**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, 2005
  OR
  o
                **TRANSITION
                    REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE
                    ACT**
  For
                    the transition period from:
                
                to
 
 Commission
                    file number:
                001-32161
 VendingData
                  Corporation(Exact
                  name of small business issuer as specified in its
                  charter)Nevada
              
              91-1696010(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)6830
                  Spencer Street, Las Vegas, Nevada 89119(Address
                  of principal executive offices)(702)
                  733-7195(Issuer’s
                  telephone number)(Former
                  name, former address and former fiscal year, if changed since last
                  report)Check
                  whether the issuer (1) filed all reports required to be filed by
                  Section
                  13 or 15(d) of the Exchange Act during the past 12 months (or for
                  such
                  shorter period that the registrant was required to file such reports),
                  and
                  (2) has been subject to such filing requirements for the past 90
                  days.
                  Yes  xNo 
                  o**APPLICABLE
                  ONLY TO CORPORATE ISSUERS**State
                    the number of shares outstanding of each
                    of the issuer’s classes of common equity, as of the latestpracticable
                    date:16,764,005shares
                  of common stock, $.001 par value, as of August 3,
                  2005Transitional
                  Small Business Disclosure Format (check one): Yes  oNo 
                  x
  
 
 **VENDINGDATA
        CORPORATION**
 
 **FORM
        10-QSB**
 
 **TABLE
        OF CONTENTS**
  Page**PART
                    I********- FINANCIAL INFORMATION**
                **1**Item
                    1.
                Financial
                    Statements.
                1Balance
                    Sheets
                1Statements
                    of Operations
                2Statements
                    of Cash Flows
                3Item
                    2.
                Management’s
                    Discussion and Analysis or Plan of Operation.
                7Overview
                7Results
                    of Operations
                8Liquidity
                    and Capital Resources
                12Critical
                    Accounting Policies and Estimates
                14Item
                    3.
                Controls
                    and Procedures
                19**PART
                    II - OTHER INFORMATION**
                **21**Item
                    1.
                Legal
                    Proceedings
                21Item
                    2.
                Unregistered
                    Sales of Equity Securities and Use of Proceeds
                21Item
                    6.
                Exhibits.
                22
  
 — —
 
 **PART
        I - FINANCIAL INFORMATION**
  **Item
                1.**
              **Financial
                  Statements.**
  **VENDINGDATA
        CORPORATION**
 **Balance
        Sheets**
  **June
                  30, 2005**
              
              **December
                  31,****2004****ASSETS**
              
              
              **(unaudited**)******Current
                  assets**:Cash
                  and cash equivalents
              
              $
              2,821,346
              
              $
              924,804Current
                  portion of accounts receivable, trade, net of allowance for uncollectables
                  of $250,590 and $125,530
              
              
              3,621,652
              
              
              3,646,568Due
                  from affiliate
              
              
              9,150
              
              
              25,000Other
                  receivables
              
              
              142,539
              
              
              35,394Inventories
              
              
              7,435,873
              
              
              6,462,626Prepaid
                  expenses
              
              
              113,527
              
              
              86,57614,144,087
              
              
              11,180,968Equipment
                  rented to customers, net of accumulated depreciation of $687,248
                  and
                  $564,351
              
              
              277,697
              
              
              400,594Property
                  and equipment, net of accumulated depreciation of $2,393,997 and
                  $2,250,432
              
              
              867,700
              
              
              923,459Intangible
                  assets, at cost, net of accumulated amortization of $516,895 and
                  $438,488
              
              
              1,851,237
              
              
              1,129,644Due
                  from affiliate
              
              
              90,800
              
              
              118,800Accounts
                  receivable, trade, net of current portion, less unamortized
                  discount
              
              
              1,152,279
              
              
              1,264,914Deferred
                  expenses
              
              
              834,206
              
              
              569,956Deposits
              
              
              936,716
              
              
              980,216$
              20,154,722
              
              $
              16,568,551**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities**:Current
                  portion of leases payable
              
              $
              1,189,602
              
              $
              1,941,445Accounts
                  payable
              
              
              2,372,754
              
              
              1,240,677Accrued
                  expenses
              
              
              829,261
              
              
              427,197Deferred
                  revenues, current portion
              
              
              207,245
              
              
              239,680Short-term
                  debt
              
              
              50,000
              
              
              238,250Customer
                  deposits
              
              
              191,840
              
              
              193,6154,840,702
              
              
              4,280,864Long
                  -term obligationsDeferred
                  revenues, net of current portion
              
              
              153,250
              
              
              198,585Notes
                  payable
              
              
              12,000,000
              
              
              3,250,000Leases
                  payable, net of current portion
              
              
              568,437
              
              
              893,244Total
                  Liabilities
              
              
              17,562,389
              
              
              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, 17,212,058
                  and
                  17,199,558 shares issued
              
              
              17,212
              
              
              17,200Treasury
                  stock 448,053 shares of common stock at cost
              
              
              (846,820
              )
              
              —Deferred
                  expenses
              
              
              (1,422,136
              )
              
              (183,074
              )Additional
                  paid in capital
              
              
              62,318,473
              
              
              59,843,273Deficit
              
              
              (57,474,396
              )
              
              (51,731,541
              )Total
                  stockholders’ equity
              
              
              2,592,333
              
              
              7,945,858Total
                  liabilities and stockholders’ equity
              
              $
              20,154,722
              
              $
              16,568,551
  See
          accompanying notes to financial statements.
 —
            1
—
 
 **VENDINGDATA
        CORPORATION**
 **Statements
        of Operations**
  **(UNAUDITED)**
  **Three
                  Months Ended June 30,**
              
              **Six
                  Months Ended June 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****Revenues:**Sales
              
              $
              908,934
              
              $
              1,877,656
              
              $
              1,619,669
              
              $
              2,870,710Rental
              
              
              135,439
              
              
              161,110
              
              
              256,779
              
              
              372,173Other
              
              
              31,092
              
              
              20,762
              
              
              60,439
              
              
              109,5351,075,465
              
              
              2,059,528
              
              
              1,936,887
              
              
              3,352,418Sales
                  returns and allowances
              
              
              (290,838
              )
              
              
              
              
              (290,838
              )784,627
              
              
              2,059,528
              
              
              1,646,049
              
              
              3,352,418**Operating
                  costs and expenses:**Cost
                  of sales
              
