to inherent risks and uncertainties, and actual results could differ
        materially from those projected in the forward-looking statements as a result
        of
        certain of the risk factors set forth below and elsewhere in this annual
        report.
        In addition to the other information contained herein, investors should
        carefully consider the following risk factors.*
  **Risks
        Related to VendingData**
  ***Given
        our recurring losses and accumulated deficits, we must manage our liquidity.***
  Our
        financial statements report recurring losses and accumulated deficits. Based
        on
        presently known commitments and plans, we believe that we will be able to
        fund
        our operations and required expenditures through the fourth quarter of 2005
        from
        cash on hand, cash flow from operations and cash from debt or equity financings
        or from lease financing sources. If we are unable to generate a sufficient
        amount of sales of our products to fund our operations, we will need to seek
        cash from private or public placements of debt or equity, institutional or
        other
        lending sources, to sell certain assets or to change operating plans to
        accommodate our liquidity issues. As result of certain restrictions on our
        ability to incur additional indebtedness under the Senior Notes, we may not
        be
        able to obtain other liquidity sources as may be necessary to fund our
        operations in the future.
  ***We
        have a history of significant operating losses and anticipate continued
        operating losses, and we may be unable to achieve
        profitability.***
  We
        have a
        history of significant operating losses and anticipate continued operating
        losses for the foreseeable future. For the three months ended March 31, 2005
        and
        the years ended December 31, 2004 and 2003, we have incurred net losses
        of
        $2,723,915, $9,538,200 and $7,812,089, respectively, and our operations have
        used $2,585,970, $10,660,133 and
        $ 11,731,150
        of cash, respectively. As of March 31, 2005, December 31, 2004 and
        December
        31, 2003, we had accumulated deficits of $56,844,463, $54,120,549 and
        $44,58 2,347 ,
        respectively. If we are unable to generate a positive cash flow in 2005,
        we will
        be required to locate additional sources of capital. If our revenues do not
        increase very substantially, or if our spending levels exceed our expectations,
        we will not become profitable. Revenues may not grow in the future, and we
        may
        not generate sufficient revenues for profitability. If we become profitable,
        we
        may not be able to sustain profitable operations.
  ***We
        may not be able to satisfy the conditions for the release of all of the proceeds
        from the Senior Notes that are presently held in
        escrow.***
  Pursuant
        to the terms of the Senior Notes, our access to $6,750,000 in proceeds is
        subject to the satisfaction of certain conditions as described above under
        "Liquidity and Capital Resources". If we
        fail to achieve one or more of the conditions by June 30, 2005, we are required
        to return the relevant funds to investors within 30 days. As of May 13, 2005,
        we
        have met two of the three conditions. The failure to meet the remaining
        condition will have a negative and
        potentially  materially
        adverse impact
        on our liquidity.
  -15-
 ***Our
        stockholders may not approve the increase in our authorized shares, which
        is
        required to ensure a sufficient number of shares are available upon the
        conversion of the March Senior Notes, if at all.***
  As
        of
        April 30, 2005, we have 25,000,000 shares of common stock authorized and
        16,751,505 shares of common stock outstanding. In addition, as of April 30,
        2005, we have issued stock options to purchase 3,332,722 shares of common
        stock,
        warrants to purchase 2,585,553 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 April 30, 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. Accordingly, our board of directors has
        already authorized an amendment to our articles of incorporation so as to
        increase our total authorized number of shares. However, since our stockholders
        must also approve the amendment to our articles of incorporation and although
        we
        expect our stockholders to approve said 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.
  ***The
        demand for our products may be insufficient to generate enough revenues to
        sustain our operations.***
  If
        we
        fail to generate sufficient demand for our products, we may be unable to
        sustain
        operations or generate a return to investors. Until January 2000, we were
        in the
        development stage and derived minimal revenues from our products. Currently
        we
        are an operating company that continues to develop new products. Since January
        2000, our activities have been limited to analyzing and consulting with persons
        in the gaming industry, developing and manufacturing new products, establishing
        distribution networks for our products, marketing our products to the gaming
        industry, and commencing product sales. During such time, we have derived
        only
        limited revenues, which have been insufficient to sustain our operations.
