**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**Washington, D.C. 20549

**FORM 10-QSB**

| (Mark One) |
|------------|
| x          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|       |   |
|       | For the quarterly period ended:                           June 30, 2004                           |
|       |   |
| OR         |
|       |   |
| o          | **TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
|       |   |
|       | For the transition period from:   ________________________   to  ________________________  |
|       |   |
|       | Commission file number:                                      001-32161                            **VendingData Corporation**(Exact name of small business issuer as specified in its charter) Nevada 91-1696010 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 6830 Spencer Street, Las Vegas, Nevada  89119(Address of principal executive offices) (702) 733-7195(Issuer’s telephone number) (Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  xNo o

**APPLICABLE ONLY TO CORPORATE ISSUERS**

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:       17,187,799 shares of common stock, $.001 par value, as of June 30, 2004     

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

**VENDINGDATA CORPORATION**

**FORM 10-QSB**

**TABLE OF CONTENTS**
   **PAGE**   **PART I – FINANCIAL INFORMATION****1**               ITEM 1.  FINANCIAL STATEMENTS1                               Balance Sheets. - 3 -1                               Statements of Operations. - 5 -2                               Statements of Cash Flows. - 6 -3                ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS7                               OVERVIEW... - 10 -7                               CRITICAL ACCOUNTING POLICIES AND ESTIMATES. - 10 -7                               RESULTS OF OPERATIONS. - 12 -9                               LIQUIDITY AND CAPITAL RESOURCES. - 16 -12                               RISK FACTORS. - 18 -14               ITEM 3.  CONTROLS AND PROCEDURES23 **PART II – OTHER INFORMATION****25**                ITEM 1.  LEGAL PROCEEDINGS. - 35 -25                ITEM 2.  CHANGES IN SECURITIES - 35 -25                ITEM 3.  DEFAULTS UPON SENIOR SECURITIES - 36 -26                ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - 36 -26                ITEM 5.  OTHER INFORMATION - 36 -26                ITEM 6.  EXHIBITS AND REPORTS ON FORM **8-K** - 36 -26 
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**PART I – FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS.**

**VENDINGDATA CORPORATION****Balance  Sheets**
                                                                                     ** June 30, 2004** ** December 31, 2003** **ASSETS**** (unaudited)** **Current assets:**        Cash and cash equivalents$ 2,407,419 $ 11,526,664   Current portion of accounts receivable, trade, net of allowance for         uncollectables of $124,561 and $125,530 3,535,365  2,354,054   Due from affiliate 18,407  31,802   Other receivables 67,133  29,836   Inventories 5,569,258  4,150,414   Prepaid expenses 331,882  52,028   11,929,464  18,144,798 Equipment rented to customers, net of accumulated depreciation of $441,894 and $316,245 523,350  608,555 Property and equipment, net of accumulated depreciation of $2,060,740 and $1,859,206 998,270  1,063,951 Intangible assets, net of accumulated amortization of $360,081 and $288,203 1,208,051  1,282,088 Due from affiliate - non current 118,800  118,800 Accounts receivable, trade, net of current portion, less unamortized discount 1,623,926  1,140,984 Deferred expenses 444,825  250,697 Deposits 1,138,278  1,284,827 Other assets —  265,478  $ 17,984,964 $ 24,160,178  **LIABILITIES AND STOCKHOLDERS’ EQUITY**      **Current liabilities:**  Current portion of leases payable$ 1,962,174 $ 2,237,073   Accounts payable 930,399  1,727,460   Accrued expenses 578,374  824,307   Deferred revenues, current portion 250,360  171,875   Short-term debt 238,250  270,743   Current portion of convertible debt —  2,368,077   Customer deposits 198,560  178,805   4,158,117  7,778,340   Deferred revenues, net of current portion 276,045  219,890   Leases payable, net of current portion 1,011,966  1,916,723   5,446,128  9,914,953 **Stockholders’ equity:**  Preferred stock, $.001 par value, 10,000,000 shares authorized, no shares         issued and outstanding —  —   Common stock, $.001 par value, 25,000,000 shares authorized, 17,187,799 and         16,765,580 shares issued and outstanding 17,188  16,766 Additional paid-in capital 59,659,307  58,810,806 Deficit (47,137,659) (44,582,347)  Total stockholders’ equity 12,538,836  14,245,225   Total liabilities and stockholders’ equity$ 17,948,964 $ 24,160,178 
See accompanying notes to financial statements.

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**VENDINGDATA CORPORATION****Statements of Operations**

**(UNAUDITED)**
 **Three Months Ended June 30,** **Six Months Ended June 30,**     **2004** **2003** **2004** **2003**      **Revenues:**            Sales$ 1,877,656 $ 1,619,055 $ 2,870,710 $ 3,223,980     Rental 161,110  300,430  372,173  630,743     Other 20,762  12  109,535  132   2,059,528  1,919,497  3,352,418  3,854,855 **Operating expenses:**                Cost of sales 1,068,888  887,082  1,849,625  2,134,286     Selling, general and administrative 1,451,912  1,732,033  2,877,946  3,064,524     Research and development 392,807  228,476  671,560  372,860   2,913,607  2,847,591  5,399,131  5,571,670 Loss from operations (854,079) (928,094) (2,046,713) (1,716,815)Interest expense, unrelated parties 231,479  556,095  494,101  1,053,771 Interest expense, related parties 540  149,572  15,063  309,393 Gain on disposition of assets —  —  (567) —   232,019  705,667  508,597  1,363,164 Net loss$ (1,086,098)$ (1,633,761)$ (2,555,310)$ (3,079,979)Basic and diluted loss per share$ (0.06)$ (0.21)$ (0.15)$ (0.40)Weighted average shares outstanding 17,187,799  7,646,430  17,146,750  7,636,185 ****
See accompanying notes to financial statements.

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**VENDINGDATA CORPORATION****STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**
 **Six Months Ended June 30,**      **2004** **2003**    **Operating activities:**            Net cash used in operating activities$ (6,180,134)$ (7,016,487)       **Investing activities:**        Acquisition of intangible assets (4,900) (8,915)  Acquisition of plant and equipment (156,381) (450,525)  Acquisition of equipment produced for rental —  (9,500)  Disposition of equipment produced for rental —  502,791   Other 665  705   Deposits —  (133,518)      Net cash used in investing activities (160,616) (98,962) **Financing activities:**        Proceeds from sale of stock —  362,550   Reimbursement of offering expense 36,731  —   Proceeds from leases payable —  924,107   Repayment of leases payable (1,179,656) (1,362,931)  Proceeds from short-term debt —  1,000,000   Repayment of short-term debt (32,493) (180,000)  Proceeds from convertible debt —  5,000,000   Repayment of convertible debt (1,603,077) —       Net cash provided by (used in) financing activities (2,778,495) 5,743,726  **Change in cash and cash equivalents:**        Decrease in cash (9,119,245) (1,371,723)  Cash and cash equivalents at beginning of period 11,526,664  1,778,297   Cash and cash equivalents at end of period$ 2,407,419 $ 406,574 ****
See accompanying notes to financial statements.

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**VENDINGDATA CORPORATION AND SUBSIDIARIES****NOTES TO FINANCIAL STATEMENTS (UNAUDITED)**

**Note 1—Basis of Presentation**

                The accompanying unaudited financial statements of VendingData Corporation (the “Company”)have been prepared in accordance with generally accepted accounting principles for interim financialinformation and with the instructions incorporated in Regulation S-B of the Securities and ExchangeCommission. Accordingly, they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring adjustments and accruals) considered necessary for afair presentation have been included. 

                The results of operations for the periods presented are not necessarily indicative of the results tobe expected for the full year. The accompanying financial statements should be read in conjunctionwith the Company’s audited financial statements for the year ended December 31, 2003, asincluded in the Company’s Annual Report on Form 10-KSB as filed with the Securities andExchange Commission from which the accompanying balance sheet information as of that date was derived.Certain reclassifications have been made to amounts presented in prior periods for comparabilityto the current period presentation. 