              
              530,049
              
              
              1,068,888
              
              
              999,739
              
              
              1,849,625Selling,
                  general and administrative
              
              
              2,818,478
              
              
              1,451,912
              
              
              5,195,564
              
              
              2,877,946Research
                  and development
              
              
              177,823
              
              
              392,807
              
              
              367,832
              
              
              671,5603,526,350
              
              
              2,913,607
              
              
              6,563,135
              
              
              5,399,131Loss
                  from operations
              
              
              (2,741,723
              )
              
              (854,079
              )
              
              (4,917,086
              )
              
              (2,046,713
              )Interest
                  expense, unrelated parties
              
              
              491,985
              
              
              231,479
              
              
              808,807
              
              
              494,101Interest
                  expense, related parties
              
              
              15,063
              
              
              540
              
              
              15,063
              
              
              15,063Gain
                  (loss) on disposition of assets
              
              
              
              
              
              
              
              
              1,900
              
              
              (567
              )507,048
              
              
              232,019
              
              
              825,770
              
              
              508,597Net
                  loss
              
              $
              (3,248,770
              )
              $
              (1,086,098
              )
              $
              (5,742,855
              )
              $
              (2,555,310
              )Basic
                  loss per share
              
              $
              (0.19
              )
              $
              (0.06
              )
              $
              (0.34
              )
              $
              (0.15
              )Weighted
                  average shares outstanding
              
              
              16,787,756
              
              
              17,187,799
              
              
              17,096,510
              
              
              17,146,750




See
        accompanying notes to financial statements.


—
            2
—
 
 **VENDINGDATA
        CORPORATION**
 **Statements
        of Cash Flows**
  **(UNAUDITED)**
  **Six
                  Months Ended June 30,****2005**
              
              **2004**Net
                  cash used in operating activities
              
              $
              (4,620,557
              )
              $
              (3,415,833
              )Cash
                  flows from investing activities:Acquisition
                  of intangible assets
              
              
              (800,000
              )Acquisition
                  of plant and equipment
              
              
              (78,842
              )
              
              (76,790
              )Proceeds
                  from sale of equipment
              
              
              4,700
              
              
              848Net
                  cash used in investing activities
              
              
              (874,142
              )
              
              (75,942
              )Cash
                  flows from financing activities:Reimbursement
                  of offering expense
              
              
              
              
              
              36,731Proceeds
                  from sale of stock
              
              
              21,875Repayment
                  of leases payable
              
              
              (1,192,384
              )
              
              (603,610
              )Proceeds
                  from debt
              
              
              8,750,000
              
              
              —Repayment
                  of debt
              
              
              (188,250
              )
              
              (1,637,470
              )Net
                  cash provided by (used in) financing activities
              
              
              7,391,241
              
              
              (2,204,349
              )Increase
                  (decrease) in cash and cash equivalents
              
              
              1,896,542
              
              
              (5,696,124
              )Cash
                  and cash equivalents at beginning of period
              
              
              924,804
              
              
              11,526,664Cash
                  and cash equivalents at end of period
              
              $
              2,821,346
              
              $
              5,830,540
   See
        accompanying notes to financial
        statements.
 —
            3
—
  **VENDINGDATA
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS (UNAUDITED)**
  **Note 1—Basis
        of Presentation**
  The
        accompanying unaudited financial statements of VendingData Corporation (the
        "Company") have been prepared in accordance with generally accepted accounting
        principles for interim financial information and with the rules and regulations
        of the Securities and Exchange Commission applicable to interim financial
        information. Accordingly, they do not include all of the information and
        footnotes required by generally accepted accounting principles for complete
        financial statements. In the opinion of management, all adjustments considered
        necessary for a fair presentation have been included.
  The
        results of operations for the current period presented here are not necessarily
        indicative of the results to be expected for the full year. The accompanying
        financial statements should be read in conjunction with the Company's audited
        financial statements for the year ended December 31, 2004, included
        in the
        Company's Annual Report on Form 10-KSB filed with the Securities and
        Exchange Commission from which the accompanying balance sheet information
        as of
        that date was derived. Certain reclassifications have been made to amounts
        presented in prior periods for comparability to the current period presentation.
  **Note 2—Segments**
  The
        segments identified for geographic region-based enterprise-wide data are
        as
        follows:
  **Three
                      Months Ended June 30,**
                  
                  **Six
                      Months Ended June, 30,****2005**
                  
                  
                  **2004**
                  
                  
                  **2005**
                  
                  
                  **2004**North
                      America
                  
                  $
                  467,827
                  
                  $
                  1,297,863
                  
                  $
                  1,254,999
                  
                  $
                  2,456,361Asia
                  
                  
                  267,300
                  
                  
                  11,665
                  
                  
                  267,300
                  
                  
                  146,057Europe
                  
                  
                  49,500
                  
                  
                  750,000
                  
                  
                  99,000
                  
                  
                  750,000South
                      America
                  
                  
                  —
                  
                  
                  —
                  
                  
                  24,750
                  
                  
                  —


—
            4
—
  The
        Company's revenues, depreciation and operating income distributed by product
        are
        as follows:
  **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **June
                      30,****2005**
                  
                  **2004**
                  
                  **2005**
                  
                  **2004**RevenuesSecure
                      Drop®
                  
                  $
                  61,345
                  
                  $
                  83,242
                  
                  $
                  72,593
                  
                  $
                  278,775Shuffler
                  
                  
                  657,199
                  
                  
                  584,672
                  
                  
                  1,164,748
                  
                  
                  1,041,947Deck
                      CheckerTM
                  
                  
                  325,829
                  
                  
                  1,370,852
                  
                  
                  639,107
                  
                  
                  1,922,161Other
                  
                  
                  31,092
                  
                  
                  20,762
                  
                  
                  60,439
                  
                  
                  109,535Sales
                      returns and allowances
                  
                  
                  (290,838
                  )
                  
                  
                  
                  
                  (290,838
                  )$
                  784,627
                  
                  $
                  2,059,528
                  
                  $
                  1,646,049
                  
                  $
                  3,352,418Depreciation
                      and amortizationSecureDrop®
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0
                  
                  $
                  0Shuffler
                  
                  
                  54,469
                  
                  
                  56,220
                  
                  
                  104,438
                  
                  
                  111,782Deck
                      CheckerTM
                  
                  
                  9,229
                  
                  
                  7,207
                  
                  
                  18,458
                  
                  
                  13,867Unallocated
                  
                  
                  107,098
                  
                  
                  145,592
                  
                  
                  206,409
                  
                  
                  300,332170,796
                  
                  
                  209,019
                  
                  
                  329,305
                  
                  
                  425,981Operating
                      income (loss)SeSecure
                      Drop®
                  