        We may
        not generate sufficient revenue to sustain our operations. No independent
        organization has conducted market research providing management with independent
        assurance from which to estimate potential demand for our products. The overall
        market may not be receptive to our products, and we may not successfully
        compete
        in the target market for our products.
  ***We
        place our leased shufflers in casinos under short-term lease arrangements,
        which
        make these products susceptible to replacement due to pressure from competitors,
        changes in economic conditions, obsolescence and declining
        popularity.***
  All
        of
        our leased shufflers are placed with customers under short-term lease
        arrangements, which, unlike long-term leases or permanent sales of our products,
        can easily be terminated by a dissatisfied customer. The manner in which
        such
        short-term leases are structured puts our shufflers at greater risk of
        replacement due to pressure from competitors, changes in economic conditions,
        obsolescence and declining popularity. Casino operators may terminate the
        use of
        our products, and we may not be able to maintain and expand the number of
        installed shufflers through enhancement of existing shufflers, introduction
        of
        new shufflers, customer service or otherwise.
  ***Since
        a significant number of our leasing agreements and purchase contracts with
        extended payment terms permit the customer to return our products at any
        time,
        we may be required to record a charge to bad debt expense which would, in
        turn,
        adversely impact our results from operations.***
  Due
        to
        the competitive environment in which we operate, we have agreed to provisions
        in
        a significant number of our leasing agreements and purchase contracts with
        extended payment terms that permit the customer to return our products at
        any
        time with no further monetary obligation to us. In the event that we have
        recorded all of the revenue that would have been received from the relevant
        leasing agreement or purchase contract, we will then be require to record
        a
        charge against bad debt expense. As a result, our operating results for the
        relevant period in which the charge is taken will be adversely
        impacted.
  -16-
 ***Our
        ability to compete may be damaged, and our revenues may be reduced if we
        are
        unable to protect our intellectual property rights
        adequately.***
  Our
        success depends upon maintaining the confidentiality and proprietary nature
        of
        our intellectual property rights. Our ability to compete may be damaged,
        and our
        revenues may be reduced if we are unable to protect our intellectual property
        rights adequately. To protect these rights, we rely principally on a combination
        of:
  ·
              contractual
                  arrangements providing for non-disclosure and prohibitions on
                  use;
  ·
              patents
                  and pending patent applications;
  ·
              trade
                  secret, copyright and trademark laws;
                  and
  ·
              certain
                  built-in technical product
                  features.
  Patent,
        trade secret, copyright and trademark laws provide limited protection. The
        protections provided by laws governing intellectual property rights do not
        prevent our competitors from developing, independently, products similar
        or
        superior to our products and technologies. In addition, effective protection
        of
        copyrights, trade secrets, trademarks, and other proprietary rights may be
        unavailable or limited in certain foreign countries. We may be unaware of
        certain non-publicly available patent applications, which, if issued as patents,
        could relate to our services and products as currently designed or as we
        may
        modify them in the future. Legal or regulatory proceedings to enforce our
        patents, trademarks or copyrights could be costly, time consuming, and could
        divert the attention of management and technical personnel.
  ***Adverse
        results in current litigation could result in substantial monetary damages
        and
        impacts on the manufacture and sale of certain of our shuffler products.***
  Shuffle
        Master, our principal competitor in the shuffler market, has filed two lawsuits
        against us for patent infringement. The first suit alleges that our shufflers
        violate two of its patents concerning registering use of a playing card shuffler
        apparatus and the displaying of the use on a display. The second lawsuit
        alleges
        that our PokerOneTM Shuffler violates two 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 have reasonable
        defenses to the same, we cannot determine whether we will prevail in these
        lawsuits, nor whether damages, if awarded, would significantly impact our
        ability to continue to manufacture and sell particular products within the
        United States and its territories. If we do not prevail, we will be unable
        to
        sell our shuffler products in the United States unless we change certain
        components used in the shufflers or obtain a license from Shuffle Master
        to use
        the playing card shuffler apparatus and the display. 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
  ***Our
        failure to compete successfully against innovative competitors could adversely
        impact our ability to sell our products and generate revenues.***
  Our
        market is characterized by changing technology, periodic product obsolescence
        and continuous protection of proprietary technology. Our success will depend
        upon our ability to sell our current products, and to develop successor systems.