**Note 2—Segments**

                The revenue segments identified for geographic region-based enterprise-wide data are as follows: 
 **Three Months Ended June 30,** **Six Months Ended June, 30,**     **2004** **2003** **2004** **2003**      United States$ 1,297,863 $ 1,844,497 $ 2,456,361 $ 3,603,963 Asia 11,665  —  146,057  134,392 Europe 750,000  75,000  750,000  75,000 South America —  —  —  41,500 
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                The Company’s revenues, depreciation and operating income distribution by product are as follows:
  **Three Months Ended** **Six Months Ended**      **June 30,** **June 30,**      **2004** **2003** **2004** **2003**      Revenues              SecureDrop®$ 83,242 $ 185,223 $ 278,775 $ 1,334,733       Shuffler 584,672  1,517,008  1,041,947  2,261,824       Deck CheckerTM 1,370,852  215,649  1,922,161  228,212       Other revenue 20,762  1,617  109,535  30,086  $ 2,059,528 $ 1,919,497 $ 3,352,418 $ 3,854,855 Depreciation and amortization       SecureDrop®$ 0 $ 0 $ 0 $ 0       Shuffler 56,220  129,229  111,782  285,017       Deck CheckerTM 7,207  0  13,867  0       Selling, general and administrative 145,592  116,253  300,332  219,934   209,019  245,482  425,981  504,951 Operating income (loss)                  SecureDrop® gross margin$ 18,813 $ (26,924)$ 110,377 $ 654,029       Shuffler gross margin 451,877  1,218,455  814,392  1,702,546       Deck CheckerTM gross margin 1,071,398  134,506  1,485,404  137,689       Other cost of goods sold (551,448) (293,622) (907,380) (773,695)      Selling, general and administrative (1,451,912) (1,732,033) (2,877,946) (3,064,524)      Research and development (392,807) (228,476) (671,560) (372,860) $ (854,079)$ (928,094)$ (2,046,713)$ (1,716,815)
**Note 3—Loss per Share (Basic and Diluted)**

                The basic loss per share is computed by dividing the net loss for the period by the weighted averagenumber of common shares outstanding for the period. Loss per share is unchanged on a diluted basissince the assumed exercise of common stock equivalents would have an anti-dilutive effect due tothe existence of operating losses. 

**Note 4—Debt**

                The company retired $2,368,077 of convertible debt during the six months ended June 30, 2004 with cashpayments and conversions to common stock. 

**Note 5—Options**

                The Company currently has two stock option plans. No stock-based employee compensation expense forstock options was reflected in net income for years prior to 2003, as all stock options granted underthose plans had an exercise price equal to or greater than the fair market value of the underlyingcommon stock on the date of grant. The exercise price range is between $1.75 and $15.00 with a weightedaverage exercise price of $3.52. There were 2,008,470 options outstanding as of June 30, 2004. 
****
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**Note 6—****Liquidity Issues**

                The Company’s ability to maintain adequate liquidity may be dependent upon the success of management’s plans to address and overcome prior operating losses. Management has developed and refined its 2004 operating plan to increase its sales by expanding its product line and improving its sales efforts domestically and internationally. Increased sales in the year ended December 31, 2003 show increased acceptance of the Company’s product line. Management has adopted a program to reduce operating costs through the transfer of manufacturing operations to China and restructuring service functions to reduce labor and rental expense. Management focused on financial condition and liquidity improvements through its capital raising efforts in 2003 along with substantial debt reduction and debt conversion. As a result of anticipated sales improvements and operating cost initiatives, management believes that the Company will begin to generate positive operating cash flow during the second half of 2004. In addition, the Company’s financial advisors have expressed confidence that additional capital can be raised by the Company, if necessary, in 2004, and the Company has received a one-year commitment for a $3.0 million lease line of credit. 

**Note 7—Trade Receivables From Major Customers**

                As of and during the six months ended June 30, 2004, approximately 2.1% of trade receivables and 5.4 % of total sales and, as of and during the year ended December 31, 2003, approximately 17.6% of trade receivables and 13.3% of total sales were concentrated in the Nevada gaming industry among five customers under common ownership. The Company’s future operations could be affected by adverse changes in the financial condition of, or the Company’s relationships with, the commonly owned Nevada gaming customers, or economic, competitive and political conditions in our customers’ respective local areas or the gaming industry, in general. 

                The Company manages its concentrations of credit risk by evaluating the creditworthiness of customers before credit is extended and monitoring it thereafter. The maximum losses that the Company would incur if a customer failed to pay amounts owed would be limited to the recorded receivables after any allowances provided. 

**Note 8—Contingencies**

                The Company is a party to certain claims, legal actions, and complaints, including a patent infringement action between the Company and one of its main competitors. The Company cannot predict the likely outcome of any such litigation or whether any such substantial litigation would have a material adverse effect on its business as presently conducted or as anticipated. 

                In early February 2004, the State of Nevada initiated a sales/use tax audit of Central and Madison Leasing, companies through which the Company has obtained lease financing. As of this filing the State of Nevada has not made a determination if there has been a shortfall in the payment of the sales/use tax. The Company has sold and leased back shufflers and Deck CheckersTM over the last five years. The auditor for the State of Nevada is trying to determine at what level a sales/use tax needs to be collected. The Company now collects from our customers in Nevada and remits payments to the State of Nevada. If the State of Nevada determines that the sales of the products to the leasing companies is the level at which sales/use tax should have been collected, liability of the leasing companies would be passed to the Company. The amount of this potential liability could range from a refund of $230,000 to the payment of sales/use tax with interest and penalties of up to $500,000. The Company intends to defend its position in this matter.
****
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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.**

        **Statement on Forward-Looking Information**

                Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as statements relating to plans for product development, product placement, capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to our liquidity requirements, our ability to locate necessary sources of capital to sustain our operations, the continued growth of the gaming industry, the success of our product development activities, the acceptance of our products in the marketplace, vigorous competition in the gaming industry, our dependence on existing management, changes in gaming laws and regulations (including actions affecting licensing), our leverage and debt service (including sensitivity to fluctuations in interest rates) and domestic or global economic conditions.

**OVERVIEW**

                Our strategy is to develop cost-effective niche products for the global gaming industry. We focus on products that increase the security, productivity and profitability of casino operations. Our strategy involves marketing certain of our products for sale or lease, depending on the product, the geographic location of the customer and other factors. We rely on our internal sales staff and distributor relationships for the sale and rental of our products. Although we anticipate significant sales development and revenue growth, there is no assurance that we will generate sufficient revenue, cash flow or profit to sustain our operations. 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

                The following is a summary of what our management believes are the critical accounting policies related to our operations. The application of these policies, in some cases, requires our management to make subjective judgments regarding the effect of matters that are inherently uncertain. 

                The preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect reported amounts and disclosures, some of which may require revision in future periods. Actual results could differ from these estimates. The following is a summary of what our management believes are the critical accounting policies related to our operations. The application of these policies, in some cases, requires our management to make subjective judgments and estimates regarding the effect of matters that are inherently uncertain. 
 ***Allowance for Doubtful Accounts.***
                In connection with the preparation of our financial statements, management reviews and evaluates the collectibility of our trade receivables and adjusts our allowance for estimated uncollectible accounts as deemed necessary in the circumstances. These estimates have the potential for critically affecting the determination of results of operations for any given period. Factors considered by management in making such estimates and adjustments include any concentrations among customers, changes in our relationships therewith, payment history and the apparent financial condition thereof. 

