** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-QSB**

** **

**(MarkOne)**
| **ý** | ** ** | **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 reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý No o

** **

**APPLICABLEONLY TO CORPORATE ISSUERS**

 

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date: 16,751,505 shares of common stock, $.001 par value,as of April 30, 2005

 

Transitional Small Business Disclosure Format (check one): Yes o No ý

 

 

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**VENDINGDATACORPORATION**

 

**FORM10-QSB**

 

**TABLE OFCONTENTS**

 
| **PART I – FINANCIAL  INFORMATION** | ** ** | ** **                                                       |
|------------------------------------------|------------|------------------------------------------------------------------|
|                                     |       |
|                                     | Item 1.    | Financial Statements                                             |   |
|                                     |       |                                                             |   |
|                                     |       | Balance Sheets                                                   |   |
|                                     |       |                                                             |   |
|                                     |       | Statements of Operations                                         |   |
|                                     |       |                                                             |   |
|                                     |       | Statements of Cash Flows                                         |   |
|                                     |       |                                                             |
|                                     | Item  2.   | Management’s  Discussion and Analysis or Plan of Operations |   |
|                                     |       |                                                             |   |
|                                     |       | Overview                                                         |   |
|                                     |       |                                                             |   |
|                                     |       | Critical  Accounting Policies and Estimates                      |   |
|                                     |       |                                                             |   |
|                                     |       | Results  of Operations                                           |   |
|                                     |       |                                                             |   |
|                                     |       | Liquidity and Capital  Resources                                 |   |
|                                     |       |                                                             |   |
|                                     |       | Risk Factors                                                     |   |
|                                     |       |                                                             |   |
|                                     | Item 3.    | Controls and Procedures                                          |   |
|                                     |       |
| **PART II – OTHER INFORMATION**     | ** ** | ** **                                                       |
|                                     |       |
|                                     | Item 1.    | Legal Proceedings                                                |   |
|                                     |       |                                                             |   |
|                                     | Item 2.    | Changes in Securities                                            |   |
|                                     |       |                                                             |   |
|                                     | Item 3.    | Defaults Upon  Senior Securities                                 |   |
|                                     |       |                                                             |   |
|                                     | Item  4.   | Submission  of Matters to a Vote of Security Holders             |   |
|                                     |       |                                                             |   |
|                                     | Item 5.    | Other Information                                                |   |
|                                     |       |                                                             |   |
|                                     | Item 6.    | Exhibits and  Reports on Form 8-K                                |   |
|                                          |            |                                                                  |  |  |

 

i

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# ** **

# **PART I – FINANCIAL INFORMATION**

# ** **

## **Item 1. Financial Statements.**

## ** **

**VENDINGDATACORPORATION**

### **Balance Sheets**

 
| ** **                                                                                                                   | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                   | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                   | ** ** | ** **         | ** ** | ** **            | ** ** |
| **Current assets:**                                                                                                          |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                    |       | $                  | 4,266,975  |                  | $          | 924,804 |   |
| Restricted cash                                                                                                              |       | 2,250,000          |       | —                |       |
| Current portion of accounts receivable, trade, net  of allowance for uncollectables of $223,590 and $223,590                 |       | 3,550,659          |       | 3,646,568             |       |
| Due from affiliate                                                                                                           |       | 9,150              |       | 25,000                |       |
| Other receivables                                                                                                            |       | 182,083            |       | 35,394                |       |
| Inventories                                                                                                                  |       | 6,827,626          |       | 6,462,626             |       |
| Prepaid expenses                                                                                                             |       | 142,333            |       | 86,576                |       |
|                                                                                                                         |       | 17,228,826         |       | 11,180,968            |       |
|                                                                                                                         |       |               |       |                  |       |
| Equipment rented to customers, net of accumulated  depreciation of $623,549 and $564,351                                     |       | 341,395            |       | 400,594               |       |
| Property and equipment, net of accumulated  depreciation of $2,323,169 and $2,250,432                                        |       | 847,615            |       | 923,459               |       |
| Intangible assets, at cost, net of accumulated  amortization of $477,692 and $438,488                                        |       | 1,090,441          |       | 1,129,644             |       |
| Due from affiliate                                                                                                           |       | —             |       | 118,800               |       |
| Accounts receivable, trade, net of current portion,  less unamortized discount                                               |       | 1,306,076          |       | 1,264,912             |       |
| Deferred expenses                                                                                                            |       | 1,475,738          |       | 753,030               |       |
| Deposits                                                                                                                     |       | 1,203,659          |       | 980,216               |       |
|                                                                                                                         |       | $                  | 23,493,750 |                  | $          | 16,751,625 |   |
|                                                                                                                         |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                |       |               |       |                  |       |
| **Current liabilities:**                                                                                                     |       |               |       |                  |       |
| Current portion of leases payable                                                                                            |       | $                  | 1,666,125  |                  | $          | 1,941,445 |   |
| Accounts payable                                                                                                             |       | 1,578,712          |       | 1,240,677             |       |
| Accrued expenses                                                                                                             |       | 606,632            |       | 427,197               |       |
| Deferred revenues, current portion                                                                                           |       | 244,210            |       | 239,680               |       |
| Short-term debt                                                                                                              |       | 238,250            |       | 238,250               |       |
| Customer deposits                                                                                                            |       | 192,240            |       | 193,615               |       |
|                                                                                                                         |       | 4,526,169          |       | 4,280,864             |       |
|                                                                                                                         |       |               |       |                  |       |
| Deferred revenues, net of current portion                                                                                    |       | 183,574            |       | 198,585               |       |
| Notes payable, net of current portion                                                                                        |       | 12,000,000         |       | 3,250,000             |       |
| Leases payable, net of current portion                                                                                       |       | 650,750            |       | 893,244               |       |
|                                                                                                                         |       | 17,360,493         |       | 8,622,693             |       |
| **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             |       | 17,200                |       |
| Additional paid-in capital                                                                                                   |       | 60,341,683         |       | 59,843,273            |       |
| Deficit                                                                                                                      |       | (54,225,626        | )          | (51,731,541           | )          |
|                                                                                                                         |       | 6,133,257          |       | 8,128,932             |       |
|                                                                                                                         |       | $                  | 23,493,750 |                  | $          | 16,751,625 |   |

 

See accompanying notes tofinancial statements.

 

1

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**VENDINGDATACORPORATION**

### **Statements of Operations**

### ** **

**(UNAUDITED)**

** **
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                |       |                                  |       |   |   |
| **Revenues:**                       |       |                                  |       |   |   |
| Sales                               |       | $                                     | 710,735    |   | $ | 993,054 |   |
| Rental                              |       | 121,340                               |       | 211,063 |   |
| Other                               |       | 29,347                                |       | 88,773 |   |
|                                |       | 861,422                               |       | 1,292,890 |   |
| **Operating expenses:**             |       |                                  |       |   |   |
| Cost of sales                       |       | 469,690                               |       | 780,737 |   |
| Selling, general and administrative |       | 2,378,986                             |       | 1,425,467 |   |
| Research and development            |       | 190,009                               |       | 278,753 |   |
|                                |       | 3,038,685                             |       | 2,484,957 |   |
| Loss from operations                |       | (2,177,263                            | )          | (1,192,067 | ) |
|                                |       |                                  |       |   |   |
| Interest expense                    |       | 316,822                               |       | 277,145 |   |
|                                |       |                                  |       |   |   |
| Net loss                            |       | $                                     | (2,494,085 | ) | $ | (1,469,212 | ) |
|                                |       |                                  |       |   |   |
| Basic loss per share                |       | $                                     | (0.15      | ) | $ | (0.09 | ) |
|                                |       |                                  |       |   |   |
| Weighted average shares outstanding |       | 17,199,558                            |       | 17,105,700 |   |

 

See accompanying notes tofinancial statements.

 

2

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** **

**VENDINGDATACORPORATION**

### **Statements of Cash Flows**

### ** **

**(UNAUDITED)**

** **
| ** **                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                |       |                                  |       |   |   |
| 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        |       | —                                |       | 183 |   |
| Proceeds from sale of equipment                     |       | 4,700                                 |       | 665 |   |
| Increase in restricted cash                         |       | (2,250,000                            | )          | — |   |
|                                                |       |                                  |       |   |   |
| Net cash used in investing activities               |       | (2,243,950                            | )          | (75,942 | ) |
|                                                |       |                                  |       |   |   |
| Cash flows from financing activities:               |       |                                  |       |   |   |
| Reimbursement of offering costs                     |       | —                                |       | 36,731 |   |
| Repayment 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    |       | 3,342,171                             |       | (5,696,124 | ) |
| Cash and cash equivalents at beginning of period    |       | 924,804                               |       | 11,526,664 |   |
| Cash and cash equivalents at end of period          |       | $                                     | 4,266,975  |   | $ | 5,830,540 |   |

 

See accompanyingnotes to financial statements.