        We will need to introduce new products and features in a timely manner to
        meet
        evolving customer requirements. We may not succeed in these efforts. Even
        if we
        succeed, products or technologies developed by others may render our products
        or
        technologies noncompetitive or obsolete, which would impair our ability to
        sell
        our products and reduce our revenue.
  ***Scrutiny
        and attempts by third parties to compromise our products’ security, if
        successful, could injure product demand and force us to take back impacted
        products.***
  In
        the
        event that our products become susceptible to attacks by third parties that
        result in a decrease or compromise of the security of our customers’ operations,
        we will most likely be required to take back our products from existing
        customers and will lose sales and rentals from prospective customers. Although
        we have tested our products for security and our products have been tested
        by
        certain gaming regulators as part of the approval process, our products may
        be
        susceptible to schemes by third parties to defraud the properties where our
        products are used. Vulnerabilities in the security of our products will almost
        certainly reduce demand for these products. Our shufflers may become vulnerable
        to card counters or expert players, and the use of our shufflers may result
        in
        financial losses for our customers. The occurrence of any of these events
        would
        likely have a material adverse effect on our sales revenues.
  -18-
 ***Any
        conditions that adversely affect the gaming industry could also have a material
        adverse effect on demand for our products.***
  The
        success of our business depends solely on the gaming industry where revenues
        are
        sensitive to general economic conditions and generally rise or fall rapidly
        in
        relation to the condition of the overall economy. Although we cannot accurately
        estimate the economic impact of the recent terrorist attacks or current
        international conflicts at this time, the gaming industry has been negatively
        affected by the reduction in air travel and tourism, and we expect that any
        significant decline in the economic health or growth of the gaming industry
        will
        reduce demand for our products.
  ***We
        are unable to predict the future impact that extraordinary events, such as
        terrorism, the uncertainty of war and worldwide health concerns, may have
        on our
        business and operations.***
  Extraordinary
        events, such as terrorist attacks, acts of war or worldwide health concerns,
        may
        cause damage or disruption to our operations, which, in turn, could
        significantly impact our revenues, costs and expenses, and financial condition.
        The terrorist attacks that took place in the United States on September 11,
        2001 were unprecedented events that have created many economic and political
        uncertainties, especially to the gaming industry, some of which have materially
        adversely affected our business, results of operations, and financial condition
        and may do so again in the future. In particular, the gaming industry has
        been
        affected by the downturn in the tourist industry as a result of the
        September 11, 2001 attacks. Because our business is directly tied
        to the
        gaming industry, the long-term effects from the September 11, 2001
        attacks
        are unknown. The potential for future terrorist attacks, the national and
        international responses to terrorist attacks, other acts of war or hostility
        and
        concerns about the spread of certain diseases, including severe acute
        respiratory syndrome, or SARS, have created many economic and political
        uncertainties, which could materially adversely affect our business, results
        of
        operations and financial condition in ways that we currently cannot
        predict.
  ***Supply
        interruption from our manufacturing facility in China could cause us to fail
        to
        supply customer orders on a timely basis.***
  We
        have
        centralized most phases of the manufacturing process for our products at
        our own
        facility in Xiaolan Town in Zhongshan City, China. We will be adversely impacted
        if there is an interruption in our ability to receive components or inventory
        from, or a material increase in labor costs in, China. Factors that may cause
        a
        supply interruption include disruption
        or changes in local
        China governmental, vendor or employee relationships, political unrest, closure of ports, worldwide health concerns, including
        SARS,
        and other events beyond our control. In the event that our manufacturing
        operations in Xiaolan Town are interrupted, our ability to fill orders, ship
        such orders and realize the revenues there from could be adversely affected.
  ***Our
        efforts to expand into international markets pose special risks that could
        adversely affect all of our business.***
  As
        a
        result of the opening of our manufacturing facility in China, we are currently
        operating in international markets. Engaging in business outside of the United
        States will subject us to the customary risks of doing business in foreign
        countries. These risks include fluctuations in foreign currency exchange
        rates
        and controls, nationalization and other economic, tax and regulatory policies
        of
        local governments and the possibility of trade embargoes, political instability
        or war or other hostility, as well as the laws and policies of the United
        Sates
        affecting foreign trade and investment. Any one or more of these factors
        could
        materially adversely affect our ability to conduct business outside the United
        States and therefore our business as whole.