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                ***Revenue Recognition.***

                We recognize revenue from the sale of our products upon installation and functional testing at customer locations because that is when the customer’s obligation becomes fixed and certain pursuant to our standard contracts for the sale of units of the SecureDrop® System, shufflers and Deck CheckersTM. Sales are recognized immediately when shufflers that are rented are converted to purchases depending on the creditworthiness and payment history of the casino company since payment terms are from 20 to 48 months. The extended warranty and maintenance components that are part of long term sales contracts are unbundled and recognized as deferred revenue amortized over the remaining life of the sales agreement after the initial 90-day warranty as required by the *Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables*. The useful life of our shufflers and Deck CheckersTM is five years with proper maintenance; the life can be extended with the replacement of component parts. If the customer does not possess the required creditworthiness or an established payment history with us, we would then book the revenue as an installment sale and recognize it over time as payments are received. Revenue from shuffler rentals is recorded at the first of each month in accordance with rental contract terms. All rental contracts are cancelable upon 30-day written notice by the customer. Maintenance expense for rental units is recorded in the period it is incurred. Although sales are not generally made with a right to return, upon occasion, usually associated with the performance warranty, sales returns and allowances are recorded after returned goods are received and inspected. We provide currently for estimated warranty repair costs associated with sales contracts. Although there are no extended warranties offered for our products, we do provide for maintenance contracts that are billed and recognized on a monthly basis. 
 ***Intangible Assets.***
                We have acquired patent rights for various products since 2001 and acquired the patent rights for the Deck CheckerTM for $1,004,900 in the third quarter of 2003. We have estimated an economic useful life of 10 years for the Deck CheckerTM patents. We currently amortize our intangible assets on a straight-line basis over the estimated useful lives of 10 years. 

**FINANCIAL CONDITION**

                Total assets decreased from $24,160,178 to $17,984,964 between December 31, 2003 and June 30, 2004, a decrease of $6,175,214 or 25.6%. The decrease in total assets was due primarily to the $9,119,245 decrease in cash, offset, in part, by an increase in our accounts receivable (trade) and an increase in our inventories. The decrease in cash was due to continuing negative operating cash flows and debt reduction. Accounts receivable (trade) increased by $1,181,311 between December 31, 2003 and June 30, 2004. The primary reasons for the increase in trade receivables were the sale of Deck CheckersTM on terms. Inventories have increased during the current period by $1,418,844 between December 31, 2003 and June 30, 2004. The increase is primarily due to the ramping up of manufacturing in China for Deck CheckerTM units, shuffler production and the PokerOneTM Shuffler. 
                Total liabilities have decreased from $9,914,953 to $5,446,128 between December 31, 2003 and June 30, 2004, a decrease of $4,468,825 or 45.1%. Accounts payable decreased by $797,061 between December 31, 2003 and June 30, 2004 primarily due to the payment of the final $500,000 for the intellectual property rights for the Deck CheckerTM and the payment of outstanding payables with funds received from the public offering in December of 2003. From December 31, 2003 to June 30, 2004, we eliminated our convertible debt of $2,368,077 through cash payments and conversions to common stock. Short-term debt decreased by $32,493 between December 31, 2003 and June 30, 2004 due to the repayment of short-term debt. 
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**RESULTS OF OPERATIONS**

                ***Comparison of Three Months Ended June 30, 2004 and 2003***
 **Revenue**
                For the three months ended June 30, 2004, total revenues increased from $1,919,497 to $2,059,528, compared to the three months ended June 30, 2003, an increase of $140,031 or 7.3%. The increase in total revenues was due primarily to increases in our Deck CheckerTM revenue and other revenue, offset, in part, by decreases in our SecureDrop® revenue and our shuffler revenue.

                **Deck CheckerTM.**   Revenue related to the sale and rental of our Deck CheckerTM product increased substantially compared to the three months ended June 30, 2003. Introduced in the second quarter of 2003, we expect Deck CheckerTM  revenue will continue to grow as the number of jurisdictions where we can sell the product increases along with the anticipated acceptance rate of the product in the casino industry. Since production has begun at our China facility at a much lower cost per unit, we will be able to establish a more aggressive price point while maintaining margins.

                **SecureDrop®.**   Our SecureDrop® revenue decreased by 51.1% during the three months ended June 30, 2004 in comparison to the three months ended June 30, 2003. The decrease was due to the a major installation of SecureDrop® products at three properties operated by Caesars Entertainment Inc. during the three months ended June 30, 2003. Although we are currently in negotiations for new contracts that would impact revenue in the second half of the year, we anticipate that we will continue to experience fluctuations in SecureDrop® revenue through the end of 2004. 

                **Shufflers.**   Our shuffler sales revenue decreased during the three months ended June 30, 2004 in comparison to the three months ending June 30, 2003. Since the majority of the sales occurring in the second quarter of 2003 were from the conversion of shufflers on rent to purchases through long-term sales agreements that range from 24-48 months, we do not anticipate that conversions will contribute significantly to our shuffler sales in the future. We made a strategic decision to offer our customers the choice to either continue renting or to purchase our shufflers for the same monthly payments. This decision was based on competitive forces in the marketplace and the anticipated introduction of our next generation shufflers in 2004. By offering some of our customers the ability to trade up to our new shuffler, the RandomPlusTM  Shuffler, when approved by the relevant regulatory bodies, we will be able to obtain binding purchase commitments for our shufflers and ensure that our products are not readily replaced with those of our competitors. 

                Our shuffler rental revenue for the three months ended June 30, 2004 decreased compared to the three months ended June 30, 2003 due to the reduced number of shufflers placed on a rental basis. The conversion of rental units to purchases reduced the number of shufflers that were rented throughout this quarter compared to the second quarter of 2003. With the introduction of the new RandomPlusTM shuffler in the fourth quarter 2004, we anticipate an increase in the number of units placed on a rental basis.

                **Other Revenues.**   Our other revenues for the three months ended June 30, 2004 increased compared to the three months ended June 30, 2003 due to increases in the sale of supplies for SecureDrop® and the Deck CheckerTM. The upward trend will continue for these consumables as we increase the installed base of these two product lines. 
****
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                **Cost of Sales**

                For the three months ended June 30, 2004, our cost of sales increased to $1,068,888, compared to $887,082 for the three months ended June 30, 2003, an increase of $181,806 or 20.5%. The gross margin on revenue for the three months ended June 30, 2004 was 48.1%. This compares to 53.8% for the three months ended June 30, 2003 and to 39.6% for the three months ended March 31, 2004. The decrease in gross margin from the same period of the prior year reflects the costs in transitioning our manufacturing to China. As this transition is completed, we expect to experience improvement in our gross margin percentage.

                The gross margin percentage on revenue from Deck CheckerTM  sales revenue was 77.7% during the three months ended June 30, 2004, compared to 62.4% during the three months ended June 30, 2003. We originally purchased our inventory of Deck CheckersTM  from a manufacturer located in New Zealand and, as of June 30, 2004, have sold most of these Deck CheckersTM. We are now manufacturing our Deck CheckersTM  at our China facility and, after initial transitional costs, anticipate lower costs per unit.

                Our cost of SecureDrop® sales revenue decreased by 69.6%. The decrease is directly related to the decrease in SecureDrop® sales during the same period. The gross margin percentage on revenue from SecureDrop® sales revenue was 22.6% in the three months ended June 30, 2004 compared to a gross margin deficit percentage of 14.5% for the three months ended June 30, 2003.

                Our cost of shuffler sales revenue for the three months ended June 30, 2004 decreased by 52% compared to the three months ended June 30, 2003. The decrease in the cost of shuffler sales revenue was due to the decreased sale of shuffler units during the three months ended June 30, 2004. The gross margin percentage on revenue from shuffler sales revenue was 83.2% in the three months ended June 30, 2004 compared to 86.1% for the three months ended June 30, 2003. The conversion of existing rental shufflers with low book values due to depreciation to purchases reduced the product cost in the prior year.

                **Selling, General and Administrative Expense**

                For the three months ended June 30, 2004, our selling, general and administrative expenses were $1,451,912, a decrease of $280,121, or 16.2%, from $1,732,033 for the three months ended June 30, 2003. The decrease in selling, general and administrative expenses related primarily to decreases in salaries and related expense, consulting and accounting expense, advertising expense, travel and entertainment expense, legal and regulatory expense and supplies expense. 

                Our general and administrative expenses for the three months ended June 30, 2004 consisted of the following: salaries and related costs of $526,556; consulting and accounting services of $67,053; advertising and marketing costs of $8,119; travel and entertainment costs of $173,172; gaming industry show costs of $68,033; rent of $91,469; repairs and maintenance expense of $20,682; supplies of $10,705; legal and regulatory expenses of $259,860; insurance expenses of $12,685; depreciation and amortization of $136,559; and other expenses of $77,019. 