 

3

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** **

**VENDINGDATA CORPORATION AND SUBSIDIARIES**

**NOTESTO FINANCIAL STATEMENTS (UNAUDITED)**

** **

**Note 1—Basis of Presentation**

 

The accompanying unaudited financial statements ofVendingData Corporation (the “Company”) have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions incorporated in Regulation S-B of the Securities andExchange Commission. Accordingly, they do not include all of the informationand footnotes required by generally accepted accounting principles for completefinancial statements. In the opinion of management, all adjustments considerednecessary for a fair presentation have been included.

 

The results of operations for the current periodpresented are not necessarily indicative of the results to be expected for thefull year. The accompanying financial statements should be read in conjunctionwith the Company’s audited financial statements for the year endedDecember 31, 2004, as included in the Company’s Annual Report onForm 10-KSB as filed with the Securities and Exchange Commission fromwhich the accompanying balance sheet information as of that date was derived.Certain reclassifications have been made to amounts presented in prior periodsfor comparability to the current period presentation.

 

**Note 2—Segments**

 

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

 

| ** **    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------|------------|----------------------------------------|------------|
| ** **    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| United States |       | $                                      | 787,172    |   | $ | 1,044,556 |   |
| Asia          |       | —                                 |       | 38,334 |   |
| Europe        |       | 49,500                                 |       | 210,000 |   |
| South America |       | 24,750                                 |       | — |   |
|               |            |                                        |            |  |  |  |  |

 

4

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The Company’s revenues, depreciation and operatingincome distributed by product are as follows:

 

| ** **                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **March 31,  2005**    | ** ** | **March 31,  2004** | ** ** |
| Revenues                      |       |                   |       |   |   |
| Secure Drop®             |       | $                      | 11,248     |   | $ | 195,533 |   |
| Shuffler                      |       | 507,549                |       | 457,275 |   |
| Deck CheckerTM                |       | 313,278                |       | 551,309 |   |
| Other                         |       | 29,347                 |       | 88,773 |   |
|                          |       | $                      | 861,422    |   | $ | 1,292,890 |   |
| Depreciation and amortization |       |                   |       |   |   |
| Secure Drop®             |       | $                      | —     |   | $ | — |   |
| Shuffler                      |       | 49,969                 |       | 55,562 |   |
| Deck CheckerTM                |       | 9,229                  |       | 6,660 |   |
| Unallocated                   |       | 107,098                |       | 162,594 |   |
|                          |       | $                      | 166,296    |   | $ | 224,816 |   |
| Operating income (loss)       |       |                   |       |   |   |
| Secure Drop®             |       | $                      | 9,729      |   | $ | 91,564 |   |
| Shuffler                      |       | 375,172                |       | 103,579 |   |
| Deck CheckerTM                |       | 269,669                |       | 414,006 |   |
| Unallocated                   |       | (2,831,833             | )          | (1,801,216 | ) |
|                          |       | $                      | (2,177,263 | ) | $ | (1,192,067 | ) |
|                               |            |                        |            |  |  |  |  |  |  |

 

**Note 3—Loss per Share (Basic and Diluted)**

 

The basic loss per share is computed by dividing thenet loss for the period by the weighted average number of common sharesoutstanding for the period. Loss per share is unchanged on a diluted basissince the assumed exercise of common stock equivalents would have ananti-dilutive effect due to the existence of operating losses.

 

**Note 4—New Debt Financing**

 

In thethree months ended March 31, 2005, the Company raised additional capitalthrough private placements of 10% senior secured convertible notes in February2005 and March 2005.

 

OnFebruary 15, 2005, the Company completed a private placement of 10% seniorsecured convertible notes (the “February Senior Notes”).  Through this private placement the Companyissued February Senior Notes in the aggregate principal amount of $10,000,000in exchange for the surrender of senior notes in the aggregate principal amountof $3,250,000 issued in August 2004 and gross cash proceeds of $6,750,000.  On March 14, 2005, the Company completed anadditional private placement of 10% senior secured convertible notes (the “MarchSenior Notes”), where the Company issued March Senior Notes in the aggregateprincipal amount of $2,000,000.  TheMarch Senior Notes were issued on a *pari passu*basis with the February Senior Notes and, as a result, are secured by a firstpriority security interest in our assets. The February Senior Notes and the March Senior Notes require semi-annualpayments of interest only, with the principal and any unpaid interest due atmaturity.  Holders of the February SeniorNotes and the March Senior Notes have a one-time right to convert up to 50% ofthe then outstanding principal into shares of common stock at a rate $1.65 pershare.

 

5

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**Note 5—Options**

 

The Company currently has two stock option plans. Nostock-based employee compensation expense for stock options was reflected innet income for years prior to 2003, as all stock options granted under thoseplans had an exercise price equal to or greater than the fair market value ofthe underlying common stock on the date of grant. The exercise price range isbetween $1.49 and $15 with a weighted average exercise price of $3.09. Therewere 2,574,222 options outstanding as of March 31, 2005.

 

**Note 6—****Liquidity Issues**

 

TheCompany’s ability to maintain adequate liquidity may be dependent upon thesuccess of management’s plans to address and overcome prior operatinglosses.  Management has developed andrefined its 2005 operating plan to make efforts to increase its sales domesticallyand internationally, including by expanding its product line.  Increased sales in the year endedDecember 31, 2004, show evidence of improved acceptance of the Company’sproduct line.  Management has adopted aprogram to reduce operating costs through the transfer of manufacturing operationsto China and by restructuring service functions to reduce labor and rentalexpense.  Management has focused onfinancial condition and liquidity improvements also through its capital-raisingefforts 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 improvementsand operating cost initiatives, management believes that the Company is likelyto begin to generate positive operating cash flow in late 2005.  In addition, the Company has received aone-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, legalactions, and complaints, including a patent infringement action between theCompany and one of its main competitors. The Company cannot predict the likelyoutcome of any such litigation or whether any such substantial litigation wouldhave a material adverse effect on its business as presently conducted or asanticipated.

 

In early February 2004, the State of Nevadainitiated a sales/use tax audit of the Company’s, equipment lessors. As of thisfiling the State of Nevada has not made a determination if there has been ashortfall in the payment of the sales/use tax. The Company has sold and leasedback shufflers and Deck Checkers over the last five years.  The auditor for the State of Nevada is tryingto determine at what level a sales/use tax needs to be collected.  The Company now collects from our customersin Nevada and remits payments to the State of Nevada.  If the State of Nevada determines that thesales of the products to the leasing companies is the level at which sales/usetax should have been collected, liability of the leasing companies would be passedto the Company.  The amount of thispotential liability could range from a refund of $144,000 to the payment ofsales/use tax with interest and penalties of up to $500,000.  The Company intends to defend its position inthis matter.

 

6

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## ** **

## **Item 2.  Management’s Discussion and Analysis or Planof Operations.**

## ** **

**Statement onForward-Looking Information**

** **

Certaininformation included herein contains statements that may be consideredforward-looking statements within the meaning of Section 27A of the SecuritiesAct and Section 21E of the Exchange Act, such as statements relating to plansfor product development, product placement, capital spending and financingsources. Such forward-looking information involves important risks anduncertainties that could significantly affect anticipated results in the futureand, accordingly, such results may differ from those expressed in anyforward-looking statements made herein. Such risks, uncertainties and otherimportant factors include, among others: our liquidity requirements, ourability to locate necessary sources of capital to sustain our operations,adverse rulings or other developments in pending or future litigation, thecontinued growth of the gaming industry, the success of our product developmentactivities, the acceptance of our products in the marketplace, vigorouscompetition 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 ininterest rates), domestic or global economic conditions and the risks andfactors described from time to time in our reports filed with the Securitiesand Exchange Commission.

 

### **Overview**

### ** **

Ourstrategy is to develop cost-effective niche products for the global gamingindustry.  We focus on products thatincrease the security, productivity and profitability of casinooperations.  Our strategy involvesmarketing 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 anddistributor relationships for the sale and rental of our products.  Although we anticipate significant salesdevelopment and revenue growth, there is no assurance that we will generatesufficient revenue, cash flow or profit to sustain our operations.

 

### **CriticalAccounting Policies and Estimates**

### ** **

Thefollowing is a summary of what our management believes are the criticalaccounting policies related to our operations. The application of thesepolicies, in some cases, requires management to make subjective judgments andestimates regarding the effect of matters that are inherently uncertain. SeeNote 1, “Description of Business and Significant Accounting Policies,” tofinancial statements included in this annual report for a more detaileddiscussion of our accounting policies. Except as described below, we do notemploy any critical accounting policies selected from among availablealternatives or that require the exercise of significant management judgment toapply, and we believe none of our estimates are so highly uncertain orsusceptible to change as to present a significant risk of a material impact onour financial condition or operating performance.