  -19-
 ***Our
        reliance on distributors in international markets and our limited sales
        experience in foreign countries could cause us to lose sales and collections
        on
        such sales.***
  In
        general, substantially all sales of our products outside the United States
        are
        achieved through distributor relationships. We believe the distributors that
        we
        have engaged are experienced and reputable; however, if we are unable to
        manage
        these relationships, our ability to generate revenue and profits in the non-U.S.
        market may be adversely affected. To the extent that we engage in direct
        sales
        outside the United States, we have limited sales experience and history in
        foreign markets. 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.
  ***Due
        to our management’s controlling interest in our common stock, our management has
        the power to control all matters submitted to our stockholders, which renders
        non-management stockholders’ efforts to effect substantial changes in our
        company more difficult.***
  As
        of
        April 8, 2005, our executive officers and members of our board beneficially
        own
        approximately 7,844,689 shares of common stock, or approximately 46.34% 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 April 8, 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 also has the effect of delaying, preventing or expediting, as the
        case
        may be, a change in control of our company.
  ***The
        loss of our executive officers, significant employees or certain members
        of our
        management could adversely impact our operations.***
  Our
        success is substantially dependent upon the efforts and skills of Mark Newburg,
        a member of our board of directors and Douglas H. Caszatt, our Acting Chief
        Financial Officer, Secretary and Controller. We have entered into a consulting
        agreement with Mr. Newburg and employment agreements with other significant
        employees. However, if we were to lose the services rendered by any of our
        executive officers or significant employees, key management, product development
        and sales functions could be adversely affected. In addition, we compete
        with
        other potential employers for employees, and we may not succeed in hiring
        and
        retaining the executives and other employees that we need. An inability to
        hire
        and retain quality employees could have a material adverse effect on our
        business, financial condition and results of operations.
  **Risks
        Related to Our Industry**
  ***We
        face intense competition from companies with longer operating histories,
        greater
        resources and more established brand names that could use such advantages
        to
        lower our market share and reduce our revenues.***
  There
        is
        significant competition in the shuffler market, where we compete with
        established companies and other entities, most of which possess substantially
        greater resources than we do. Almost all of the companies with which we compete
        in the shuffler market are substantially larger, have more substantial
        histories, backgrounds, experience and records of successful operations,
        greater
        financial, technical, marketing and other resources, more employees and more
        extensive facilities than we now have, or will have in the foreseeable future.
        It is also likely that other competitors will emerge in the near future.
        Other
        companies may develop products competitive to our SecureDrop® System. We may not
        be able to compete successfully with other established gaming product
        manufacturers. If we are unable to compete successfully it will likely result
        in
        loss of market share and lower revenues, or increases in operating costs,
        such
        as marketing costs.
  -20-
 ***We
        face extensive regulation from gaming and other government
        authorities.***
  The
        gaming industry is a highly regulated industry and is subject to numerous
        statutes, rules and regulations administered by the gaming commissions or
        similar regulatory authorities of each jurisdiction. Generally, companies
        that
        seek to introduce gaming products or concepts into such jurisdictions may
        be
        required to submit applications relating to their activities or products
        (including detailed background information concerning controlling persons
        within
        their organization), which are then reviewed for approval. In this regard,
        we
        may incur significant expenses in seeking to obtain licenses for our gaming
        products and concepts, and our products may not be approved in all
        jurisdictions. The failure to obtain such approval in any jurisdiction in
        which
        we may seek to introduce our products or concepts could have a material adverse
        effect on our business. In addition, any change to the applicable statutes,
        rules and regulations that restricts or prevents our ability to operate could
        have an adverse effect on us.