                **Research and Development Expenses**

                For the three months ended June 30, 2004, research and development expenses were $392,807, an increase of $164,332, or 71.9%, from $228,476 for the three months ended June 30, 2003. The increase in research and development expenses was due to the development of the RandomPlusTM shuffler and PokerOneTM. Although research and development has been a significant cost, we anticipate that these costs will decrease in the future as most of the research and development functions have been or are being moved to our China facility.
****
— 10 —

                **Interest Expense**

                For the three months ended June 30, 2004, we incurred interest expenses of $232,019, compared to $705,667 for the three months ended June 30, 2003, a decrease of $473,648 or 67.1%. This decrease was primarily attributable to the reduced debt service as a result of a decrease in our outstanding indebtedness and the retirement and conversion of $20,331,995 convertible debt in 2003 and early 2004.

                **Net Loss**

                For the three months ended June 30, 2004, we had a net loss of $1,086,098 compared to a net loss of $1,633,761 for the three months ended June 30, 2003, a decrease of $547,663, or 33.5%. The decrease in net loss was primarily due to decreases in selling, general and administrative expense and interest expenses. Basic loss per share was $0.06 for the three months ended June 30, 2004, compared to $0.21 for the three months ended June 30, 2003. 

                ***Comparison of Six Months Ended June 30, 2004 and 2003***

                **Revenue**

                For the six months ended June 30, 2004, our revenues were $3,352,418, compared to $3,854,855 for the six months ended June 30, 2003, a decrease of $502,437, or 13.0%. The decrease was due primarily to decreases in SecureDropTM sales and shuffler sales and rentals incurred in the three months ended March 31, 2004 and the three months ended June 30, 2004, offset, in part by an increase in Deck CheckerTM revenue during the same period.

                **Cost of Sales**

                For the six months ended June 30, 2004, our cost of sales was $1,849,625, compared to $2,134,286 for the six months ended June 30, 2003, a decrease of $172,539, or 8.1%. The gross margin on revenue for the six months ended June 30, 2004 was $1,502,793 or 44.8%, compared to the gross margin on revenue for the six months ended June 30, 2003 of $1,720,569, or 44.6%. The decrease in gross margin of $217,776 from the six months ended June 30, 2003 to the six months ended June 30, 2004 reflects a decrease in revenues during the period. 

                **Selling, General and Administrative Expenses**

                For the six months ended June 30, 2004, our selling, general and administrative expenses were $2,877,946, compared to $3,064,524 for the six months ended June 30, 2003, a decrease of $186,578, or 6.1%. The decrease in selling, general and administrative expenses related primarily to decreases in salaries and related expense, consulting and accounting expense, advertising expense, travel and entertainment expense, legal and regulatory expense and supplies expense.

                Our selling, general and administrative expenses for the six months ended June 30, 2004 consisted of the following: salaries and related costs of $1,098,170; consulting services of $158,371; advertising and marketing costs of $14,028; travel and entertainment costs of $277,646; gaming industry trade show costs of $109,131; rent of $179,281; repairs and maintenance expenses of $43,105; legal and regulatory expenses of $457,755; supplies of $30,399; insurance expenses of $40,324; depreciation and amortization of $290,120; and other expenses of $179,616. 
****
— 11 —

                **Research and Development Expense**

                For the six months ended June 30, 2004, our research and development expenses were $671,560, compared to $372,860 for the six months ended June 30, 2003, an increase of $298,700, or 80.1%. The increase was due to the our continued development efforts on the RandomPlusTM  and PokerOneTM  shufflers. 

                **Interest Expense**

                For the six months ended June 30, 2004, we incurred interest expense of $509,164, compared to $1,363,164 for the six months ended June 30, 2003, a decrease of $854,000, or 62.6%. This decrease was primarily attributable to the reduced debt service resulting from the substantial decrease in our outstanding indebtedness and the retirement and conversion into shares of common stock of $20,331,995 convertible debt in 2003 and in the three months ended March 31, 2004.

                **Net Loss**

                For the six months ended June 30, 2004, we had a net loss of $2,555,310, compared to a net loss of $3,079,979 for the six months ended June 30, 2003, a decrease of $524,669, or 17.0%. The decrease in net loss was primarily due to the decrease in interest expense, offset, in part, by the increase in loss from operations. Basic loss per share was $0.15 for the six months ended June 30, 2004, compared to $0.40 for the six months ended June 30, 2003. 

                **LIQUIDITY AND CAPITAL RESOURCES**

                Because of our efforts to transition from a development stage company to an operating company, we have generated substantial cash flow deficits from operations, including cash used in operating activities of $6,180,134 and $7,016,487 in the six months ended June 30, 2004 and 2003, respectively. In addition, to fund our development and operating activities, we generated cash through financing activities in 2003 of $23,047,432. We have used cash of $2,778,495 in financing activities during the six months ending June 30, 2004 for the repayment of leases payable, short-term debt, and convertible debt.

                Consequently, we have been substantially dependent on cash from financing activities to fund our development and operating activities. We will continue to require cash from financing activities for our current operating needs until our operations generate sufficient cash flow to provide for such cash requirements. As a result of anticipated sales improvements and operating cost initiatives, management believes that the Company will begin to generate positive operating cash flow during the second half of 2004. In terms of sources of additional capital, we have received a one-year commitment for a $3.0 million lease line of credit and have been advised by our financial advisors that additional capital can be raised, if necessary, in 2004.

                **Sources of Capital**

                In the event our cash on hand plus cash from operations should be insufficient during future periods, we anticipate relying upon private and institutional sources of debt and equity, and we may seek public, private and institutional sources of capital for working capital purposes. During the years ended December 31, 2003 and 2002, our sources of capital included a public stock offering, equipment financing from a third party, short-term notes from stockholders, convertible debentures and other private sources of capital. 

— 12 —

                With respect to our equipment financing where we have sold and leased back most of our furniture, equipment, tooling and shufflers held for rent, we have repaid $1,179,656 for the six months ended June 30, 2004, received proceeds of $2,988,385 and repaid $2,823,331 for the year ended December 31, 2002 and have received proceeds of $989,820 and repaid $2,754,607 for the year ended December 31, 2003. As of June 30, 2004, we had outstanding equipment financing of $2,974,140. These equipment leases have terms of 36 to 39 months and were not recorded as sales because each of the leases included a mandatory buy-back provision. 

                With respect to our short-term debt, we have received proceeds of $2,264,871 and repaid $650,000 for the year ended December 31, 2002 and have received proceeds of $7,400,000 and repaid $1,310,000 for the year ended December 31, 2003 and have repaid $32,493 for the six months ended June 30, 2004. As of June 30, 2004, we had outstanding short-term loans in the aggregate amount of $238,250. Prior to 2003, we were substantially dependent on short-term loans from our principal stockholder and other directors. Despite such reliance, neither our principal stockholder nor our directors are obligated to provide additional financing to us, and our principal stockholder and directors are free to decline to fund additional financings to us at any time. In such event and in the absence of third party financing sources, we may have substantial difficulties in raising additional financings.

                With respect to our convertible debentures, we received proceeds of $4,903,076 and $11,050,000 during the years ended December 31, 2002 and 2003, respectively, and have completely retired the convertible debentures during the three months ended March 31, 2004. 

                With respect to the public offering of common stock in December 2003, we sold 5,500,000 shares at $5.00 per share for gross proceeds of $27,500,000. The net proceeds after all offering and commission expenses were $24,800,000.