 

***Allowance for Doubtful Accounts.***

 

Inconnection with the preparation of our financial statements, management reviewsand evaluates the collectibility of our trade receivables and adjusts ourallowance for estimated uncollectible accounts as deemed necessary in thecircumstances. These estimates have the potential for critically affecting thedetermination of results of operations for any given period. Factors consideredby management in making such estimates and adjustments include anyconcentrations among customers, changes in our relationships therewith, paymenthistory and the apparent financial condition thereof.

 

7

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***Revenue Recognition.***

 

Werecognize revenue from the sale of our shuffler and Deck CheckerTM products uponshipment against valid customer contracts or purchase orders.  Sales are recognized immediately whenshufflers that are rented are converted to purchases depending on thecreditworthiness and payment history of the casino company since payment termsare from 20 to 48 months. We recognize revenue from the sale of our SecureDrop®products upon installation and functional testing at customer locations becausethat is when the customer’s obligation becomes fixed and certain pursuant toour standard contracts for sale. The extended warranty and maintenancecomponents that are part of long term sales contracts are unbundled and recognizedas deferred revenue amortized over the remaining life of the sales agreementafter the initial 90-day warranty as required by the Emerging Issues TaskForce Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.The useful life of our shufflers and Deck CheckersTM is five years with propermaintenance; the life can be extended with the replacement of component parts.If the customer does not possess the required creditworthiness or anestablished payment history with us, we would then book the revenue as aninstallment sale and recognize it over time as payments are received. Revenuefrom shuffler rentals is recorded at the first of each month in accordance withrental contract terms. All rental contracts are cancelable upon 30-daywritten notice by the customer. Maintenance expense for rental units isrecorded in the period it is incurred. Although sales are not generally madewith a right to return, upon occasion, usually associated with the performancewarranty, sales returns and allowances are recorded after returned goods arereceived and inspected. We provide currently for estimated warranty repaircosts associated with sales contracts. Although there are no extendedwarranties offered for our products, we do provide for maintenance contractsthat are billed and recognized on a monthly basis.

 

***Intangible Assets.***

 

Wecurrently amortize our intangible assets (patent and technology rights) on astraight-line basis over estimated useful lives of 10 years. Managementbelieves that the useful life of patents and technology rights equals the fullterm of the patent.

 

***Recent Accounting Pronouncements.***

 

InDecember, 2004, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 123 (Revised 2004), Share Based Payment (“SFAS 123R”).  SFAS 123R requires that compensation costrelated to share based employee compensation transactions be recognized in thefinancial statements. Share based employee compensation transactions within thescope of SFAS 123R include stock options, restricted stock plans, performancebased awards, stock appreciation rights and employee share purchase plans. Theprovisions of SFAS 123R are effective as of the first interim period thatbegins after December 15, 2005. Accordingly, we will implement the revisedstandard in the first quarter of fiscal year 2006, unless we adopt it earlier.

 

InDecember 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,an Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (“SFAS153”). The amendments made by SFAS 153 are based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged. Further, the amendments eliminate the narrow exceptionfor nonmonetary exchanges of similar productive assets and replace it with abroader exception for exchanges of nonmonetary assets that do not havecommercial substance. The Statement is effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005. We do notexpect to enter into any transactions that would be affected by adopting SFAS153.

 

8

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**FinancialCondition**

 

During the three monthsended March 31, 2005, total assets increased by $6,742,125  from $16,751,625 at December 31, 2004 to$23,493,750 at March 31, 2005.  Theincrease 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 ourprivate placement of senior secured convertible notes in February 2005 andMarch 2005.  During the three monthsended March 31, 2005, we experienced a $95,909 decrease in accounts receivable(trade) from $3,646,568 at December 31, 2004 to $3,550,659 at March 31,2005, a $146,689 increase in other receives from $35,394 at December 31, 2004to $182,083 at March 31, 2005 and a $365,000 increase in inventories from$6,462,626 at December 31, 2004 to $6,827,626 at March 31, 2005.

 

Total liabilities haveincreased from $8,622,693 at December 31, 2004 to $17,360,493 at March 31,2005.  The $8,622,693 increase in totalliabilities resulted primarily from the issuance of senior secured convertiblenotes in February 2005 and March 2005 in the aggregate principal amount of$12,000,000, including the exchange of previously outstanding senior notes inthe aggregate principal amount of $3,250,000. In addition, during the three months ended March 31, 2005, our accountspayable increased by $338,035 from $1,240,677 at December 31, 2004 to $1,578,712at March 31, 2005 as a result of the receipt of additional parts inventoryrelated to our RandomPlusTM shuffler.

 

### **Results ofOperations**

### ** **

##### ***Comparison ofThree Months Ended March 31, 2005 and 2004***

##### *** ***

###### **Revenue**

###### ** **

For the three months endedMarch 31, 2005, we generated total revenues of $861,422, compared to $1,292,890for the three months ended March 31, 2004, a decrease of $431,468, or 33.4%.  Our revenues for the three months ended March31, 2005 consisted of SecureDrop® sales of $11,248, shuffler rentals of$56,105, shuffler sales of $451,444, Deck CheckerTMrentals of $65,235, Deck Checker TMsales of $248,043 and miscellaneous other revenues of $29,347.  The decrease in revenue was due to a decreasein SecureDrop® sales of $184,285, a decrease in shuffler rentals of $98,078, anincrease in shuffler sales of $148,352, a decrease in Deck CheckerTM sales of$246,386 and a decrease in miscellaneous other sales of $59,426, offset by anincrease 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 $195,533 for the three months ended March 31, 2004, adecrease of $184,285, or 94.2%.  Sincethere 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 $451,444,compared to $303,092 for the three months ended March 31, 2004, anincrease of $148,352, or 48.9%.  Theincrease was due, in part, to increased 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 threemonths ended March 31, 2004, a decrease of $98,078, or 63.6%.  The decrease in shuffler rental revenuereflects the reduced number of shufflers placed on a rental basis as a resultof the conversion of rental units to purchased units in 2003 and the failure toplace additional shuffler units on a rental basis.  This failure

 

9

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was due, in part, to thedelays related to the introduction of new shuffler products, such as theRandomPlusÔ Shuffler.

 

**Revenue –Deck Checker****TM****Sales.** For the three months ended March 31, 2005, we generated revenuerelated to the sale of our Deck CheckersTM of $248,043, compared to $494,429 for the threemonths ended March 31, 2004, a decrease of $246,386, or 49.8%.  The decrease in Deck CheckerTM sales resulted primarily from reducedinternational sales. For the three months ended March 31, 2004, international salesreflect the buildup of distributor inventory levels.  For the three months ended March 31, 2005,international sales reflect the replacement of Deck CheckersTM in inventory.

 

**Revenue –Deck Checker****TM****Rentals.** For the three months ended March 31, 2005, we generated revenuerelated to the rental of our Deck CheckersTM of $65,235, compared to $56,880 for the three monthsended March 31, 2004, an increase of $8,355, or 14.7%. The increase in Deck CheckerTM rental revenue resulted primarily fromthe 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 thethree months ended March 31, 2004, a decrease of $59,426, or66.9%.  The decrease in other revenues is dueprimarily to the sale of products that are not produced by us and sold only on a limitedbasis.

 

###### **Cost of Sales**

###### ** **

Forthe three months ended March 31, 2005, our cost of sales was $469,690, compared to $780,737 for the threemonths ended March 31, 2004, a decrease of $311,047, or 39.8%.  Our cost of sales for the three months endedMarch 31, 2005 included cost of SecureDrop® sales of $1,519, cost ofshuffler sales of $76,425, shuffler rental depreciation of $49,969, shufflerservice costs of $238,881, other shuffler cost of $5,983, manufacturing costsof $57,380, Deck CheckerTM costs of $34,380, Deck CheckerTM rental depreciation of $9,229, warrantycosts of ($4,063) and other expenses of ($13). The manufacturing of products in China will continue the trend ofreducing cost of sales on a per unit basis. The gross margin on revenue for the three months ended March 31,2005 was $391,732, or 45.5%, compared to the gross margin on revenue for theyear ended March 31, 2004 of $512,153, or 39.6%.  The decrease in gross margin of $120,421 fromthe three months ended March 31, 2004 to the three months ended March 31,2005 reflects the decreased revenue.

 

**Cost of Sales – SecureDrop**®**Sales.**  Our cost of SecureDrop®****salesrevenue 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 decreaseof $102,450, or 98.5%.  The decrease inour costs of SecureDrop® sales revenue reflects the reduced sales from theprior period.  The gross marginpercentage on revenue from SecureDrop®****sales revenue was 86.5% in the threemonths ended March 31, 2005 compared to 46.8% for the three months endedMarch 31, 2004.  The increase ingross margin percentage on SecureDrop® is attributable to the fixed costsassociated with installation combined with the sale of supply parts during thethree months ended March 31, 2005.