  ***Any
        person who is the beneficial owner of our common stock or with whom we have
        a
        material relationship that fails or refuses to apply for a finding of
        suitability, or that is found unsuitable for licensing, would be required
        to
        dispose of all of our stock.***
  Certain
        gaming regulatory agencies to which we are subject may investigate any
        beneficial holder of our voting securities (regardless of the numbers of
        shares
        owned), and any individual who has a material relationship or involvement
        with
        us, in order to determine whether such individual is suitable or should be
        licensed as a business associate of ours. In addition, the gaming authorities
        of
        various jurisdictions may require our officers, directors and certain key
        employees to be licensed or found suitable by these gaming authorities, which
        would require these officers, directors and key employees to submit detailed
        background information. Any person who fails or refuses to apply for a finding
        of suitability or a license after being ordered to do so by gaming regulatory
        agencies may be found unsuitable and we could be subject to adverse regulatory
        action. In the event that the gaming authorities were to find an officer,
        director, key employee, stockholder, or any other individual that has a material
        relationship with us, unsuitable for licensing or unsuitable to continue
        having
        a relationship with us, we would have to sever all relationships with that
        individual, and that individual would be required to dispose of all of our
        stock. This could result in the loss of key persons critical to our success
        or
        in significant selling pressure on our stock if such persons are required
        to
        dispose of shares of our common stock in an amount that exceeds typical trading
        volumes in our shares.
  ***Our
        focus on products for the gaming industry subjects us to greater risk than
        we
        would have if we marketed our products to multiple industries.***
  We
        design
        and manufacture products and concepts solely for the gaming industry and
        depend
        almost exclusively on our ability to generate revenues from the rental or
        sale
        of our products to customers in the gaming industry. The economic health
        of the
        gaming industry, and, therefore, our revenues, are affected by a number of
        factors beyond our control, including:
  ·
              general
                  economic conditions, such as recession, inflation, business cycle
                  fluctuations and interest rates;
  ·
              levels
                  of disposable income of gaming property
                  patrons;
  ·
              acts
                  of terrorism and anti-terrorism
                  efforts;
  ·
              increased
                  transportation costs resulting in decreased travel by gaming
                  patrons;
  ·
              changes
                  or proposed changes in tax laws;
  -21-
 ·
              legal
                  and regulatory issues affecting the development, operation and
                  licensing
                  of our gaming customers; and
  ·
              competitive
                  conditions in the gaming industry.
  These
        factors may adversely impact the demand for our products and materially affect
        the revenues that we realize on the sale or placement of our
        products.
  **Risks
        Related to Our Common Stock**
  ***Our
        common stock is thinly traded, so our stockholders may have difficulty in
        trading large amounts of stock or may lose the total value of their
        investment.***
  There
        had
        been no trading market for our common stock until September 10, 2003, when
        our
        common stock became eligible for quotation on the OTC Bulletin Board. It
        was not
        until May 4, 2004, that our common stock began trading on AMEX. Due to the
        limited trading volume of our common stock, an active trading and/or a liquid
        market may be difficult to sustain. Moreover, in the event that we are unable
        to
        continue as a going concern and we are dissolved or otherwise terminated,
        you
        could lose your entire investment in our common stock. Investment in our
        common
        stock is at risk of complete loss if our operations are unsuccessful.
  ***Investors
        seeking guaranteed dividend-paying investments should not invest in our common
        stock.***
  Our
        operations may not become profitable. If we become profitable, we intend
        to use
        any earnings that may be generated to finance the growth of our business.
        Any
        payment of future dividends will be at the discretion of our board of directors
        and will depend on, among other things, our earnings, financial condition,
        capital requirements, level of indebtedness, statutory and contractual
        restrictions applying to the payment of dividends, and other considerations
        that
        our board of directors deems relevant. We also have substantial
        restrictions on the ability to pay dividends under our covenants in  our
        senior notes. Accordingly, stockholders may have to sell some or all of their common stock
        in
        order to generate cash flow from their investment. Stockholders may not realize
        a gain on their investment, and they may lose all or a significant amount
        of
        their investment when they sell their common stock.
  ***If
        we are unable to generate sufficient revenue to provide the cash required
        to
        fund our operations in the future, we may be required to issue additional
        equity
        or convertible debt securities to provide our operations with additional
        working
        capital, which, in turn, will have the effect of diluting the relative ownership
        of our existing stockholders.***
  We
        have
        supplemented the cash deficit arising from our operations with the proceeds
        from
        the Senior Notes, and will, if necessary, continue to supplement with cash
        from
        private or public placements of debt or equity, institutional or other lending
        sources. Although we have also utilized convertible debt securities and warrants
        to raise capital in the past, we are limited under the terms and conditions
        of
        the Senior Notes to incur additional debt. The issuance of additional equity
        or
        convertible debt securities will have the effect of reducing the percentage
        ownership of our current stockholders. In addition, these equity or convertible
        debt securities may have additional rights, preferences or privileges to
        those
        of our common stock, such as registration rights and preferences in liquidation.