                **Outlook**

                Our ability to maintain adequate liquidity is substantially dependent upon the success of management’s plans to address and overcome prior operating losses. Management has developed and refined its 2004 operating plan to increase its sales by expanding its product line and improving its sales efforts domestically and internationally. Increased sales in the year ended December 31, 2003 show increased acceptance of our product line. Management has adopted efforts to reduce operating costs through the transfer of manufacturing operations to China and restructuring service functions to reduce labor and rental expense. Management has focused on financial condition and liquidity improvements through its capital raising efforts in 2003 along with substantial debt reduction and debt conversion, resulting in positive cash position and substantially reduced indebtedness at June 30, 2004. As a result of anticipated sales improvements and operating cost initiatives, management believes that we will begin to generate positive operating cash flow by the end of 2004. In addition, our financial advisors have expressed confidence that additional capital can be raised by us, if necessary, in 2004 and we have received a one-year commitment for a $3.0 million lease line of credit. 

                Based on presently known commitments and plans, we believe that we will be able to fund our operations and required expenditures through the fourth quarter of 2004 through cash on hand, cash flow from operations, and cash from private placements of debt or equity or from lease financing sources. In the event that such sources are insufficient or unavailable, we will need to seek cash from public or private placements of debt or equity, institutional or other lending sources, sell certain assets or change operating plans to accommodate such liquidity issues. No assurances can be given that we will successfully obtain liquidity sources necessary to fund our operations in the upcoming year. If we continue to generate significant losses from our operations and we are not able to located additional sources of liquidity, we may be unable to continue as a going concern.

— 13 —

**RISK FACTORS**

**RISKS RELATED TO VENDINGDATA**

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

                Our financial statements report recurring losses and accumulated deficits. Based on presently known commitments and plans, we believe that we will be able to fund our operations and required expenditures through the fourth quarter of 2004 from cash on hand, cash flow from operations and cash from debt or equity financings or from lease financing sources. The completion of the offering of 5,500,000 shares of common stock in December 2003 allowed us to pay off all bridge financing, to convert approximately $5,730,000 of our convertible debt and accrued interest, to repay our convertible debt, to retire $7,500,000 of our convertible 10% senior notes and still have adequate funds available with which to fund additional product inventory, and use for general corporate purposes. If we are unable to generate a sufficient amount of sales of our products to fund our operations, we will need to seek cash from private or public placements of debt or equity, institutional or other lending sources, to sell certain assets or to change operating plans to accommodate our liquidity issues. We may not be able to obtain other liquidity sources as may be necessary to fund our operations in the future.

                ***We have a history of significant operating losses and anticipate continued operating losses, and we may be unable to achieve profitability.***

                We have a history of significant operating losses and anticipate continued operating losses for the foreseeable future. For the six months ended June 30, 2004 and years ended December 31, 2003 and 2002, we have incurred net losses of $2,555,310, $7,812,089 and $6,192,786, respectively, and our operations have used $6,180,134, $11,731,150 and $5,206,489 of cash, respectively. As of June 30, 2004, December 31, 2003 and 2002, we had accumulated deficits of $47,137,659, $44,582,347 and $36,770,258, respectively. If we are unable to generate a positive cash flow in 2004, we will be required to locate additional sources of capital. If our revenues do not increase very substantially, or if our spending levels exceed our expectations, we will not become profitable. Revenues may not grow in the future, and we may not generate sufficient revenues for profitability. If we become profitable, we may not be able to sustain profitable operations. 

                ***Even if our operations do not become profitable, we will continue to be obligated to pay our management substantial salaries and benefits.***

                We currently compensate our executive officers and significant employees with substantial salaries and other benefits and, in the future, may pay increased salaries and benefits. In 2003, we paid an aggregate amount equal to approximately $1,300,000 to our executive officers and significant employees. In June and July 2003, we extended our employment agreements for an additional five years with Mr. Blad and an additional three years with seven other key employees. In February 2004, we expanded our management team with the hiring of H. Michael Jahnke as our Chief Operating Officer. We intend to continue to pay substantial salaries and benefits to Mr. Blad and our other key employees. The payment of such compensation and benefits may be a burden on us and may be a factor in limiting or preventing our profitability. Upon the expiration of those employment agreements, we may elect to continue compensating management with similar or higher salaries and other benefits. 

— 14 —

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

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

                ***Due to the limited placement of our SecureDrop® System and the Deck Checker TM, we may not achieve significant market acceptance of these products and, as a result, general sufficient revenue to sustain our operations.***

                Although we installed our SecureDrop® System and have placed units of the Deck CheckerTM at a limited number of properties, we not be able to achieve significant market acceptance of our SecureDrop® System or the Deck CheckerTM. We have only sold our SecureDrop® Hard Count Module to a small number of casinos. The SecureDrop® System Soft Count Module has been slow to sell outside Nevada. Due to the resistance of gaming companies to the implementation of unproven technologies and product flaws that we subsequently corrected, we have experienced longer than expected sales cycles for our SecureDrop® System. In addition, we have only placed 156 Deck CheckerTM units (including 20 rentals) as of June 30, 2004. The commercial success of our SecureDrop® System and Deck CheckerTM will depend upon the degree of market acceptance of these products in the gaming community and will depend on a number of factors, including: 
•demonstration of effectiveness and reliability;  •the prevalence and severity of any quality problems or defects in the early stage of introduction that were not anticipated in the design of those products; •effectiveness of our marketing and distribution capabilities;  •ability to promptly service and repair the products; and  •receipt of approval by respective gaming jurisdictions.
                If we fail to expand our sales and leases for our SecureDrop® System and our Deck CheckerTM, we may be unable to generate sufficient revenues to continue to operate our business.

                ***Our revenues and receivables are concentrated among a few major customers, which means that our financial condition could deteriorate if any meaningful reduction in the level of sales to any of these customers occurs.***

                We are substantially dependent upon sales to a few major customers. In the first two quarters 2004 and in the fiscal year 2003, Caesars Entertainment, Inc. (formerly Park Place Entertainment Corporation), our largest customer, accounted for more than 5% of our revenues. During the six months ending June 30, 2004, approximately 2.1% of trade receivables and 5.4% of total sales and during the year ended December 31, 2003, approximately 17.6% of trade receivables and 13.3% of total sales were concentrated in the Nevada gaming industry among five customers under the common ownership of Caesars Entertainment, Inc. Any adverse changes in the financial condition of our major customers, any loss of our major customers, or any meaningful reduction in the level of sales to any of these customers could have a materially adverse impact on us. 

— 15 —

                ***The acceptance and expansion of coinless gaming may adversely affect the demand for our SecureDrop®Hard Count Module.***

                Certain gaming operators have tested and employed as part of their current operations certain gamingdevices that have totally eliminated the use of coins or tokens, or use a combination of coins and“cashless” vouchers. The acceptance and expansion of totally coinless gaming devices mayreduce the demand for the SecureDrop® Hard Count Module, which is based on coin usage, and mayadversely affect our operations in the future. For example, International Game Technology has introducedthe EZ-PayTM system, which attempts to reduce operating costs and machine downtime by providinggaming operators with machines that drop coins for smaller payouts and print tickets for larger,predetermined payouts. As a result of the issuance of tickets, players are not required to wait forattendants in order to be paid larger payouts and may use their tickets at other machines equippedwith the EZ-PayTM system or similar systems. Due to positive customer response, the number ofslot operations with online systems that use coinless gaming systems continues to grow. However,while SecureDrop® Hard Count Module sales may be adversely impacted, we believe demand for ourSecureDrop® Soft Count Module has been enhanced.

                ***We place our leased shufflers in casinos under short-term lease arrangements, which makes these productssusceptible to replacement due to pressure from competitors, changes in economic conditions, obsolescenceand declining popularity.***

                All of our leased shufflers are placed with customers under short-term lease arrangements, which, unlikelong-term leases or permanent sales of our products, can easily be terminated by a dissatisfied customer.The manner in which such short-term leases are structured puts our shufflers at greater risk of replacementdue to pressure from competitors, changes in economic conditions, obsolescence and declining popularity.Casino operators may terminate the use of our products, and we may not be able to maintain and expandthe number of installed shufflers through enhancement of existing shufflers, introduction of newshufflers, customer service or otherwise. Our ability to compete may be damaged, and our revenuesmay be reduced if we are unable to protect our intellectual property rights adequately.