 

**Cost of Sales – Shuffler Sales.** Our cost of shuffler****sales revenue was $76,425 for thethree months ended March 31, 2005 compared to $39,560 for the three monthsended March 31, 2004, representing an increase of $36,865, or 93.2%.  The increase in the cost of shuffler****salesrevenue was due primarily to the additional placement of shufflers during thethree months ended March 31, 2005 versus the three months ended March 31,2004.  The gross margin percentage onrevenue from shuffler****sales revenue was 83.1% in the threemonths ended March 31, 2005 compared to 81.8% in the three months endedMarch 31, 2004.

 

10

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**Cost ofSales – Deck CheckerTM Sales. **Our cost ofDeck CheckerTM sales revenue was $34,380 for the quarter endedMarch 31, 2005, compared to $130,643 for the quarter ended March 31, 2004,a decrease of $96,263.  The gross marginpercentage on revenue from Deck CheckerTM sales revenue was 86.1%for the quarter ended March 31, 2005 compared to 73.6% for the quarter endedMarch 31, 2004. The increase in gross margin percentage resulted from the saleof lower cost Deck CheckersTM produced in our China facility.

 

###### **General andAdministrative Expense**

###### ** **

For the three months endedMarch 31, 2005, our general and administrative expenses were $2,378,986,compared to $1,425,467 for the three months ended March 31, 2004, anincrease of $953,519, or 66.9%.  Theincrease in general and administrative expenses related primarily to a $550,409increase in legal and regulatory costs due to defense of the Shuffle Master, Inc.lawsuits and regulatory issues pertaining to former senior management, a $131,212increase in consulting and accounting expense, a $78,533 increase in travel andentertainment expenses, a $61,488 increase in rent expense due mainly to ourexpansion in China, a $21,287 increase in insurance, a $122,297 increase infinance fees, and a $78,518 increase in other expenses, offset by a $46,463decrease in depreciation, a $23,658 decrease in payroll cost, and a $15,201decrease in trade show expenses.

 

Our general andadministrative expenses for the three months ended March 31, 2005 consistedof the following: salaries and related costs of $547,956; consulting andaccounting services of $222,530; advertising and marketing costs of $4,653;travel and entertainment costs of $183,007; gaming industry show costs of$25,897; rent of $149,300; repairs and maintenance expense of $25,332; suppliesof $13,138; legal and regulatory expenses of $748,304; insurance expenses of$48,926; depreciation and amortization of $107,098; finance fees of $122,297and other expenses of $180,548.

 

###### **Research and DevelopmentExpense**

###### ** **

Forthe three months ended March 31, 2005, research and development expenseswere $190,009, compared to $278,753 for the three months ended March 31,2004, a decrease of $88,744, or 31.8%. The decrease in research and development expenses was due to thesubstantial completion of the development on our new shuffler products, theRandomPlusTM Shuffler and the Poker OneTM Shuffler, a reduction of ourengineering staff in the United States and the transfer of many engineeringfunctions to our China operations.

 

###### **Interest Expense**

###### ** **

Forthe three months ended March 31, 2005, we incurred interest expenses of $316,822,compared to $277,145 for the three months ended March 31, 2004, an increaseof $39,677, or 14.3%.  This increase wasprimarily attributable to the additional debt service related to our previouslyoutstanding 9% senior secured notes and the currently outstanding 10% seniorsecured convertible notes.  The debtservice on our 10% senior secured convertible notes will continue until Februaryand March 2008 at which time the principal amount is due.

 

###### **Net Loss**

###### ** **

Forthe three months ended March 31, 2005, we had a net loss of $2,494,085, comparedto a net loss of $1,469,212 for the three months ended March 31, 2004, anincrease of $1,024,873, or 69.8%.   Basic loss per share was $0.15 for the threemonths ended March 31, 2005, compared to $0.09 for the three months endedMarch 31, 2004.  The increase in netloss and the increase in the basic net loss per share were primarily due to a $325,310 decreasein gross margin, a $953,519 increase in general and

 

11

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administrative expensesand a $39,677 increase in interest expenses, offset by an $88,744 decrease inresearch and development expenses.

 

### **Liquidity andCapital Resources**

### ** **

As aresult of our operating loss and our use of cash, our net working capital has increasedfrom $6,900,104 at December 31, 2004 to $12,702,657 at March 31, 2005, as shown in the tablebelow:

 
| ** **                                                                                                    | ** ** | **March 31,  2005** | ** ** | **December  31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| **Current Assets**                                                                                            | ** ** | ** **          | ** ** | ** **              | ** ** |
|                                                                                                          |       |                |       |                    |       |
| Cash  and cash equivalents                                                                                    |       | $                   | 4,266,975  |                    | $          | 924,804 |   |
| Restricted  cash                                                                                              |       | 2,250,000           |       | —                  |       |
| Current  portion of accounts receivable, trade, net of allowance for uncollectibles of  $223,590 and $223,590 |       | 3,550,659           |       | 3,646,568               |       |
| Due  from affiliate                                                                                           |       | 9,150               |       | 25,000                  |       |
| Other  receivables                                                                                            |       | 182,083             |       | 35,394                  |       |
| Inventories                                                                                                   |       | 6,827,626           |       | 6,462,626               |       |
| Prepaid  expenses                                                                                             |       | 142,333             |       | 86,576                  |       |
| Total  current assets                                                                                         |       | 17,228,826          |       | 11,180,968              |       |
|                                                                                                          |       |                |       |                    |       |
| Current  portion of leases payable                                                                            |       | $                   | 1,666,125  |                    | 1,941,445  |   |
| Accounts  payable                                                                                             |       | 1,578,712           |       | 1,240,677               |       |
| Accrued  expenses                                                                                             |       | 606,632             |       | 427,197                 |       |
| Deferred  revenues, current portion                                                                           |       | 244,210             |       | 239,680                 |       |
| Short-term  debt                                                                                              |       | 238,250             |       | 238,250                 |       |
| Current  portion of convertible debt                                                                          |       | —              |       | —                  |       |
| Customer  deposits                                                                                            |       | 192,240             |       | 193,615                 |       |
| Total  current liabilities                                                                                    |       | 4,526,169           |       | 4,280,864               |       |
|                                                                                                          |       |                |       |                    |       |
| Net  working capital                                                                                          |       | $                   | 12,702,657 |                    | $          | 6,900,104 |   |

 

Net Cash Used in Operating Activities.  For the three months ended March 31, 2005, thenet cash used in operating activities was $2,585,971, compared to $3,415,833for the three months ended March 31, 2004, a decrease of $829,862, or 24.3%.  The net cash used in operating activitiesresulted from a net loss of $2,494,085, a decrease of deferred interest of$60,093,non-cash compensation expense of $92,077, loss on disposition ofequipment of $1,900, a decrease in accounts receivable of $54,747, an increasein other receivables of $12,039, an increase in inventory of $365,000, anincrease in prepaid expenses of $55,757, 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, adecrease in customer deposits of $1,375, and depreciation of $166,296.

 

Net Cash Used In Investing Activities. For the threemonths ended March 31, 2005, we used net cash in investing activities of $2,243,950compared to $75,942 for the three months ended March 31, 2004.  The net cash used in investing activitiesduring the three months ended March 31, 2005 consisted of $6,050 fromdisposition of equipment and the receipt of restricted cash of $2,250,000.

 

Net Cash Provided By Financing Activities.  For the three months ended March 31, 2005, ourfinancing activities provided net cash of $8,172,092, whereas, for the threemonths ended 

 

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March 31, 2004, ourfinancing activities used net cash of $2,204,349.  The net cash provided by financing activitiesduring the three months ended March 31, 2005 consisted of $8,750,000 providedby the issuance of 10% senior secured convertible notes, offset by the repaymentof equipment leases of $577,908.

 

###### **Sources of Capital**

###### ** **

Shouldour cash on hand plus cash from operations be insufficient during futureperiods, we anticipate relying upon private and institutional sources of debtand equity, and we may seek public, private and institutional sources ofcapital for working capital purposes. During the years ended December 31, 2004and 2003, our sources of capital included a public stock offering, equipmentfinancing from a third party, short-term notes from stockholders, convertibledebentures and other private sources of capital.

 

Withrespect to our equipment financing where we have sold and leased back most ofour furniture, equipment, tooling and shufflers held for rent, we have repaid $603,610for the three months ended March 31, 2004 and repaid $577,908 for the three months ended March 31, 2005. As of March31, 2005, we had outstanding equipment financing of $2,316,874. These equipmentleases have terms of 36 to 39 months and were not recorded as sales becauseeach of the leases included a mandatory buy-back provision.