                  $
                  55,121
                  
                  $
                  18,813
                  
                  $
                  64,850
                  
                  $
                  110,377Shuffler
                  
                  
                  493,651
                  
                  
                  451,877
                  
                  
                  868,823
                  
                  
                  814,392Deck
                      CheckerTM
                  
                  
                  291,596
                  
                  
                  1,071,398
                  
                  
                  561,265
                  
                  
                  1,485,404Unallocated
                  
                  
                  (3,582,091
                  )
                  
                  (2,396,167
                  )
                  
                  (6,412,024
                  )
                  
                  (4,456,886
                  )$
                  (2,741,723
                  )
                  $
                  (854,079
                  )
                  $
                  (4,917,086
                  )
                  $
                  (2,046,713
                  )
 **Note 3—Loss
        per Share (Basic and Diluted)**
  The
        basic
        loss per share is computed by dividing the net loss for the period by the
        weighted average number of common shares outstanding for the period. Loss
        per
        share is unchanged on a diluted basis since the assumed exercise of common
        stock
        equivalents would have an anti-dilutive effect due to the existence of operating
        losses.
  **Note 4—New
        Debt Financing**
  In
        the
        six months ended June 30, 2005, the Company raised additional capital through
        private placements of 10% senior secured convertible notes in February 2005
        and
        March 2005 as follows.
  On
        February 15, 2005, the Company completed a private placement of 10% senior
        secured convertible notes in the aggregate principal amount of $10,000,000
        (the
“February Senior Notes”). The Company issued the February Senior Notes in
        exchange for gross cash proceeds of $6,750,000 and the surrender of senior
        notes
        in the aggregate principal amount of $3,250,000 issued in August 2004. On
        March
        14, 2005, the Company completed an additional private placement of 10% senior
        secured convertible notes in the aggregate principal amount of $2,000,000
        (the
“March Senior Notes”). The March Senior Notes were issued on a *pari
        passu* basis
        with the February Senior Notes. Both the February Senior Notes and the March
        Senior Notes are secured by a first priority security  interest
        in the Company’s assets. The February Senior Notes and the March Senior Notes
        require semi-annual payments of interest only, with the principal and all
        unpaid
        interest due at maturity in February 2008 and March 2008, respectively. Holders
        of the February Senior Notes and the March Senior Notes have a one-time right
        to
        convert up to 50% of the then outstanding principal into shares of common
        stock
        at a rate $1.65 per share.
  —
            5
—
  **Note 5—Options**
  The
        Company currently has two stock option plans. The exercise price of the options
        ranges from $1.49 to $15 with a weighted average exercise price of $3.09.
        There
        were 3,267,622 options outstanding as of June 30, 2005.
 
  **Note 6—Contingencies**
  The
        Company is a party to certain claims, legal actions, and complaints, including
        a
        patent infringement action between the Company and one of its main competitors.
        The Company cannot predict the outcome of any such litigation or say with
        any
        certainty whether any such litigation would have a material adverse effect
        on
        its business as presently conducted or as anticipated.
  In
        early
        February 2004, the State of Nevada initiated a sales/use tax audit of the
        Company’s equipment lessors. As of the date of this report, the State of Nevada
        has not determined whether there has been a shortfall in the payment of the
        sales/use tax. The Company has sold and leased back shufflers and Deck Checkers
        over the last five years. The auditor for the State of Nevada is trying to
        determine at what level a sales/use tax needs to be collected. The Company
        now
        collects from our customers in Nevada and remits payments to the State of
        Nevada. If the State of Nevada determines that the sales of the products
        to the
        leasing companies is the level at which sales/use tax should have been
        collected, liability of the leasing companies would be passed to the Company.
        The amount of this potential liability could range from a refund of $144,000
        to
        the payment of sales/use tax with interest and penalties of up to $500,000.
        The
        Company intends to defend its position in this matter.
  —
            6
—
 
 **Item
                2.**
              **Management’s
                  Discussion and Analysis or Plan of Operation.******
  **CAUTIONARY
        STATEMENT**
 
 You
        should read the following discussion and analysis in conjunction with our
        unaudited condensed consolidated financial statements and the related notes
        thereto contained elsewhere in this report. The information contained in
        this
        quarterly report on form 10-QSB is not a complete description of our
        business or the risks associated with an investment in our common stock.
        We urge
        you to carefully review and consider the various disclosures made by us in
        this
        report and in our other reports filed with the Securities and Exchange
        Commission, or SEC, including our annual report on form 10-KSB for
        the year
        ended December 31, 2004 and subsequent reports on Forms 10-QSB
        and
        8-K, which discuss our business in greater detail.
 
 In
        this
        report we make, and from time to time we otherwise make, written and oral
        statements regarding our business and prospects, such as projections of future
        performance, statements of management’s plans and objectives, forecasts of
        market trends, and other matters that are forward-looking statements within
        the
        meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
        Securities Exchange Act of 1934. Statements containing the words or phrases
        “will likely result,” “are expected to,” “will continue,” “is
        anticipated,” “estimates,” “projects,” “believes,” “expects,”
“anticipates,” “intends,” “target,” “goal,” “plans,”
“objective,” “should”
        or similar expressions identify forward-looking statements, which may appear
        in
        documents, reports, filings with the Securities and Exchange Commission,
        news
        releases, written or oral presentations made by officers or other
        representatives made by us to analysts, stockholders, investors, news
        organizations and others, and discussions with management and other of our
        representatives. For such statements, we claim the protection of the safe
        harbor
        for forward-looking statements contained in the Private Securities Litigation
        Reform Act of 1995.
  Our
        future results, including results related to forward-looking statements,
        involve
        a number of risks and uncertainties. No assurance can be given that the results
        reflected in any forward-looking statements will be achieved. Any
        forward-looking statement speaks only as of the date on which such statement
        is
        made. Our forward-looking statements are based upon assumptions that are
        sometimes based upon estimates, data, communications and other information
        from
        suppliers, government agencies and other sources that may be subject to
        revision. Except as required by law, we do not undertake any obligation to
        update or keep current either (i) any forward-looking statement to reflect
        events or circumstances arising after the date of such statement, or (ii)
        the
        important factors that could cause our future results to differ materially
        from
        historical results or trends, results anticipated or planned by us, or which
        are
        reflected from time to time in any forward-looking statement.
  In
        addition to other matters identified or described by us from time to time
        in
        filings with the SEC, there are several important factors that could cause
        our
        future results to differ materially from historical results or trends, results
        anticipated or planned by us, or results that are reflected from time to
        time in
        any forward-looking statement. Some of these important factors, but not
        necessarily all important factors, include those matters included in the
        section
“Risk Factors” further below.
  **Overview**
  Our
        strategy is to develop cost-effective niche products for the global gaming
        industry. We focus on products that increase the security, productivity and
        profitability of casino operations. Our strategy involves marketing certain
        of
        our products for sale or lease, depending on the product, the geographic
        location of the customer and other factors. We rely on our internal sales
        staff
        and distributor relationships for the sale and rental of our products.
  —
            7
—
  **Results
        of Operations** **** ****
  ***Comparison
        of Three Months Ended June 30, 2005 and 2004***
  For
        the
        three months ended June 30, 2005, we generated gross revenues of $1,075,465
        or
        48% less than the three months ended June 30, 2004. Gross revenue was offset
        by
        sales returns and allowances of $290,838. Specific product line results for
        the
        three months ended June 30, 2005 compared to the three months ended June
        30,
        2004 are provided below.
 