                Our success depends upon maintaining the confidentiality and proprietary nature of our intellectualproperty rights. Our ability to compete may be damaged, and our revenues may be reduced if we areunable to protect our intellectual property rights adequately. To protect these rights, we rely principallyon a combination of:
•contractual arrangements providing for non-disclosure and prohibitions on use; •patents and pending patent applications; •trade secret, copyright and trademark laws; and •certain built-in technical product features.
— 16 —

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

                ***Adverse results in current litigation could result in substantial monetary damages and adversely impact  the manufacture and sale of certain of our shuffler products.***

                Shuffle Master, Inc., our principal competitor in the shuffler market, has sued us for patent infringementand alleges that our shufflers violate two of its patents concerning registering use of a playingcard shuffler apparatus and the displaying of the use on a display. Shuffle Master seeks treble damages,which, if awarded, could result in us owing it substantial sums of money, and, if large enough, couldhave a material adverse effect on our liquidity and our ability to conduct operations. Although webelieve our position to be meritorious, litigation of this nature is a drain on our cash resourcesand our management’s time. Inasmuch as Shuffle Master has asserted patent infringement claimsand we have reasonable defenses to the same, we cannot determine whether we will prevail in thislitigation, nor whether damages, if awarded, would significantly impact our ability to continue tomanufacture and sell particular products within the United States and its territories. If we do notprevail, we will be unable to sell our shuffler products unless we change certain components usedin the shufflers or obtain a license from Shuffle Master to use the playing card shuffler apparatusand the display. Similarly, we cannot determine whether Shuffle Master will assert other litigationclaims based upon other patents it may currently or in the future own, nor can we determine the likelyoutcome of any such litigation or whether any such substantial litigation would have a material adverseeffect on our business as presently conducted or as anticipated. 

                ***We believe that it is likely that our PokerOneTM Shuffler will be the subject of future patentlitigation if the product is sold and installed in the United States and, if commenced, could subjectus to continuing litigation costs and risks.***

                Other than the allegations made by Shuffle Master, Inc. discussed above, we are not aware of any claimsor basis for our current products infringing on the proprietary rights of third parties. To the extentthat we introduce new products that incorporate the same or similar technology, it is likely thatShuffle Master, Inc. will bring one or more claims against us seeking damages, injunctive or otherequitable relief, or both. Moreover, we believe that it is reasonably likely that if we introducethe PokerOneTM Shuffler in the United States, Shuffle Master will bring one or more claims againstus seeking various remedies at equity or law. We cannot predict the outcome of any future litigationthat may occur. 

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

                In furtherance of the development of our services or products, we may need to acquire licenses forintellectual property to avoid infringement of third party rights or claims of infringement. Theselicenses may not be available on commercially reasonable terms, if at all. Claims for infringement,if made, could damage our business prospects, our results of operations and financial condition,whether or not the claims have merit, by:
•consuming substantial time and financial resources required to defend against them; •diverting the attention of management from growing our business and managing operations; •resulting in costly litigation; and •disrupting product sales and shipments.
— 17 —

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

                ***Our failure to compete successfully against innovative competitors or new entrants could adverselyimpact our ability to sell our products and generate revenues.***

                Our market is characterized by changing technology, periodic product obsolescence and continuous protectionof proprietary technology. Our success will depend upon our ability to sell our current products,and to develop successor systems. We will need to introduce new products and features in a timelymanner to meet evolving customer requirements. We may not succeed in these efforts. Even if we succeed,products or technologies developed by others may render our products or technologies noncompetitiveor obsolete, which would impair our ability to sell our products and reduce our revenue.

                ***Our inability to complete the development of our specialty game shuffler could adversely impact potentialrevenue growth.***

                We may not be able to complete development of the PokerOneTM Shuffler. We are continuing to finetune this product, and we plan to start the testing phase in Asia by the end of the second quarterof 2004. We have expended significant time and resources into the development of this product, andour failure to bring about a viable product may limit our long-term revenue growth in our shufflerproduct line. 

                ***Scrutiny and attempts by third parties to compromise our products’ security, if successful, couldinjure product demand and force us to take back impacted products.***

                In the event that our products become susceptible to attacks by third parties that result in a decreaseor compromise of the security of our customers’ operations, we will most likely be requiredto take back our products from existing customers and will lose sales and rentals from prospectivecustomers. Although we have tested our products for security and our products have been tested bycertain gaming regulators as part of the approval process, our products may be susceptible to schemesby third parties to defraud the properties where our products are used. Vulnerabilities in the securityof our products will almost certainly reduce demand for these products. Our shufflers may becomevulnerable to card counters or expert players, and the use of our shufflers may result in financiallosses for our customers. The occurrence of any of these events would likely have a material adverseeffect on our sales revenues. 

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

                The success of our business depends solely on the gaming industry where revenues are sensitive to generaleconomic conditions and generally rise or fall rapidly in relation to the condition of the overalleconomy. Although we cannot accurately estimate the economic impact of past or future terrorist attacksor current international conflicts at this time, the gaming industry has been negatively affectedby the reduction in air travel and tourism, and we expect that any significant decline in the economichealth or growth of the gaming industry will reduce demand for our products. 

— 18 —

                ***We are unable to predict the future impact that extraordinary events, such as terrorism, the uncertaintyof war and worldwide health concerns, may have on our business and operations.***

                Extraordinary events, such as terrorist attacks, acts of war or worldwide health concerns, may causedamage or disruption to our operations, which, in turn, could significantly impact our revenues,costs and expenses, and financial condition. The terrorist attacks that took place in the UnitedStates on September 11, 2001 were unprecedented events that have created many economic and politicaluncertainties, especially to the gaming industry, some of which have materially adversely affectedour business, results of operations, and financial condition and may do so again in the future. Inparticular, the gaming industry has been affected by the downturn in the tourist industry as a resultof the September 11, 2001 attacks. Because our business is directly tied to the gaming industry,the long-term effects from the September 11, 2001 attacks are unknown. The potential for futureterrorist attacks, the national and international responses to terrorist attacks, other acts of waror hostility and concerns about the spread of certain diseases, including severe acute respiratorysyndrome, or SARS, have created many economic and political uncertainties, which could materiallyadversely affect our business, results of operations and financial condition in ways that we currently cannot predict.

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

                We have centralized most phases of the manufacturing process for our products at our own facility inXiaolan Town in Zhongshan City, China. We will be adversely impacted if there is an interruptionin our ability to receive components or inventory from, or a material increase in labor costs in,China. Factors that may cause a supply interruption include political unrest, closure of ports, worldwidehealth concerns, including SARS, and other events beyond our control. In the event that our manufacturingoperations in Xiaolan Town are interrupted, our ability to fill orders, ship such orders and realizethe revenues therefrom could be adversely affected. 

                ***Our efforts to expand into international markets pose special risks that could adversely affect allof our business.***

                As a result of the opening of our manufacturing facility in China, we are currently operating in internationalmarkets, and we propose to further expand our international sales and operations. Engaging in businessoutside the United States will subject us to the customary risks of doing business in foreign countries.These risks include fluctuations in foreign currency exchange rates and controls, competitive disadvantagesto established foreign businesses with significant current market share and business/customer relationships,nationalization and other economic, tax and regulatory policies of local governments and the possibilityof trade embargoes, political instability or war or other hostility, as well as the laws and policiesof the United Sates affecting foreign trade and investment. Any one or more of these factors couldmaterially adversely affect our ability to conduct business outside the United States and thereforeour business as whole. 

                ***Our reliance on distributors in 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 products outside the United States are achieved throughdistributor relationships. We believe the distributors that we have engaged are experienced and reputable,however, if we are unable to manage these relationships, our ability to generate revenue and profitsin the non-U.S. market may be adversely affected. To the extent that we engage in direct sales outsidethe United States, we have limited sales experience and history in foreign markets. 