 

Duringthe three months ended March 31, 2005, we raised additional capital throughprivate placements of 10% senior secured convertible notes in February 2005 (the“February Senior Notes”) and March 2005 (the “March Senior Notes” and togetherwith the February Senior Notes, the “Senior Notes”).

 

•                                          On February 15, 2005, we completed aprivate placement of the February Senior Notes. The February Senior Notes are securedby a first priority security interest in our assets. The February Senior Notesrequire semi-annual payments of interest only on August 1 and February 1 of eachyear, with the principal and any unpaid interest due at maturity of theFebruary Senior Notes. Any prepayments of the February Senior Notes made priorto 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 ourcommon stock, $.001 par value, at a rate $1.65 per share. Through the privateplacement we issued an aggregate of $10,000,000 in February Senior Notes, inreturn for exchanged notes in the aggregate principal amount of $3,250,000 andgross cash proceeds of $6,750,000.

 

•                                          On March 14, 2005, we completed anadditional $2 million private placement of the March Senior Noted. The MarchSenior Notes were issued on a pari passu basis with the February Senior Notesand, 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 onSeptember 1 and March 1 of each year, with the principal and any unpaidinterest due at maturity of the March Senior Notes. Any prepayments of theMarch Senior Notes made prior to March 2007 require the payments of premiumsthat decline each year. Holders of the March Senior Notes have a one-time rightto convert up to 50% of the then outstanding principal of the March SeniorNotes into shares of our common stock, $.001 par value, at a conversion priceof $1.65 per share.

 

Aportion of the proceeds raised through these private placements were subject tothe following conditions.

 

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•                                          One third (1/3) of the total proceedsheld in escrow shall be released to us upon the execution of a distributoragreement with TCS or an affiliate thereof and the sale and service outside theUnited States of 100 units of our RandomPlus ShufflerTM and the PokerOneTMshuffler, where such events must occur no later than June 30, 2005;

 

•                                          One-third (1/3) of the total proceedsheld in escrow shall be released to us upon the hiring by of a North Americanmanager of operations or Chief Operating Officer, where such person shall behired no later than June 30, 2005; and

 

•                                          One-third (1/3) of the total proceedsheld in escrow shall be released to us upon the approval of our RandomPlusTMshuffler by Gaming Laboratories International and the Nevada State GamingControl Board and the placement of 100 units of our RandomPlusTM shuffler inNorth America, where such approvals and shuffler placement must occur no laterthan June 30, 2005.

 

As ofMay 13, 2005, the first and the second escrow condition above have beenmet.  As to the third escrow condition,we need only place 100 units of our RandomPlusTM shuffler in North America toreceive the remaining funds from the private placements.  Once we satisfy this remaining condition, wewill have access to the remaining $2,250,000.

 

###### **Outlook**

###### ** **

Ourability to maintain adequate liquidity is dependent upon the success ofmanagement’s plans to address and overcome prior operating losses. Managementhas developed and refined its 2005 operating plan to increase its sales byexpanding its product line and improving its sales efforts domestically andinternationally. We have entered into an exclusive five-year agreement with TCSto market and distribute our shuffler products outside of the UnitedStates.  Management has adopted effortsto reduce operating costs through the transfer of manufacturing operations toChina and restructuring service functions to reduce labor and rental expense.  We appointed to Mark R. Newburg to our boardof directors.  With a career that spansover 30 years, Mr. Newburg is a skilled global executive with experience in thegaming industry, as well as in executive positions in Fortune 100 companies.Management has focused on financial condition and liquidity improvementsthrough its capital raising efforts in 2004 and 2005 that have resulted in animproved cash position. As a result of anticipated sales improvements andoperating cost initiatives, management believes that we will begin to be cashflow neutral to cash flow positive on an intermittent monthly basis by latefiscal year 2005. In Mr. Newburg’s role as executive director and expected roleas an officer in due course, we anticipate substantial changes in strategiesand operating plans.

 

Basedon presently known commitments and plans, we believe that we will be able tofund our operations and required expenditures through the fourth quarter of2005 through cash on hand, cash flow from operations, and cash from private placementsof debt or equity or from lease financing sources. In the event that suchsources are insufficient or unavailable, we will need to seek cash from publicor private placements of debt or equity, institutional or other lending sources,sell certain assets or change operating plans to accommodate such liquidityissues.  Our ability to seek additionalsources of capital is restricted by a covenant related to our 10% seniorsecured convertible notes that prohibits us from incurring indebtedness throughloans, lines of credit and other forms of indebtedness, including equipmentfinancing, in excess of $15,000,000.  Accordingly,no assurances can be given that we will successfully obtain liquidity sourcesnecessary to fund our operations in the upcoming year.

 

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### **Risk Factors**

### ** **

*This Report contains certainforward-looking statements within the meaning of Section 27A of the SecuritiesAct and Section 21E of the Exchange Act. Such statements refer to events that could occur in the future and maybe identified by the use of words such as “intend,” “plan,” “believe,”correlative words, and other expressions indicating that future events arecontemplated.  Such statements are subjectto inherent risks and uncertainties, and actual results could differ materiallyfrom those projected in the forward-looking statements as a result of certainof the risk factors set forth below and elsewhere in this annual report.  In addition to the other informationcontained herein, investors should carefully consider the following riskfactors.*

 

**RisksRelated to VendingData**

** **

***Given our recurring losses and accumulated deficits,we must manage our liquidity.***

*** ***

Our financial statements report recurring losses andaccumulated deficits.  Based on presentlyknown commitments and plans, we believe that we will be able to fund ouroperations and required expenditures through the fourth quarter of 2005 fromcash on hand, cash flow from operations and cash from debt or equity financingsor from lease financing sources.  If weare unable to generate a sufficient amount of sales of our products to fund ouroperations, we will need to seek cash from private or public placements of debtor equity, institutional or other lending sources, to sell certain assets or tochange operating plans to accommodate our liquidity issues.  As result of certain restrictions on ourability to incur additional indebtedness under the Senior Notes, we may not beable to obtain other liquidity sources as may be necessary to fund ouroperations in the future.

 

***We have a history of significant operating losses andanticipate continued operating losses, and we may be unable to achieveprofitability.***

*** ***

Wehave a history of significant operating losses and anticipate continuedoperating losses for the foreseeable future. For the three months ended March 31, 2005 and the years endedDecember 31, 2004 and 2003, we have incurred net losses of $2,494,085,$7,149,194 and $7,812,089, respectively, and our operations have used $2,585,971,$10,660,133 and $11,526,665 of cash, respectively.  As of March 31, 2005, December 31, 2004and December 31, 2003, we had accumulated deficits of $54,225,626, $51,731,541and $44,582,347, respectively.  If we areunable to generate a positive cash flow in 2005, we will be required to locateadditional sources of capital.  If ourrevenues do not increase very substantially, or if our spending levels exceedour expectations, we will not become profitable.  Revenues may not grow in the future, and wemay not generate sufficient revenues for profitability.  If we become profitable, we may not be ableto sustain profitable operations.

 

***Wemay not be able to satisfy the conditions for the release of all of theproceeds from the Senior Notes that are presently held in escrow.***

*** ***

Pursuantto the terms of the Senior Notes, our access to $6,750,000 in proceeds issubject to the satisfaction of certain conditions as described above under “Liquidityand Capital Resources”.  If we fail toachieve one or more of the conditions by June 30, 2005, we are required toreturn the relevant funds to investors within 30 days.  As of May 13, 2005, we have met two of thethree conditions.  The failure to meetthe remaining condition will have a negative and potentially materially adverseimpact on our liquidity.

 

15

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***Ourstockholders may not approve the increase in our authorized shares, which isrequired to ensure a sufficient number of shares are available upon theconversion of the March Senior Notes, if at all.***

*** ***

As of April30, 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 haveissued stock options to purchase 3,332,722 shares of common stock, warrants topurchase 2,585,553 shares of common stock and February Senior Notes convertibleinto 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 theshares issuable upon the conversion of the March Senior Notes, if at all.  Accordingly, our board of directors hasalready authorized an amendment to our articles of incorporation so as toincrease our total authorized number of shares. However, since our stockholders must also approve the amendment to ourarticles of incorporation and although we expect our stockholders to approvesaid amendment, there is no guarantee of such a result.  If the stockholders do not approve of theamendment, we will be in breach under the terms of the March Senior Notes.