 For
        the
        three months ended June 30, 2005, our cost of sales was $530,049, or 50%
        less
        than the three months ended June 30, 2004. We expect the manufacturing of
        products in China to continue to reduce cost of sales on a per unit basis
        through the end of this year as we identify more efficiencies and optimize
        vendors in China. These efforts should also result in an improved gross margin.
        The gross margin on revenue for the three months ended June 30, 2005 was
        $736,063 less than the three months ended June 30, 2004 because of the decreased
        revenue for the quarter as well as a sales returns and allowances adjustment
        of
        $290,000.
 
 Three
                  months ended
                June
                  30, 2005
              
              Three
                  months ended
                June
                  30, 2004
              
              Percentage
                change**Secure
                  Drop**Revenue
              
              
              61,345
              
              
              83,242
              
              
              (26.3
              %)Cost
                  of Sales
              
              
              6,224
              
              
              64,429
              
              
              (90.3
              %)Gross
                  Margin
              
              
              55,121
              
              
              18,813
              
              
              193.0
              %**Shuffler
                  Sales**Revenue
              
              
              586,995
              
              
              483,492
              
              
              21.4
              %Cost
                  of Sales
              
              
              102,593
              
              
              81,227
              
              
              26.3
              %Gross
                  Margin
              
              
              484,402
              
              
              402,265
              
              
              20.4
              %**Shuffler
                  Rentals**Revenue
              
              
              70,204
              
              
              101,180
              
              
              (30.6
              %)Cost
                  of Sales
              
              
              60,995
              
              
              51,568
              
              
              18.3
              %Gross
                  Margin
              
              
              9,209
              
              
              49,612
              
              
              (81.4
              %)**DeckChecker
                  Sales**Revenue
              
              
              260,593
              
              
              1,310,922
              
              
              (80.1
              %)Cost
                  of Sales
              
              
              25,003
              
              
              292,247
              
              
              (91.4
              %)Gross
                  Margin
              
              
              235,590
              
              
              1,018,675
              
              
              (76.9
              %)**DeckChecker
                  Rentals**Revenue
              
              
              65,235
              
              
              59,930
              
              
              8.9
              %Cost
                  of Sales
              
              
              9,229
              
              
              7,207
              
              
              28.1
              %Gross
                  Margin
              
              
              56,006
              
              
              52,723
              
              
              6.2
              %**Other**Revenue
              
              
              31,092
              
              
              20,762
              
              
              49.8
              %Cost
                  of Sales
              
              
              40,498
              
              
              (1,586
              )
              
              2,653
              %Gross
                  Margin
              
              
              (9,406
              )
              
              22,348
              
              
              (142
              %)
   **SecureDrop®
        Sales.** Since
        there were no system sales generated in the three months ended June 30, 2005,
        due to the Company’s decision to discontinue new installations of this product
        line, our SecureDrop® sales consisted of supply items for systems already in
        place. The decrease in our costs of SecureDrop® sales revenue reflects the
        reduced sales from the prior period. The increase in gross margin percentage
        on
        SecureDrop® is attributable to the higher fixed costs associated with the
        installation of new systems compared to the sale of supply parts during the
        three months ended June 30, 2005.
  —
            8
—
  **Shuffler
        Sales.** The
        increase in revenue was due to the product line addition of the PokerOneTM
        shuffler. The decrease in the cost of shuffler **** sales
        revenue was due to the introduction of the PokerOneTM line of shufflers during
        the three months ended June 30, 2005 versus the three months ended June 30,
        2004. The PokerOneTM has a lower production cost than the Random Ejection
        Shuffler. Our cost of sales included cost of shuffler sales of $102,598 and
        shuffler service costs of $296,597.
  **Shuffler
        Rentals.** The
        decrease in shuffler rental revenue reflects the reduced number of shufflers
        placed on a rental basis as a result of the conversion of rental units to
        purchased units in 2003 and the failure to place additional shuffler units
        on a
        rental basis. This failure was due, in part, to the production delays related
        to
        the introduction of new shuffler products, such as the RandomPlus Ô Shuffler. Our cost of sales for the three months ended June 30, 2005 included
        cost of shuffler rental depreciation of $54,469.
  **Deck
        Checker** **TM** **Sales.** The
        decrease in Deck Checker TM sales
        resulted primarily from reduced international sales as our international
        distributor was working off inventory purchased in the second half of 2004.
        For
        the three months ended June 30, 2004, international sales reflect the buildup
        of
        distributor inventory levels. The decrease in gross margin percentage resulted
        from the overall sales decrease during the quarter. Our cost of sales for
        the
        three months ended June 30, 2005 included Deck Checker TM costs of
        $25,003.
  **Deck
        Checker** **TM** **Rentals.** The
        increase in Deck Checker TM rental
        revenue resulted primarily from the placement of additional units during
        the
        quarter ended June 30, 2005. Our cost of sales included Deck Checker TM rental
        depreciation of $9,229
  **Other
        Income.** The
        increase in other revenues was due to sale of supplies for Secure
        Drop **®** and
        DeckChecker TM .
        We also
        had sales returns and allowances of $290,838 for the quarter ended June 30,
        2005.
  **General
        and Administrative Expense**
  For
        the
        three months ended June 30, 2005, our general and administrative expenses
        were
        $2,818,477, or 91% more than the three months ended June 30, 2004. The increase
        in general and administrative expenses related primarily to a $810,800 increase
        in legal costs due to defense of the Shuffle Master, Inc. lawsuits, and
        legal/regulatory issues pertaining to former senior management, a $225,000
        increase in consulting expenses associated with the change in management
        team, a
        $200,000 increase in salaries primarily attributable to the expensing of
        stock
        options, a $59,000 increase in rent expense due mainly to our expansion in
        China, offset by a $70,000 decrease in travel and entertainment expenses.
  **Research
        and Development Expense**
  For
        the
        three months ended June 30, 2005, research and development expenses were
        $177,823, or 54.7% less than the period ended June 30, 2004. The decrease
        in
        research and development expenses was due to the substantial completion of
        the
        development on our new shuffler products, the RandomPlusTM Shuffler and the Poker
        OneTM Shuffler, a reduction of our engineering staff in the United States and
        the
        transfer of many engineering functions to our China operations.
  —
            9
—
  **Interest
        Expense**
  For
        the
        three months ended June 30, 2005, we incurred interest expenses of $507,048,
        or
        118.5% more than the three months ended June 30, 2004. This increase was
        primarily attributable to the additional debt service related to our previously
        outstanding 9% senior secured notes and the currently outstanding 10% senior
        secured convertible notes. The debt service on our 10% senior secured
        convertible notes will continue until February and March 2008, at which time
        the
        principal amount is due.
  **Net
        Loss**
  For
        the
        three months ended June 30, 2005, we had a net loss of $3,248,770, or 199%
        more
        than the three months ended June 30, 2004.. Basic loss per share was $0.19
        for
        the three months ended June 30, 2005, compared to $0.06 for the three months
        ended June 30, 2004. The increase in net loss and the increase in the basic
        net
        loss per share were primarily due to a $736,063 decrease in gross margin,
        a
        $1,366,565 increase in general and administrative expenses and a $275,029
        increase in interest expenses, offset by a $214,984 decrease in research
        and
        development expenses.
  ***Comparison
        of Six Months Ended June 30, 2005 and 2004***
  For
        the
        six months ended June 30, 2005, we generated gross revenues of $1,936,887,
        or
        42.2% less than the six month period ended June 30, 2004. Gross revenues
        were
        offset by sales returns and allowances of $290,838. Specific product line
        results for the six months ended June 30, 2005 compared to the six months
        ended
        June 30, 2004 are provided below.
 