        In the event we are required to raise additional funds to support our
        operations, additional funds may not be available on terms favorable to our
        company, or at all. If adequate funds are not available or are not available
        on
        acceptable terms, we may not be able to fund our operations or otherwise
        continue as a going concern.
  -22-
 ***Shares
        eligible for sale in the near future may cause the market price for our common
        stock to decline.***
  In
        addition to the number of shares registered on behalf of investors who purchased
        the Senior Notes and excluding the shares held by our executive officers
        and
        directors, as of April 30, 2005, we have approximately 9,082,917 shares of
        common stock that are either freely tradable pursuant to Rule 144(k) of the
        Securities Act of 1933, or the Securities Act, or have previously been
        registered by us through a registration statement filed with the SEC. As
        such,
        the future sale of a substantial number of shares of our common stock in
        market
        transactions, or the perception that these sales could occur, may depress
        the
        market price for our common stock. These sales could also impair our ability
        to
        raise additional capital through the sale of our equity securities in the
        future.
  ***Our
        board of directors may issue blank check preferred stock, which may affect
        the
        voting rights of our holders and could deter or delay an attempt to obtain
        control of us.***
  Our
        board
        of directors is authorized, without stockholder approval, to issue preferred
        stock in series and to fix and state the voting rights and powers, designation,
        preferences and relative, participating, optional or other special rights
        of the
        shares of each such series and the qualifications, limitations and restrictions
        thereof. Preferred stock may rank prior to our common stock with respect
        to
        dividends rights, liquidation preferences, or both, and may have full or
        limited
        voting rights. Accordingly, issuance of shares of preferred stock could
        adversely affect the voting power of holders of our common stock and could
        have
        the effect of deterring or delaying an attempt to obtain control of
        us.
  **Item
            3.** **Controls
            and Procedures** ****
 (a)  *Evaluation
        of Disclosure Controls.* In our
        quarterly report on Form 10-QSB for the period ended March 31, 2005 filed
        by us
        with the SEC on May 16, 2005 (“Original Quarterly Report”),  we
        evaluated the effectiveness of our disclosure controls and procedures as
        of the
        end of the three months ended March 31, 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 March 31, 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 March 31, 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 March 31, 2005 that have materially affected,
        or
        are reasonably likely to materially affect, our internal controls over financial
        reporting.
  -23-
 **PART
        II - OTHER INFORMATION**
  **Item
        1. Legal Proceedings** ****
  On
        March
        27, 2002, Shuffle Master, Inc., or Shuffle Master, filed a complaint (Case
        No.
        CV-S-02-0438-JCM-PAL) against VendingData in the United States District Court,
        District of Nevada. The amended complaint alleges, among other things, claims
        for patent infringement and requests treble damages, an injunction enjoining
        us
        from infringing on two of Shuffle Master's patents (United States Patent
        Nos.
        6,325,373 and 6,068,258), an accounting of our gains and profits that resulted
        from the alleged infringement, and for interest, costs and attorneys' fees.
        The
        Shuffle Master patents that are at issue in the litigation concern registering
        use of a playing card shuffler apparatus and the displaying of the use on
        a
        display. We have filed our answer and counterclaims, in which we deny Shuffle
        Master's allegation of patent infringement and request that Shuffle Master's
        complaint be dismissed. We also seek a declaration that we do not infringe
        Shuffle Master's patents and that Shuffle Master's patents and certain of
        its
        related claims are invalid. We further assert counterclaims against Shuffle
        Master for breach of contract and violation of the Uniform Trade Secrets
        Act. On
        May 20, 2002, the United States District Court, District of Nevada denied
        Shuffle Master's motion for preliminary injunction against us. Discovery
        in this
        litigation is now closed. On May 28, 2003, we filed a motion for summary
        judgment. The hearing on this motion was taken off calendar pending a ruling
        from the Court regarding claim construction to determine the scope and
        definition of the patent claims at issue. On March 31, 2004, the Magistrate
        Judge issued an order with regard to claim interpretation. On June 25, 2004,
        the
        District Court affirmed the Magistrate Judge's order. On August 24, 2004,
        we
        renewed our motion for summary judgment to invalidate Shuffle Master's patents.