 

***The demand for our products may be insufficient togenerate enough revenues to sustain our operations.***

*** ***

If wefail to generate sufficient demand for our products, we may be unable tosustain operations or generate a return to investors.  Until January 2000, we were in thedevelopment stage and derived minimal revenues from our products.  Currently we are an operating company thatcontinues to develop new products.  SinceJanuary 2000, our activities have been limited to analyzing and consulting withpersons in the gaming industry, developing and manufacturing new products,establishing distribution networks for our products, marketing our products tothe gaming industry, and commencing product sales.  During such time, we have derived onlylimited revenues, which have been insufficient to sustain our operations.  We may not generate sufficient revenue tosustain our operations.  No independentorganization has conducted market research providing management withindependent assurance from which to estimate potential demand for ourproducts.  The overall market may not bereceptive to our products, and we may not successfully compete in the targetmarket for our products.

 

***We place our leasedshufflers in casinos under short-term lease arrangements, which make theseproducts susceptible to replacement due to pressure from competitors, changesin economic conditions, obsolescence and declining popularity.***

*** ***

All of our leased shufflers are placed withcustomers under short-term lease arrangements, which, unlike long-term leasesor permanent sales of our products, can easily be terminated by a dissatisfiedcustomer.  The manner in which such short-termleases are structured puts our shufflers at greater risk of replacement due topressure from competitors, changes in economic conditions, obsolescence anddeclining popularity.  Casino operatorsmay terminate the use of our products, and we may not be able to maintain andexpand the number of installed shufflers through enhancement of existingshufflers, introduction of new shufflers, customer service or otherwise.

 

***Since a significant number of our leasing agreements and purchasecontracts with extended payment terms permit the customer to return ourproducts at any time, we may be required to record a charge to bad debt expensewhich would, in turn, adversely impact our results from operations.***

 

Due to the competitiveenvironment in which we operate, we have agreed to provisions in a significantnumber of our leasing agreements and purchase contracts with extended paymentterms that

 

16

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permit the customer toreturn our products at any time with no further monetary obligation to us.  In the event that we have recorded all of therevenue that would have been received from the relevant leasing agreement orpurchase contract, we will then be require to record a charge against bad debt expense.  As a result, our operating results for therelevant period in which the charge is taken will be adversely impacted.

 

***Our ability to compete may be damaged, and our revenues may be reducedif we are unable to protect our intellectual property rights adequately.***

 

Our success depends uponmaintaining the confidentiality and proprietary nature of our intellectualproperty rights.  Our ability to compete may be damaged, and ourrevenues may be reduced if we are unable to protect our intellectual propertyrights adequately.  To protectthese rights, we rely principally on a combination of:

 

•                  contractualarrangements providing for non-disclosure and prohibitions on use;

 

•                  patents andpending patent applications;

 

•                  trade secret,copyright and trademark laws; and

 

•                  certain built-intechnical product features.

 

Patent, trade secret,copyright and trademark laws provide limited protection.  The protections provided by laws governingintellectual property rights do not prevent our competitors from developing,independently, products similar or superior to our products andtechnologies.  In addition, effectiveprotection of copyrights, trade secrets, trademarks, and other proprietaryrights may be unavailable or limited in certain foreign countries.  We may be unaware of certain non-publiclyavailable patent applications, which, if issued as patents, could relate to ourservices and products as currently designed or as we may modify them in thefuture.  Legal or regulatory proceedingsto enforce our patents, trademarks or copyrights could be costly, timeconsuming, and could divert the attention of management and technicalpersonnel.

 

***Adverse results in current litigation could result insubstantial monetary damages and impacts on the manufacture and sale of certainof our shuffler products.***

*** ***

ShuffleMaster, our principal competitor in the shuffler market, has filed two lawsuitsagainst us for patent infringement.  Thefirst suit alleges that our shufflers violate two of its patents concerningregistering use of a playing card shuffler apparatus and the displaying of theuse on a display.  The second lawsuitalleges that our PokerOneTM Shuffler violates two of its patents concerning thecard moving mechanism.  Shuffle Masterseeks treble damages, which, if awarded, could result in us owing itsubstantial sums of money, and, if large enough, could have a material adverseeffect on our liquidity and our ability to conduct operations.  Although we believe our position to bemeritorious, litigation of this nature is a drain on our cash resources and ourmanagement’s time.  Although Shuffle Masterhas asserted patent infringement claims and we have reasonable defenses to thesame, we cannot determine whether we will prevail in these lawsuits, norwhether damages, if awarded, would significantly impact our ability to continueto manufacture and sell particular products within the United States and itsterritories.  If we do not prevail, wewill be unable to sell our shuffler products in the United States unless wechange certain components used in the shufflers or obtain a license fromShuffle Master to use the playing card shuffler apparatus and the display.  The preliminary injunction that ShuffleMaster obtained against us in November 2004 prevented us from selling ourPokerOneTM Shuffler in the United States. An appellate courtstayed the injunction in March 2005.  Similarly,we cannot determine whether Shuffle Master will assert other litigation claimsbased upon other patents it may currently or in the

 

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future own, nor can wedetermine the likely outcome of any such litigation or whether any suchsubstantial litigation would have a material adverse effect on our business aspresently conducted or as anticipated.

 

***We believe that it is likely that our future products will be thesubject of future patent litigation if the products are sold and installed inthe United States and, if commenced, could subject us to continuing litigationcosts and risks.***

 

Other than the allegationsmade by Shuffle Master discussed above, we are not aware of any claims or basisfor our current products infringing on the proprietary rights of thirdparties.  To the extent that we introducenew products that incorporate the same or similar technology, it is likely thatShuffle Master will bring one or more claims against us seeking damages, injunctiveor other equitable relief, or both.  Wecannot predict the outcome of any future litigation that may occur.

 

If our future productsincorporate technology that infringes the proprietary rights of third partiesand we do not secure licenses from them, we could be liable for substantialdamages that would cause a material reduction in revenues and impair ourprospects for achieving growth and profitability.

 

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

 

•                  consumingsubstantial time and financial resources required to defend against them;

 

•                  diverting theattention of management from growing our business and managing operations;

 

•                  resulting incostly litigation; and

 

•                  disruptingproduct sales and shipments.

 

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

 

***Our failure tocompete successfully against innovative competitors could adversely impact ourability to sell our products and generate revenues.***

 

Our market is characterizedby changing technology, periodic product obsolescence and continuous protectionof proprietary technology.  Our successwill depend upon our ability to sell our current products, and to developsuccessor systems.  We will need tointroduce new products and features in a timely manner to meet evolvingcustomer requirements.  We may notsucceed in these efforts.  Even if wesucceed, products or technologies developed by others may render our productsor technologies noncompetitive or obsolete, which would impair our ability tosell our products and reduce our revenue.

 

***Scrutiny and attempts bythird parties to compromise our products’ security, if successful, could injureproduct demand and force us to take back impacted products.***

*** ***

In the event that our products become susceptible toattacks by third parties that result in a decrease or compromise of thesecurity of our customers’ operations, we will most likely be required to

 

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take back our productsfrom existing customers and will lose sales and rentals from prospectivecustomers.  Although we have tested ourproducts for security and our products have been tested by certain gamingregulators as part of the approval process, our products may be susceptible toschemes by third parties to defraud the properties where our products areused.  Vulnerabilities in the security ofour products will almost certainly reduce demand for these products.  Our shufflers may become vulnerable to cardcounters or expert players, and the use of our shufflers may result infinancial losses for our customers.  Theoccurrence of any of these events would likely have a material adverse effecton our sales revenues.

 

***Any conditions thatadversely affect the gaming industry could also have a material adverse effecton demand for our products.***

*** ***

The success of our business depends solely on thegaming industry where revenues are sensitive to general economic conditions andgenerally rise or fall rapidly in relation to the condition of the overalleconomy.  Although we cannot accuratelyestimate the economic impact of the recent terrorist attacks or currentinternational conflicts at this time, the gaming industry has been negativelyaffected by the reduction in air travel and tourism, and we expect that anysignificant decline in the economic health or growth of the gaming industrywill reduce demand for our products.

 

***We are unable to predict thefuture impact that extraordinary events, such as terrorism, the uncertainty ofwar 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 ouroperations, which, in turn, could significantly impact our revenues, costs andexpenses, and financial condition.  Theterrorist attacks that took place in the United States on September 11,2001 were unprecedented events that have created many economic and politicaluncertainties, especially to the gaming industry, some of which have materiallyadversely affected our business, results of operations, and financial conditionand may do so again in the future.  Inparticular, the gaming industry has been affected by the downturn in thetourist industry as a result of the September 11, 2001 attacks.  Because our business is directly tied to thegaming industry, the long-term effects from the September 11, 2001 attacksare unknown.  The potential for futureterrorist attacks, the national and international responses to terroristattacks, other acts of war or hostility and concerns about the spread ofcertain diseases, including severe acute respiratory syndrome, or SARS, havecreated many economic and political uncertainties, which could materiallyadversely affect our business, results of operations and financial condition inways that we currently cannot predict.