 For
        the
        six months ended June 30, 2005, our cost of sales was $999,739, or 46% less
        than
        the six month period ended June 30, 2004.  The
        manufacturing of products in China is expected to continue to reduce cost
        of
        sales on a per unit basis through the end of this year as we identify more
        efficiencies and optimize vendors in China. These efforts should result in
        an
        improved gross margin.
 
 The
        gross
        margin on revenue for the six months ended June 30, 2005 was $646,309, or
        39.3%,
        compared to the gross margin on revenue for the year ended June 30, 2004
        of
        $1,502,793, or 44.8%. The decrease in gross margin of $856,484 from the six
        months ended June 30, 2004 to the six months ended June 30, 2005 reflects
        the
        decreased revenue.
  Six
                  months ended
                June
                  30, 2005
              
              Six
                  months ended
                June
                  30, 2004
              
              Percentage
                  change**Secure
                  Drop**Revenue
              
              
              72,593
              
              
              278,775
              
              
              (74.0
              %)Cost
                  of Sales
              
              
              7,743
              
              
              168,398
              
              
              (95.4
              %)Gross
                  Margin
              
              
              64,850
              
              
              110,377
              
              
              (41.2
              %)**Shuffler
                  Sales**Revenue
              
              
              1,038,439
              
              
              786,584
              
              
              32.0
              %Cost
                  of Sales
              
              
              179,018
              
              
              120,787
              
              
              48.2
              %Gross
                  Margin
              
              
              859,421
              
              
              665,797
              
              
              29.1
              %**Shuffler
                  Rentals**Revenue
              
              
              126,309
              
              
              255,363
              
              
              (50.5
              %)Cost
                  of Sales
              
              
              116,907
              
              
              106,768
              
              
              9.5
              %Gross
                  Margin
              
              
              9,402
              
              
              148,595
              
              
              (93.7
              %)**DeckChecker
                  Sales**Revenue
              
              
              508,636
              
              
              1,805,351
              
              
              (71.8
              %)Cost
                  of Sales
              
              
              59,383
              
              
              422,890
              
              
              (86.0
              %)Gross
                  Margin
              
              
              449,253
              
              
              1,382,461
              
              
              (67.5
              %)**DeckChecker
                  Rentals**Revenue
              
              
              130,470
              
              
              116,810
              
              
              11.7
              %Cost
                  of Sales
              
              
              18,458
              
              
              13,867
              
              
              33.1
              %Gross
                  Margin
              
              
              112,012
              
              
              102,943
              
              
              8.8
              %**Other**Revenue
              
              
              60,439
              
              
              109,535
              
              
              (44.8
              %)Cost
                  of Sales
              
              
              40,485
              
              
              46,452
              
              
              (12.8
              %)Gross
                  Margin
              
              
              19,954
              
              
              63,083
              
              
              (68.4
              %)
 