        On October 14, 2004, the District Court issued an order denying the motion
        for
        summary judgment for failure to submit admissible evidence in support of
        the
        motion for summary judgment. We filed a motion for clarification and
        reconsideration of the Court's order on November 5, 2004. No decision has
        yet
        been reached on this motion. The trial is set for June 6, 2005.
  On
        October 5, 2004, Shuffle Master filed another patent infringement action
        against
        us in the United States District Court, District of Nevada (Case No.
        CV-S-04-1373-JCM-LRL). Shuffle Master alleges that the use, importation and
        offering for sale of the PokerOneTM shuffler infringes Shuffle Master's United
        States Patent No. 6,655,684. On October 25, 2004, we filed our answer and
        counterclaim that denies Shuffle Master's allegations of patent infringement
        and
        requests that the Court enter a declaratory judgment of non-infringement.
        On
        October 14, 2004 Shuffle Master filed a Motion for Preliminary Injunction
        seeking to enjoin us from selling the PokerOneTM shuffler in the United States
        during the pendency of its second lawsuit. The United States District Court,
        District of Nevada, granted the Motion for Preliminary Injunction filed by
        Shuffle Master, Inc. On March 3, 2005, the Court of Appeals stayed the
        preliminary injunction granted by the United States District Court pending
        the
        disposition of our appeal. In its order, the Court of Appeals stated that
        "VendingData has shown the requisite likelihood of success to obtain a stay
        of
        the injunction, pending appeal" and that "VendingData has shown that in the
        circumstances of this case the district court likely erred in entering a
        preliminary injunction without providing any analysis of the disputed claim
        language." A Markman hearing is scheduled for May 16, 2005.
  **Item
        2. Changes in Securities.**
  Not
        applicable.
  **Item
        3. Defaults Upon Senior Securities.**
  Not
        applicable.
  **Item
        4. Submission of Matters to a Vote of Security Holders.**
  Not
        applicable.
  -24-
 **Item
        5. Other Information.******
  Not
        applicable.
  **Item
        6. Exhibits and Reports on Form 8-K.**
   (a)
                Exhibits.31.1
                Certifications
                      Pursuant to Section 302 of the Sarbanes-Oxley Act of
                      2002.31.2
                Certifications
                      Pursuant to Section 302 of the Sarbanes-Oxley Act of
                      2002.32.1
                Certification
                      of Principal Executive Officer and Principal Financial Officer
                      pursuant to
                      Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
                      1350).(b)
                Reports
                    on Form 8-K.
  During
        the three months ended March 31, 2005, we filed the following:
  ·
              Current
                  Report on Form 8-K dated March 25, 2005 and filed on March 29,
                  2005;
  ·
              Current
                  Report on Form 8-K dated March 16, 2005 and filed on March 14,
                  2005;
  ·
              Current
                  Report on Form 8-K dated March 15, 2005 and filed on March 11,
                  2005;
  ·
              Current
                  Report on Form 8-K dated March 3, 2005 and filed on March 4, 2005;
  ·
              Current
                  Report on Form 8-K dated February 9, 2005 and filed on February
                  15, 2005;
                  and
  ·
              Current
                  Report on Form 8-K dated January 6, 2005 and filed on January 11,
                  2005.
  -25-
 **SIGNATURE**
  In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  **VENDINGDATA
                  CORPORATION**
                (Registrant)Date: December
                9, 2005
              By:
              /s/ Mark
                R. NewburgMark
                  R. NewburgIts:
              President,
                  Chief Executive Officer and Treasurer (Principal Executive
                  Officer)
 Date: December
                      9, 2005
                    By:
                    /s/ Arnaldo
                      F. GalassiArnaldo
                          F. GalassiIts:
                    Chief
                          Financial Officer and Secretary (Principal Financial
                          Officer)
  -26-