 

***Supply interruption from ourmanufacturing facility in China could cause us to fail to supply customerorders on a timely basis.***

*** ***

Wehave centralized most phases of the manufacturing process for our products atour own facility in Xiaolan Town in Zhongshan City, China.  We will be adversely impacted if there is aninterruption in our ability to receive components or inventoryfrom, or a material increase in labor costs in, China.  Factors that may cause a supply interruptioninclude disruption or changes in local China governmental, vendor or employeerelationships, political unrest, closure of ports, worldwide health concerns,including SARS, and other events beyond our control.  In the event that our manufacturing operationsin Xiaolan Town are interrupted, our ability to fill orders, ship such ordersand realize the revenues there from could be adversely affected.

 

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***Our efforts to expand intointernational markets pose special risks that could adversely affect all of ourbusiness.***

*** ***

As a result of the opening of our manufacturingfacility in China, we are currently operating in international markets.  Engaging in business outside of the UnitedStates will subject us to the customary risks of doing business in foreigncountries.  These risks includefluctuations in foreign currency exchange rates and controls, nationalizationand other economic, tax and regulatory policies of local governments and thepossibility of trade embargoes, political instability or war or otherhostility, as well as the laws and policies of the United Sates affectingforeign trade and investment.  Any one ormore of these factors could materially adversely affect our ability to conductbusiness outside the United States and therefore our business as whole.

 

***Our reliance on distributorsin international markets and our limited sales experience in foreign countriescould cause us to lose sales and collections on such sales.***

*** ***

In general, substantially all sales of our productsoutside the United States are achieved through distributor relationships.  We believe the distributors that we haveengaged are experienced and reputable; however, if we are unable to manage theserelationships, our ability to generate revenue and profits in the non-U.S.market may be adversely affected.  To theextent that we engage in direct sales outside the United States, we havelimited sales experience and history in foreign markets.  On January 21, 2005, we entered into an exclusivefive-year agreement with TCS to market and distribute our shuffler productsoutside 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’scontrolling interest in our common stock, our management has the power tocontrol all matters submitted to our stockholders, which renders non-managementstockholders’ efforts to effect substantial changes in our company moredifficult.***

*** ***

As of April 8, 2005, our executive officers andmembers of our board beneficially own approximately 7,844,689 shares of commonstock, or approximately 46.34% of the outstanding shares of our common stock,assuming exercise or conversion of all options, warrants and convertibledebentures held by our executive officers and members of our board that areexercisable within 60 days of April 8, 2005. Accordingly, these stockholders have the power to control all mattersrequiring approval by our stockholders, including the election of directors andapproval of mergers and other significant corporate transactions.  This concentration of ownership also has theeffect of delaying, preventing or expediting, as the case may be, a change incontrol of our company.

 

***The loss of our executiveofficers, significant employees or certain members of our management couldadversely impact our operations.***

*** ***

Our success is substantially dependent upon theefforts and skills of Mark Newburg, a member of our board of directors andDouglas H. Caszatt, our Acting Chief Financial Officer, Secretary andController.  We have entered into aconsulting agreement with Mr. Newburg and employment agreements with othersignificant employees.  However, if wewere to lose the services rendered by any of our executive officers orsignificant employees, key management, product development and sales functionscould be adversely affected.  Inaddition, we compete with other potential employers for employees, and we maynot succeed in hiring and retaining the executives and other employees that weneed.  An inability to hire and retainquality employees could have a material adverse effect on our business,financial condition and results of operations.

 

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**Risks Related to OurIndustry**

** **

***We face intense competitionfrom companies with longer operating histories, greater resources and moreestablished brand names that could use such advantages to lower our marketshare and reduce our revenues.***

*** ***

There is significant competition in the shufflermarket, where we compete with established companies and other entities, most ofwhich possess substantially greater resources than we do.  Almost all of the companies with which wecompete in the shuffler market are substantially larger, have more substantialhistories, backgrounds, experience and records of successful operations,greater financial, technical, marketing and other resources, more employees andmore extensive facilities than we now have, or will have in the foreseeablefuture.  It is also likely that othercompetitors will emerge in the near future. Other companies may develop products competitive to our SecureDrop®System.  We may not be able to competesuccessfully with other established gaming product manufacturers.  Our inability to compete successfully willlikely result in loss of market share and lower revenues, or increases inoperating costs, such as marketing costs.

 

***We face extensive regulation from gaming and other governmentauthorities.***

*** ***

The gaming industry is a highly regulated industryand is subject to numerous statutes, rules and regulations administered by thegaming commissions or similar regulatory authorities of each jurisdiction.  Generally, companies that seek to introducegaming products or concepts into such jurisdictions may be required to submitapplications relating to their activities or products (including detailedbackground information concerning controlling persons within theirorganization), which are then reviewed for approval.  In this regard, we may incur significantexpenses 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 anyjurisdiction in which we may seek to introduce our products or concepts couldhave a material adverse effect on our business. In addition, any change to the applicable statutes, rules andregulations that restricts or prevents our ability to operate could have anadverse effect on us.

 

***Any person who is thebeneficial owner of our common stock or with whom we have a materialrelationship that fails or refuses to apply for a finding of suitability, orthat is found unsuitable for licensing, would be required to dispose of all ofour stock.***

*** ***

Certain gaming regulatory agencies to which we aresubject may investigate any beneficial holder of our voting securities(regardless of the numbers of shares owned), and any individual who has amaterial relationship or involvement with us, in order to determine whethersuch individual is suitable or should be licensed as a business associate ofours.  In addition, the gamingauthorities of various jurisdictions may require our officers, directors andcertain key employees to be licensed or found suitable by these gamingauthorities, which would require these officers, directors and key employees tosubmit detailed background information. Any person who fails or refuses to apply for a finding of suitability ora license after being ordered to do so by gaming regulatory agencies may befound unsuitable and we could be subject to adverse regulatory action.  In the event that the gaming authorities wereto find an officer, director, key employee, stockholder, or any other individualthat has a material relationship with us, unsuitable for licensing orunsuitable to continue having a relationship with us, we would have to severall relationships with that individual, and that individual would be requiredto dispose of all of our stock.  Thiscould result in the loss of key persons critical to our success or insignificant selling pressure on our stock if such persons are required todispose of shares of our common stock in an amount that exceeds typical tradingvolumes in our shares.

 

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***Our focus on products forthe gaming industry subjects us to greater risk than we would have if wemarketed our products to multiple industries.***

*** ***

We design and manufacture products and conceptssolely for the gaming industry and depend almost exclusively on our ability togenerate revenues from the rental or sale of our products to customers in thegaming industry.  The economic health ofthe gaming industry, and, therefore, our revenues, are affected by a number offactors beyond our control, including:

 

•                  generaleconomic conditions, such as recession, inflation, business cycle fluctuationsand interest rates;

 

•                  levels ofdisposable income of gaming property patrons;

 

•                  acts ofterrorism and anti-terrorism efforts;

 

•                  increased transportationcosts resulting in decreased travel by gaming patrons;

 

•                  changes orproposed changes in tax laws;

 

•                  legal andregulatory issues affecting the development, operation and licensing of ourgaming customers; and

 

•                  competitiveconditions in the gaming industry.

 

These factors may adversely impact the demand forour products and materially affect the revenues that we realize on the sale orplacement of our products.

 

**Risks Related to Our CommonStock**

** **

***Our common stock is thinlytraded, so our stockholders may have difficulty in trading large amounts ofstock or may lose the total value of their investment.***

*** ***

There had been no trading market for our commonstock until September 10, 2003, when our common stock became eligible forquotation on the OTC Bulletin Board.  Itwas not until May 4, 2004, that our common stock began trading on AMEX.  Due to the limited trading volume of ourcommon stock, an active trading and/or a liquid market may be difficult tosustain.  Moreover, in the event that weare unable to continue as a going concern and we are dissolved or otherwiseterminated, you could lose your entire investment in our common stock.  Investment in our common stock is at risk ofcomplete loss if our operations are unsuccessful.

 

***Investors seeking guaranteeddividend-paying investments should not invest in our common stock.***

*** ***

Our operations may not become profitable.  If we become profitable, we intend to use anyearnings that may be generated to finance the growth of our business.  Any payment of future dividends will be atthe discretion of our board of directors and will depend on, among otherthings, our earnings, financial condition, capital requirements, level ofindebtedness, statutory and contractual restrictions applying to the payment ofdividends, and other considerations that our board of directors deems relevant. We also have substantial restrictions onthe ability to pay dividends under our covenants in our senior notes.  Accordingly, stockholders may have to sellsome or all of their common stock in order to generate cash flow from theirinvestment.  Stockholders may not realizea gain on their investment, and they may lose all or a significant amount oftheir investment when they sell their common stock.