 —
            10
—
  **SecureDrop®
        Sales.** As
        a
        result of our decision to discontinue new installations for this product
        line **** there
        were no system sales generated in the six months ended June 30, 2005. Our
        SecureDrop® sales consisted of supply items for systems already in place. The
        decrease in cost of sales to $7,743 reflects the reduced sales from the prior
        period.
  **Shuffler
        Sales.** The
        increase in sales was due, in part, to increased sales efforts related to
        our
        shufflers and the addition of PokerOneTM to the product line during the quarter
        ended June 30, 2005. **** The
        increase in the cost of shuffler **** sales
        revenue was due primarily to the additional placement of shufflers during
        the
        six months ended June 30, 2005 versus the six months ended June 30, 2004
        and
        included shuffler service costs of $535,478.
  **Shuffler
        Rentals.** The
        decrease in shuffler rental revenue reflects the reduced number of shufflers
        placed on a rental basis as a result of the conversion of rental units to
        purchased units in 2003 and the failure to place additional shuffler units
        on a
        rental basis. This failure was due, in part, to the production delays related
        to
        the introduction of new shuffler products, such as the RandomPlus Ô Shuffler. Cost of sales include shuffler rental depreciation of
        $104,438.
  **Deck
        Checker** **TM** **Sales.** The
        decrease in Deck Checker TM sales
        resulted primarily from reduced international sales. For the six months ended
        June 30, 2004, international sales reflect the buildup of distributor inventory
        levels.
  **Deck
        Checker** **TM** **Rentals** .
        The
        increase in Deck Checker TM rental
        revenue resulted primarily from the placement of additional units. Cost of
        sales
        included rental depreciation of $7,207.
  **Other
        Income.** The
        decrease in other revenues is due to product returns offset by the sale of
        products that are not produced by us and sold only on a limited basis. We
        also
        had sales returns and allowances of $290,838 for the quarter ending June
        30,
        2005.
  **General
        and Administrative Expense**
  For
        the
        six months ended June 30, 2005, our general and administrative expenses were
        $5,195,563, or 80.5% more than the six months ended June 30, 2004 The increase
        in general and administrative expenses related primarily to a $1,360,000
        increase in legal and regulatory costs due to defense of the Shuffle Master,
        Inc. lawsuits and legal/regulatory issues pertaining to former senior
        management, a $356,000 increase in consulting expenses related to the management
        change in March, a $177,000 increase in payroll costs, a $120,000 increase
        in
        rent expense due mainly to our expansion in China, a $62,000 increase in
        insurance, and a $67,000 increase in finance fees.
  —
            11
—
  **Research
        and Development Expense**
  For
        the
        six months ended June 30, 2005, research and development expenses were $367,832,
        or 45.2% less than the six months ended June 30, 2004. The decrease in research
        and development expenses was due to the substantial completion of the
        development on our new shuffler products, the RandomPlusTM Shuffler and the Poker
        OneTM Shuffler, a reduction of our engineering staff in the United States and
        the
        transfer of many engineering functions to our China operations.
  **Interest
        Expense**
  For
        the
        six months ended June 30, 2005, we incurred interest expenses of $823,870
        or
        61.8% more than the six months ended June 30, 2004. This increase was primarily
        attributable to the additional debt service related to our previously
        outstanding 9% senior secured notes and the currently outstanding 10% senior
        secured convertible notes. The debt service on our 10% senior secured
        convertible notes will continue until February and March 2008 at which time
        the
        principal amount is due.
  **Net
        Loss**
  For
        the
        six months ended June 30, 2005, we had a net loss of $5,742,855, or 125%
        more
        than the six months ended June 30, 2004. Basic loss per share was $0.34 for
        the
        six months ended June 30, 2005, compared to $0.31 for the six months ended
        June
        30, 2004. The increase in net loss and the increase in the basic net loss
        per
        share were primarily due to a $856,484 decrease in gross margin, a $2,317,617
        increase in general and administrative expenses and a $314,706 increase in
        interest expenses, offset by a $303,728 decrease in research and development
        expenses.
  **Liquidity
        and Capital Resources** ****
  As
        a
        result of the proceeds from our private placement of senior notes, offset
        by our
        operating loss, our working capital has increased from $6,900,104 at December
        31, 2004 to $9,303,385 at June 30, 2005. However, our working capital is
        decreasing due to ongoing losses. Based on presently known commitments and
        plans, we believe that we will require approximately $3 million of
        additional capital to fund our operations and required expenditures through
        the
        fourth quarter of 2005. We will endeavor to raise additional required funds
        through various financing sources, including additional sales of our equity
        and
        debt securities and the procurement of commercial debt financing. However,
        there
        can be no guarantees that such funds will be available on commercially
        reasonable terms, if at all. Our ability to seek additional sources of capital
        is restricted by a covenant related to our 10% senior secured convertible
        notes
        that prohibits us from incurring indebtedness through loans, lines of credit
        and
        other forms of indebtedness, including equipment financing, in excess of
        $15,000,000. Accordingly, no assurances can be given that we will successfully
        obtain liquidity sources necessary to fund our operations in the upcoming
        year.
  Net
        Cash
        Used in Operating Activities. For the six months ended June 30, 2005, the
        net
        cash used in operating activities was $4,620,557, compared to $3,415,833
        for the
        six months ended June 30, 2004, a decrease of $1,204,724, or 35.3%. The net
        cash
        used in operating activities resulted from a net loss of $5,742,855, a decrease
        of deferred interest of $115,734,non-cash compensation expense of $367,456,
        loss
        on disposition of equipment of $1,900, a decrease in accounts receivable
        of
        $137,551 an increase in other receivables of $63,295, an increase in inventory
        of $973,247, an increase in prepaid expenses of $26,951, an increase in deferred
        expenses of $264,251, an increase in vendor deposits of $43,510, an increase
        in
        accounts payable of $1,132,078, an increase in accrued expenses of $402,064,
        a
        decrease in deferred revenue of $77,770, a decrease in customer deposits
        of
        $1,775, and depreciation of $329,304.
  —
            12
—
  Net
        Cash
        Used In Investing Activities. For the six months ended June 30, 2005, we
        used
        net cash in investing activities of $874,142 compared to $75,942 for the
        six
        months ended June 30, 2004. The net cash used in investing activities during
        the
        six months ended June 30, 2005 consisted of $800,000 from acquisition of
        intangible assets, $78,842 from the acquisition of plant and equipment and
        $4,700 from disposition of equipment.
  Net
        Cash
        Provided By Financing Activities. For the six months ended June 30, 2005,
        our
        financing activities provided net cash of $7,391,241, whereas, for the six
        months ended June 30, 2004, our financing activities used net cash of
        $2,204,349. The net cash provided by financing activities during the six
        months
        ended June 30, 2005 consisted of $8,750,000 provided by the issuance of 10%
        senior secured convertible notes, offset by the repayment of equipment leases
        of
        $1,192,384 and repayment of short term debt of $188,250.
  **Sources
        of Capital**
  During
        the years ended December 31, 2004 and 2003, our sources of capital included
        a
        public stock offering, equipment financing from a third party, short-term
        notes
        from stockholders, convertible debentures and other private sources of
        capital.
  With