— 19 —

                ***Due to our management’s controlling interest in our common stock, our management has the powerto control all matters submitted to our stockholders, which renders non-management stockholders’efforts to effect substantial changes in our company more difficult.***

                Our executive officers and members of our board beneficially own approximately 9,060,278 shares ofcommon stock, or approximately 50.3% of the outstanding shares of our common stock, assuming exerciseor conversion of all options, warrants and convertible debentures held by our executive officersand members of our board that are exercisable within 60 days of June 30, 2004. Accordingly, thesestockholders have the power to control all matters requiring approval by our stockholders, includingthe election of directors and approval of mergers and other significant corporate transactions. Thisconcentration of ownership also has the effect of delaying, preventing or expediting, as the casemay be, a change in control of our company.

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

                Our success is substantially dependent upon the efforts and skills of Steven J. Blad, our chiefexecutive officer and president, and H. Michael Jahnke, our chief operating officer. We have enteredinto employment agreements with Messrs. Blad and Jahnke and nine other significant employees. However,if we were to lose the services rendered by any of our executive officers or significant employees,key management, product development and sales functions could be adversely affected. In addition,we compete with other potential employers for employees, and we may not succeed in hiring and retainingthe executives and other employees that we need. An inability to hire and retain quality employeescould have a material adverse effect on our business, financial condition and results of operations. 

**RISKS RELATED TO OUR INDUSTRY**

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

                There is significant competition in the shuffler market, where we compete with established companiesand other entities, most of which possess substantially greater resources than we do. Almost allof the companies with which we compete in the shuffler market are substantially larger, have moresubstantial histories, backgrounds, experience and records of successful operations, greater financial,technical, marketing and other resources, more employees and more extensive facilities than we nowhave, or will have in the foreseeable future. It is also likely that other competitors will emergein the near future. Other companies may develop products competitive to our SecureDrop® System.We may not be able to compete successfully with other established gaming product manufacturers. Ourinability to compete successfully will likely result in loss of market share and lower revenues,or increases in operating costs, such as marketing costs. 

                ***We face extensive regulation from gaming and other government authorities.***

                The gaming industry is a highly regulated industry and is subject to numerous statutes, rules and regulationsadministered by the gaming commissions or similar regulatory authorities of each jurisdiction. Generally,companies that seek to introduce gaming products or concepts into such jurisdictions may be requiredto submit applications relating to their activities or products (including detailed background informationconcerning controlling persons within their organization), which are then reviewed for approval.In this regard, we may incur significant expenses in seeking to obtain licenses for our gaming productsand concepts, and our products may not be approved in all jurisdictions. The failure to obtain suchapproval in any jurisdiction in which we may seek to introduce our products or concepts could havea material adverse effect on our business. In addition, any change to the applicable statutes, rulesand regulations that restricts or prevents our ability to operate could have an adverse effect on us. 

— 20 —

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

                Certain gaming regulatory agencies to which we are subject may investigate any beneficial holder ofour voting securities (regardless of the numbers of shares owned), and any individual who has a materialrelationship or involvement with us, in order to determine whether such individual is suitable orshould be licensed as a business associate of ours. In addition, the gaming authorities of variousjurisdictions may require our officers, directors and certain key employees to be licensed or foundsuitable by these gaming authorities, which would require these officers, directors and key employeesto submit detailed background information. Any person who fails or refuses to apply for a findingof suitability or a license after being ordered to do so by gaming regulatory agencies may be foundunsuitable, and we could be subject to adverse regulatory action. In the event that the gaming authoritieswere to find an officer, director, key employee, stockholder, or any other individual that has amaterial relationship with us, unsuitable for licensing or unsuitable to continue having a relationshipwith us, we would have to sever all relationships with that individual, and that individual wouldbe required to dispose of all of our stock. This could result in the loss of key persons criticalto our success or in significant selling pressure on our stock if such persons are required to disposeof shares of our common stock in an amount that exceeds typical trading volumes in our shares.

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

                We design and manufacture products and concepts solely for the gaming industry and depend almost exclusivelyon our ability to generate revenues from the rental or sale of our products to customers in the gamingindustry. The economic health of the gaming industry, and, therefore, our revenues, are affectedby a number of factors beyond our control, including:
•general economic conditions, such as recession, inflation, business cycle fluctuations and interestrates; •levels of disposable income of gaming property patrons; •acts of terrorism and anti-terrorism efforts; •increased transportation costs resulting in decreased travel by gaming patrons; •changes or proposed changes in tax laws; •legal and regulatory issues affecting the development, operation and licensing of our gaming customers;and •competitive conditions in the gaming industry. 
                These factors may adversely impact the demand for our products and materially affect the revenues thatwe realize on the sale or placement of our products.

— 21 —

**RISKS RELATED TO OUR COMMON STOCK**

                ***There has only recently been a public market for our common stock, so our stockholders may be unableto dispose of their investment, or may lose the total value of their investment.***

                There had been no trading market for our common stock until September 10, 2003, when our commonstock became eligible for quotation on the OTC Bulletin Board. Due to the limited trading historyof our common stock, an active trading and/or a liquid market may not be maintained. Moreover, inthe event that we are unable to continue as a going concern and we are dissolved or otherwise terminated,you could lose your entire investment in our common stock. Investment in our common stock is at riskof complete loss if our operations are unsuccessful. 

                Historically, our common stock has been deemed to be “penny stock” as that term is definedin Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, or the Exchange Act. Pennystock may be more difficult for investors to resell. Penny stocks are stocks:
•with a price of less than $5.00 per share; •that are not traded on a “recognized” national exchange (exchange-listed securities muststill have a price of not less than $5.00 per share); •whose prices are not quoted on the Nasdaq automated quotation system (Nasdaq-listed stock must stillhave a price of not less than $5.00 per share); or •from issuers with net tangible assets less than $2.0 million (if the issuer has been in continuousoperation for at least three years) or $5.0 million (if in continuous operation for less than threeyears), or with average revenues of less than $6.0 million for the last three years.
                Although our AMEX listing application has been approved and our common stock began trading on the AMEXon May 4, 2004, since the closing price for our common stock was less than $5.00 per share as ofJune 30, 2004, our common stock is deemed to be penny stock for purposes of Section 15(b)(6) of theExchange Act. Federal rules and regulations generally impose additional sale practice and disclosurerequirements and penalties on broker/dealers and persons associated with or seeking to become associatedwith such broker/dealers who sell or recommend penny stocks to certain investors. These requirementsmay reduce the potential market for our common stock by reducing the number of potential investors,and any or all of these factors may make it more difficult for investors in our common stock to sellshares to third parties or to otherwise dispose of them and could cause our stock price to decline.Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitableinvestment for a prospective investor and receive the investor’s written consent to the transaction. 

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

                Our operations may not become profitable. If we become profitable, we intend to use any earnings thatmay 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 other things, our earnings, financialcondition, capital requirements, level of indebtedness, statutory and contractual restrictions applyingto the payment of dividends, and other considerations that our board of directors deems relevant.Accordingly, stockholders may have to sell some or all of their common stock in order to generatecash flow from their investment. Stockholders may not realize a gain on their investment, and theymay lose all or a significant amount of their investment when they sell their common stock.

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                ***If we are unable to generate sufficient revenue to provide the cash required to fund our operationsin the future, we may be required to issue additional equity or convertible debt securities to provideour operations with additional working capital, which, in turn, will have the effect of dilutingthe relative ownership of our existing stockholders.***

                We have supplemented the cash deficit arising from our operations with the proceeds of our December2003 offering of 5,500,000 shares of common stock and have received a one-year commitment for a $3million lease line of credit, and will, if necessary, continue to supplement with cash from privateor public placements of debt or equity, institutional or other lending sources. We have also utilizedconvertible debt securities and warrants to raise capital in the past. The issuance of additionalequity or convertible debt securities will have the effect of reducing the percentage ownership ofour current stockholders. In addition, these equity or convertible debt securities may have additionalrights, preferences or privileges to those of our common stock, such as registration rights and preferencesin liquidation. In the event we are required to raise additional funds to support our operations,additional funds may not be available on terms favorable to our company, or at all. If adequate fundsare not available or are not available on acceptable terms, we may not be able to fund our operationsor otherwise continue as a going concern. 