 

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***If we are unable to generatesufficient revenue to provide the cash required to fund our operations in thefuture, we may be required to issue additional equity or convertible debtsecurities to provide our operations with additional working capital, which, inturn, will have the effect of diluting the relative ownership of our existingstockholders.***

*** ***

We have supplemented the cash deficit arising fromour operations with the proceeds from the Senior Notes, and will, if necessary,continue to supplement with cash from private or public placements of debt orequity, institutional or other lending sources. Although we have also utilized convertible debt securities and warrantsto raise capital in the past, we are limited under the terms and conditions ofthe Senior Notes to incur additional debt. The issuance of additional equity or convertible debt securities willhave the effect of reducing the percentage ownership of our currentstockholders.  In addition, these equityor convertible debt securities may have additional rights, preferences orprivileges to those of our common stock, such as registration rights andpreferences in liquidation.  In the eventwe are required to raise additional funds to support our operations, additionalfunds may not be available on terms favorable to our company, or at all.  If adequate funds are not available or arenot available on acceptable terms, we may not be able to fund our operations orotherwise continue as a going concern.

 

***Shares eligible for sale inthe near future may cause the market price for our common stock to decline.***

*** ***

In addition to the number of shares registered onbehalf of investors who purchased the Senior Notes and excluding the sharesheld by our executive officers and directors, as of April 30, 2005, we haveapproximately 9,082,917 shares of common stock that are either freely tradablepursuant 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 filedwith the SEC.  As such, the future saleof a substantial number of shares of our common stock in market transactions,or the perception that these sales could occur, may depress the market pricefor our common stock.  These sales couldalso impair our ability to raise additional capital through the sale of ourequity securities in the future.

 

***Our board of directors mayissue blank check preferred stock, which may affect the voting rights of ourholders and could deter or delay an attempt to obtain control of us.***

*** ***

Our board of directors is authorized, withoutstockholder approval, to issue preferred stock in series and to fix and statethe voting rights and powers, designation, preferences and relative,participating, optional or other special rights of the shares of each suchseries and the qualifications, limitations and restrictions thereof.  Preferred stock may rank prior to our commonstock with respect to dividends rights, liquidation preferences, or both, andmay have full or limited voting rights. Accordingly, issuance of shares of preferred stock could adverselyaffect the voting power of holders of our common stock and could have theeffect of deterring or delaying an attempt to obtain control of us.

 

## **Item 3.**                             Controlsand Procedures

## ** **

(a)           *Evaluationof Disclosure Controls.*  Weevaluated the effectiveness of our disclosure controls and procedures as of theend of the three months ended March 31, 2005. This evaluation was done with the participation of Mark R. Newburg, our ExecutiveDirector, and Douglas H. Caszatt, our Acting Chief Financial Officer, Secretaryand Controller.  Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin 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 informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and

 

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communicated to ourmanagement, as appropriate to allow timely decisions regarding requireddisclosure.

 

Ourmanagement does not expect that our disclosure controls and procedures or ourinternal controls over financial reporting will prevent all error and allfraud.  A control system, no matter howwell conceived and operated, can provide only reasonable, but not absolute,assurance that the objectives of a control system are met.  Further, any control system reflectslimitations on resources, and the benefits of a control system must beconsidered relative to its costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, have been detected.  These inherent limitations include the realitiesthat judgments in decision-making can be faulty and that breakdowns can occurbecause of simple error or mistake. Additionally, controls can be circumventedby the individual acts of some persons, by collusion of two or more people, orby management override of a control.  Thedesign of a control system is also based upon certain assumptions about thelikelihood of future events, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions;over time, controls may become inadequate because of changes in conditions, orthe degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand may not be detected.

 

Basedon this evaluation, we concluded that, subject to the limitations noted above,our disclosure controls and procedures are effective to ensure that informationwe are required to disclose in reports that we file or submit under theExchange Act is recorded, processed, summarized, and reported within the timeperiods specified in the SEC’s rules and forms.

 

(b)           *Changesin Disclosure Controls and Procedures.*  There were no changes in our internalcontrols over financial reporting that occurred during the three months endedMarch 31, 2005 that have materially affected, or are reasonably likely tomaterially affect, our internal controls over financial reporting.

 

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# ** **

# **PART II – OTHER INFORMATION**

# ** **

## **Item 1.  LegalProceedings**

## ** **

OnMarch 27, 2002, Shuffle Master, Inc., or Shuffle Master, filed a complaint(Case No. CV-S-02-0438-JCM-PAL) against VendingData in the United StatesDistrict Court, District of Nevada. The amended complaint alleges, among otherthings, claims for patent infringement and requests treble damages, aninjunction 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 gainsand profits that resulted from the alleged infringement, and for interest,costs and attorneys’ fees. The Shuffle Master patents that are at issue in thelitigation concern registering use of a playing card shuffler apparatus and thedisplaying 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 requestthat Shuffle Master’s complaint be dismissed. We also seek a declaration thatwe do not infringe Shuffle Master’s patents and that Shuffle Master’s patentsand certain of its related claims are invalid. We further assert counterclaimsagainst Shuffle Master for breach of contract and violation of the UniformTrade Secrets Act. On May 20, 2002, the United States District Court, Districtof 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 onthis motion was taken off calendar pending a ruling from the Court regardingclaim construction to determine the scope and definition of the patent claimsat issue. On March 31, 2004, the Magistrate Judge issued an order with regardto claim interpretation. On June 25, 2004, the District Court affirmed theMagistrate Judge’s order. On August 24, 2004, we renewed our motion for summaryjudgment to invalidate Shuffle Master’s patents.  On October 14, 2004, the District Courtissued an order denying the motion for summary judgment for failure to submitadmissible evidence in support of the motion for summary judgment. We filed amotion for clarification and reconsideration of the Court’s order on November5, 2004. No decision has yet been reached on this motion. The trial is set for June6, 2005.

 

OnOctober 5, 2004, Shuffle Master filed another patent infringement actionagainst 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 andoffering for sale of the PokerOneTM shuffler infringes Shuffle Master’s UnitedStates Patent No. 6,655,684. On October 25, 2004, we filed our answer andcounterclaim that denies Shuffle Master’s allegations of patent infringementand requests that the Court enter a declaratory judgment of non-infringement.On October 14, 2004 Shuffle Master filed a Motion for Preliminary Injunctionseeking to enjoin us from selling the PokerOneTM shuffler in the United Statesduring the pendency of its second lawsuit. The United States District Court,District of Nevada, granted the Motion for Preliminary Injunction filed byShuffle Master, Inc. On March 3, 2005, the Court of Appeals stayed thepreliminary injunction granted by the United States District Court pending thedisposition of our appeal. In its order, the Court of Appeals stated that “VendingDatahas shown the requisite likelihood of success to obtain a stay of theinjunction, pending appeal” and that “VendingData has shown that in thecircumstances of this case the district court likely erred in entering apreliminary injunction without providing any analysis of the disputed claimlanguage.” A Markman hearing is scheduled for May 16, 2005.

 

## **Item 2. Changes in Securities.**

## ** **

Notapplicable.

 

## **Item 3.  Defaults Upon Senior Securities.**

## ** **

Notapplicable.

 

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## **Item 4.  Submission of Matters to a Vote of SecurityHolders.**

## ** **

Notapplicable.

 

## **Item 5.  OtherInformation.**

## ** **

Notapplicable.

 

## **Item 6.  Exhibits and Reports on Form 8-K.**

## ** **

(a)                                  Exhibits.

 

31.1                           CertificationsPursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                           CertificationsPursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1         Certificationof Principal Executive Officer and Principal Financial Officer pursuant toSection 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

 

(b)                                 Reportson Form 8-K.

 

Duringthe three months ended March 31, 2005, we filed the following:

 

•                                          Current Report on Form 8-K dated March25, 2005 and filed on March 29, 2005;

 

•                                          Current Report on Form 8-K dated March16, 2005 and filed on March 14, 2005;

 

•                                          Current Report on Form 8-K dated March15, 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 February9, 2005 and filed on February 15, 2005; and

 

•                                          Current Report on Form 8-K dated January6, 2005 and filed on January 11, 2005.

 

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**SIGNATURE**

** **

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| ** ** | ** **   | ** ** | **VendingData Corporation** | ** **                                        |
|------------|--------------|------------|-----------------------------|---------------------------------------------------|
|       |         |       | (Registrant)                |                                              |
|       |         |       |                        |
| Date:      | May 16, 2005 |       | By:                         | /s/ Mark R. Newburg                               |   |
|       |         |       |                        | Mark R. Newburg                                   |
|       |         |       | Its:                        | Executive Director (Principal Executive  Officer) |
|            |              |            |                             |                                                   |  |  |

 

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