        respect to our equipment financing where we have sold and leased back most
        of
        our furniture, equipment, tooling and shufflers held for rent, we have repaid
        $1,179,656 for the six months ended June 30, 2004 and repaid $1,076,650 for
        the
        six months ended June 30, 2005. As of June 30, 2005, we had outstanding
        equipment financing of $1,758,039. These equipment leases have terms of 36
        to 39
        months and were not recorded as sales because each of the leases included
        a
        mandatory buy-back provision.
  During
        the six months ended June 30, 2005, we raised additional capital through
        private
        placements of 10% senior secured convertible notes in February 2005 (the
        “February Senior Notes”) and March 2005 (the “March Senior Notes” and together
        with the February Senior Notes, the “Senior Notes”).
  ·
              On
                  February 15, 2005, we completed a private placement of the February
                  Senior
                  Notes, which mature on February 15, 2008. The February Senior Notes
                  are
                  secured by a first priority security interest in our assets. The
                  February
                  Senior Notes require semi-annual payments of interest only on August
                  1 and
                  February 1 of each year, with the principal and any unpaid interest
                  due at
                  February 15, 2008. Any prepayments of the February Senior Notes
                  made prior
                  to February 2007 require the payments of premiums that decline
                  each year.
                  Holders of the February Senior Notes have a one-time right to convert
                  up
                  to 50% of the then outstanding principal of the February Senior
                  Notes into
                  shares of our common stock, $.001 par value, at a rate $1.65 per
                  share.
                  Through the private placement we issued an aggregate of $10,000,000
                  in
                  February Senior Notes, in return for exchanged notes in the aggregate
                  principal amount of $3,250,000 and gross cash proceeds of
                  $6,750,000.
  ·
              On
                  March 14, 2005, we completed an additional $2 million private placement
                  of
                  the March Senior Notes, which mature on March 14, 2008.Notes. The
                  March
                  Senior Notes were issued on a*pari
                  passu*basis with the February Senior Notes and, as a result, are secured
                  by a
                  first priority security interest in our assets. The March Senior
                  Notes
                  require semi-annual payments of interest only on September 1 and
                  March 1
                  of each year, with the principal and any unpaid interest due at
                  March 15,
                  2008. Any prepayments of the March Senior Notes made prior to March
                  2007
                  require the payments of premiums that decline each year. Holders
                  of the
                  March Senior Notes have a one-time right to convert up to 50% of
                  the then
                  outstanding principal of the March Senior Notes into shares of
                  our common
                  stock, $.001 par value, at a conversion price of $1.65 per
                  share.
  —
            13
—
  A
        portion
        of the proceeds raised through these private placements was subject to the
        following conditions.
  ·
              One
                  third (1/3) of the total proceeds held in escrow shall be released
                  to us
                  upon the execution of a distributor agreement with TCS or an affiliate
                  thereof and the sale and service outside the United States of 100
                  units of
                  our RandomPlus ShufflerTM and the PokerOneTM shuffler, where such events
                  must occur no later than June 30,
                  2005;
  ·
              One-third
                  (1/3) of the total proceeds held in escrow shall be released to
                  us upon
                  the hiring of a North American manager of operations or Chief Operating
                  Officer, where such person shall be hired no later than June 30,
                  2005;
                  and
  ·
              One-third
                  (1/3) of the total proceeds held in escrow shall be released to
                  us upon
                  the approval of our RandomPlusTM shuffler by Gaming Laboratories
                  International and the Nevada State Gaming Control Board and the
                  placement
                  of 100 units of our RandomPlusTM shuffler in North America, where such
                  approvals and shuffler placement must occur no later than June
                  30,
                  2005.
  By
        the
        June 30, 2005 deadline, we satisfied the first and the second escrow conditions
        and received a waiver from the holders of the Senior Notes with respect to
        the
        third condition. Accordingly, we have access to the all of the proceeds received
        through the private placement of the Senior Notes.
  **Off
        Balance Sheet Arrangements**
  We
        do not
        have any off balance sheet arrangements.
   **Critical
        Accounting** **Policies** **and Estimates**
  The
        following is a summary of what management believes are the critical accounting
        policies related to operations. The application of these policies, in some
        cases, requires management to make subjective judgments and estimates regarding
        the effect of matters that are inherently uncertain. See Note 1, "Description
        of
        Business and Significant Accounting Policies," to financial statements included
        in our annual report on Form 10KSB for a more detailed discussion of our
        accounting policies. Except as described below, we do not employ any critical
        accounting policies selected from among available alternatives or that require
        the exercise of significant management judgment.,
  ***Allowance
        for Doubtful Accounts.***
  In
        connection with the preparation of our financial statements, management reviews
        and evaluates the collectibility of our trade receivables and adjusts our
        allowance for estimated uncollectible accounts as deemed necessary in the
        circumstances. These estimates have the potential for critically affecting
        the
        determination of results of operations for any given period. Factors considered
        by management in making such estimates and adjustments include any
        concentrations among customers, changes in our relationships therewith, payment
        history and the apparent financial condition thereof.
  —
            14
—
  ***Revenue
        Recognition.***
  We
        recognize revenue from the sale of our shuffler and Deck CheckerTM products upon
        shipment against valid customer contracts or purchase orders. Sales are
        recognized immediately when shufflers that are rented are converted to purchases
        depending on the creditworthiness and payment history of the casino company
        since payment terms are from 20 to 48 months. We recognize revenue from our
        sales to independent distributors at the time that the distributor takes
        possession of our product. We recognize revenue from the sale of our SecureDrop®
        products upon installation and functional testing at customer locations because
        that is when the customer's obligation becomes fixed and certain pursuant
        to our
        standard contracts for sale. The extended warranty and maintenance components
        that are part of long term sales contracts are unbundled and recognized as
        deferred revenue amortized over the remaining life of the sales agreement
        after
        the initial 90−day warranty as required by the Emerging Issues Task Force Issue
        No. 00−21, Revenue Arrangements with Multiple Deliverables. The useful life of
        our shufflers and Deck CheckersTM is five years with proper maintenance; the life
        can be extended with the replacement of component parts. If the customer
        does
        not possess the required creditworthiness or an established payment history
        with
        us, we would then book the revenue as an installment sale and recognize it
        over
        time as payments are received. Revenue from shuffler rentals is recorded
        at the
        first of each month in accordance with rental contract terms. All rental
        contracts are cancelable upon 30−day written notice by the customer. Maintenance
        expense for rental units is recorded in the period it is incurred. Although