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

                In addition to the number of shares registered on behalf of the Selling Stockholders, we have approximately7,595,200 shares of common stock that are either freely tradable pursuant to Rule 144(k) of the SecuritiesAct of 1933, or the Securities Act, or have previously been registered by us through a registrationstatement filed with the SEC. As such, the future sale of a substantial number of shares of our commonstock in market transactions, or the perception that these sales could occur, may depress the marketprice for our common stock. These sales could also impair our ability to raise additional capitalthrough the sale of our equity securities in the future.

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

                Our board of directors is authorized, without stockholder approval, to issue preferred stock in seriesand to fix and state the voting rights and powers, designation, preferences and relative, participating,optional or other special rights of the shares of each such series and the qualifications, limitationsand restrictions thereof. Preferred stock may rank prior to our common stock with respect to dividendsrights, liquidation preferences, or both, and may have full or limited voting rights. Accordingly,issuance of shares of preferred stock could adversely affect the voting power of holders of our commonstock and could have the effect of deterring or delaying an attempt to obtain control of us.

**ITEM 3.          CONTROLS AND PROCEDURES**

                (a)           *Evaluation of Disclosure Controls.*  We evaluated the effectiveness of our disclosure controls and procedures as of the end of thethree months ended June 30, 2004. This evaluation was done with the participation of our chief executiveofficer and our acting chief financial officer. Disclosure controls and procedures are controls andother procedures that are designed to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure that information requiredto be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicatedto our management, as appropriate to allow timely decisions regarding required disclosure.

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                Our management does not expect that our disclosure controls and procedures or our internal controlsover financial reporting will prevent all error and all fraud. A control system, no matter how wellconceived and operated, can provide only reasonable, but not absolute, assurance that the objectivesof a control system are met. Further, any control system reflects limitations on resources, and thebenefits of a control system must be considered relative to its costs. Because of the inherent limitationsin all control systems, no evaluation of controls can provide absolute assurance that all controlissues and instances of fraud, if any, have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty and that breakdowns can occur because ofsimple error or mistake. Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people, or by management override of a control. The design ofa control system is also based upon certain assumptions about the likelihood of future events, therecan be no assurance that any design will succeed in achieving its stated goals under all potentialfuture 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 inherentlimitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. 

                Based on this evaluation, we concluded that, subject to the limitations noted above, our disclosurecontrols and procedures are effective to ensure that information we are required to disclose in reportsthat we file or submit under the Exchange Act is recorded, processed, summarized, and reported withinthe time periods specified in the SEC’s rules and forms. 

                (b)           *Changes in Disclosure Controls and Procedures.*  Although there have been no significant changes in internal controls or in other factors thatcould significantly affect these controls subsequent to the date of their evaluation, we are continuouslyevaluating means of enhancing our internal controls. During the twelve months ended December 31,2003, we added qualified staff to our accounting department, we improved our approval process foraccounting entries, and we commenced implementation of MAS-500 integrated financial and manufacturingsoftware application. MAS-500 has been implemented in Las Vegas to provide an integrated controlprocess for purchasing, inventory control and manufacturing and should improve the accuracy and timelinessof our financial reporting. With respect to our China facility, we completed the implementation ofand training on MAS-500 during the second quarter of 2004.
****
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**PART II – OTHER INFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

                On March 27, 2002, Shuffle Master, Inc., or Shuffle Master, filed a complaint (Case No. CV-S-02-0438-JCM-PAL)against VendingData in the United States District Court, District of Nevada. The amended complaintalleges, among other things, claims for patent infringement and requests treble damages, an injunctionenjoining us from infringing on two of Shuffle Master’s patents, an accounting of our gainsand profits that resulted from our alleged infringement, and for interest, costs and attorneys’fees. The Shuffle Master patents that are at issue in the litigation concern registering use of aplaying card shuffler apparatus and the displaying of the use on a display. We have filed our answer,counterclaims, and amended counterclaims against Shuffle Master. In our answer, we deny Shuffle Master’sallegation of patent infringement and request that Shuffle Master’s complaint be dismissed.We also seek, in our amended counterclaim, a declaration that we do not infringe Shuffle Master’spatents and that Shuffle Master’s patents and certain of its related claims are invalid. Wefurther assert counterclaims against Shuffle Master for breach of contract and violation of the UniformTrade Secrets Act. On May 20, 2002, the United States District Court, District of Nevada deniedShuffle Master’s motion for preliminary injunction against us. Discovery in this litigationis now closed. On May 28, 2003, we filed a motion for summary judgment requesting that the courtdismiss the case against us. The hearing for our motion for summary judgment was taken off calendarpending a ruling by a magistrate judge with respect to a October 24, 2003 claim constructionhearing to determine the scope and definition of the patent claims at issue. On March 31, 2004, themagistrate judge issued an order with regard to claim interpretation, to which we have filed writtenobjections. On June 25, 2004, the District Court affirmed the magistrate judge’s order. Althoughwe anticipate that in due course the District Court will rule on our arguments for summary judgmentagainst the patent claims of Shuffle Master, if this matter is not resolved as a result of our motionfor summary judgment, the District Court will set a date for trial.

**ITEM 2.  CHANGES IN SECURITIES.**

                On December 18, 2003, we completed a public offering of 5,000,000 shares of our common stock. The placementagent for the offering was Philadelphia Brokerage Corporation. Our shares of common stock sold inthe offering were registered under the Securities Act in a Registration Statement on Form SB-2, asamended (File No. 333-109115), or the Registration Statement. The Securities and Exchange Commission,or the Commission, declared the Registration Statement effective on December 11, 2003. 

                The public offering price was $5.00 per share for an aggregate sales price of $27,500,000. We paidcommissions of $1,925,000 to our placement agent, a non-accountable expense allowance of $25,000to our placement agent and offering expenses of approximately $750,000. None of the expenses relatedto the initial public offering were paid directly or indirectly to any of our directors, officers,general partners or their associates, or to any persons owning 10% or more of any class of our equitysecurities, or to any of our affiliates. We received net proceeds from the public offering of approximately$24,800,000 after deducting the underwriting discounts and commissions and the offering expenses. 

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                From the effective date of the Registration Statement through the six months ended June 30, 2004, wehave used approximately $22,400,000 of the $24,800,000 of net proceeds from the initial public offeringas follows:

**USE OF PROCEEDS TO DATE**
 
**AMOUNT**
  Retirement of loan from Mellon Bank HBV SPV, LLC $  2,775,000 Retirement of loan from Triage Capital Management LP  850,000 Retirement of loan from Triage Offshore Fund, Ltd.  1,000,000 Retirement of loan from LC Capital Master Fund, Ltd.  1,000,000 Retirement of a portion of 10% convertible senior notes  7,100,000 Repayment of convertible senior notes  1,600,000 Lease payments  1,200,000 Funding to increase product inventory  1,500,000 Purchase of fixed assets  160,000 Payment of operating expenses  5,215,000  **                                T**OTAL**** **$****22,400,000**  
**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.**

               Not applicable. 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

               Not applicable. 

**ITEM 5.  OTHER INFORMATION.**

               Not applicable. 

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.**
 (a)Exhibits. 31.1Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1Certification of President and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 (18 U.S.C. Section 1350).  (b)Reports on Form 8-K.
                During the three months ended June 30, 2004, we filed the following:
•Current Report on Form 8-K filed on May 10, 2004 reporting the approval of our common stock for listingon the American Stock Exchange under the ticker symbol, “VNX”;  •Current Report on Form 8-K filed on May 14, 2004 reporting our financial results for the period endedMarch 31, 2004; and •Current Report on Form 8-K filed on May 27, 2004 reporting the separation agreements entered into withJohn R. Spina, our former Chief Financial Officer, and Stacie L. Brown, our former Secretary andCorporate Counsel. ****
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**SIGNATURE**

                In accordance with the requirements of the Exchange Act, the registrant caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
 **VENDINGDATA CORPORATION**  (Registrant)     Date:    August 10, 2004By:  /s/ Steven J. Blad   ——————————————————     Steven J. Blad  Its:  Chief Executive Officer and President      (Principal Executive Officer and Duly      Authorized Officer)
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