        sales are not generally made with a right to return, upon occasion, usually
        associated with the performance warranty, sales returns and allowances are
        recorded after returned goods are received and inspected. We provide currently
        for estimated warranty repair costs associated with sales contracts. Although
        there are no extended warranties offered for our products, we do provide
        for
        maintenance contracts that are billed and recognized on a monthly
        basis.
  ***Intangible
        Assets.***
  We
        currently amortize our intangible assets (patent and technology rights) on
        a
        straight-line basis over estimated useful lives of 10 years. Management believes
        that the useful life of patents and technology rights equals the full term
        of
        the patent.
  ***Recent
        Accounting Pronouncements.***
  In
        December, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 123 (Revised 2004), *Share
        Based Payment* (“SFAS
        123R”). SFAS 123R requires certain changes in the way compensation cost related
        to share based employee compensation transactions is recognized in the financial
        statements as compared to SFAS No. 123, *Accounting
        for Stock-Based Compensation* .
        The
        provisions of SFAS 123R are effective for the company as of the first interim
        period that begins after December 15, 2005. Accordingly, we will implement
        the
        revised standard in the first quarter of fiscal year 2006, unless we decide
        to
        adopt it earlier. Since the company adopted SFAS No. 123 effective as of
        January
        1, 2003, the effect of adopting SFAS 123R is not expected to be
        material.
  In
        December 2004, the FASB issued SFAS No. 153 *,
        Exchanges of Nonmonetary Assets, an*  *Amendment
        of APB Opinion No. 29, Accounting for Nonmonetary Transactions* (“SFAS
        153”). The amendments made by SFAS 153 are based on the principle that exchanges
        of nonmonetary assets should be measured based on the fair value of the assets
        exchanged. Further, the amendments eliminate the narrow exception for
        nonmonetary exchanges of similar productive assets and replace it with a
        broader
        exception for exchanges of nonmonetary assets that do not have commercial
        substance. The Statement is effective for nonmonetary asset exchanges occurring
        in fiscal periods beginning after June 15, 2005. We do not expect to enter
        into
        any transactions that would be affected by adopting SFAS 153.
  In
        May
        2005, the Financial Accounting Standards Board (FASB) issued Statement of
        Financial Accounting Standards (SFAS) No. 154 *,
        Accounting Changes and Error Corrections, a Replacement of*  *APB
        Opinion No. 20 and SFAS No. 3* . SFAS No. 154 replaces
        APB Opinion No. 20, *Accounting*  *Changes* and SFAS
        No 3, *Reporting
        Accounting Changes in Interim Financial Statements* and
        changes the requirement for the accounting for and reporting of a change
        in
        accounting principles. SFAS No. 154 applies to all voluntary changes in
        accounting principles. It also applies to changes required by an accounting
        pronouncement in the unusual instance that the pronouncement does not include
        specific transition provisions. When a pronouncement includes specific
        transition provisions, those provisions should be followed. The provisions
        of
        SFAS No. 154 will be effective for accounting changes made in fiscal year
        beginning after December 15, 2005. We
        have
        not completed our evaluation or determined the impact of adopting SFAS No.
        154,
        which may be material to our results of operations in the first quarter of
        fiscal year 2006 and thereafter.
  —
            15
—
  **Risk
        Factors**
  ***We*** ***require*** ***additional funding in the future to continue to operate our business.*** We
        had
        working capital of $9,303,385 as of June 30, 2005, however our working capital
        continues  to
        deteriorate due to  ongoing
        losses. Based on presently known commitments and plans, we believe that we
        will
        require a minimum of $3 million of additional capital to fund our operations
        and
        required expenditures through the fourth quarter of 2005. We will endeavor
        to
        raise additional required funds through various financing sources, including
        additional sales of our equity and debt securities and the procurement of
        commercial debt financing. However, there can be no guarantees that such
        funds
        will be available on commercially reasonable terms, if at all. Our ability
        to
        seek additional sources of capital is restricted by a covenant related to
        our
        10% senior secured convertible notes that prohibits us from incurring
        indebtedness through loans, lines of credit and other forms of indebtedness,
        including equipment financing, in excess of $15,000,000. Accordingly, no
        assurances can be given that we will successfully obtain liquidity sources
        necessary to fund our operations in the upcoming year. Our inability to obtain
        additional capital as and when needed may materially adversely affect our
        ability to continue our present level of operations.
  ***We
        have a history of significant operating losses and anticipate continued
        operating losses for the foreseeable future.*** For the
        six months ended June 30, 2005 and the years ended December 31, 2004
        and
        2003, we have incurred net losses of $5,742,855, $7,149,194 and $7,812,089,
        respectively, and our operations have used $4,620,557, $10,660,133 and
        $11,526,665 of cash,
        respectively. As of June 30, 2005, December 31, 2004 and December
        31, 2003,
        we had accumulated deficits of $57,474,396, $51,731,541 and $44,58 2,347 ,
        respectively. Based on our presently known commitments and plans, we believe
        that we will require a minimum of $3 million of additional capital to fund
        our
        operations and required expenditures through the fourth quarter of 2005.
        If we
        are unable to generate these funds from operational cash flow we will be
        required to locate additional sources of capital from private or public
        placements of debt or equity, or from institutional or other lending sources.
        If
        our revenues do not increase very substantially, or if our spending levels
        exceed our expectations, we will not become profitable. Revenues may not
        grow in
        the future, and we may not generate sufficient revenues for profitability.
        If we
        become profitable, we may not be able to sustain profitable operations.
  ***We
        require stockholder approval to increase our authorized shares to ensure
        a
        sufficient number of shares are available for the conversion of the March
        Senior
        Notes..*** As of
        July 1, 2005, we have 25,000,000 shares of common stock authorized and
        16,764,005 shares of common stock outstanding. In addition, as of July 1,
        2005,
        we have issued stock options to purchase 3,267,622 shares of common stock,
        warrants to purchase 2,543,053 shares of common stock and February Senior
        Notes
        convertible into 3,636,363 shares of common stock. Due to the shares outstanding
        and shares reserved as of July 1, 2005, we do not have a sufficient number
        of
        authorized shares remaining to cover the shares issuable upon the conversion
        of
        the March Senior Notes, if at all. Our board of directors has authorized
        an
        amendment to our articles of incorporation to increase our total authorized
        number of shares. However, our stockholders must also approve the amendment
        to
        our articles of incorporation. Although we expect our stockholders to approve
        the amendment, there is no guarantee of such a result. If the stockholders
        do
        not approve of the amendment, we will be in breach under the terms of the
        March
        Senior Notes.
  —
            16
—
 ***We
        may be unable to generate sufficient demand for our
        products.*** **** If
        we
        fail to generate sufficient demand for our products, we may be unable to
        sustain
        operations or generate a return to investors. Until January 2000, we were
        in the
        development stage and derived minimal revenues from our products. Currently
        we
        are an operating company that continues to develop new products. Since January
        2000, our activities have been limited to analyzing and consulting with persons
        in the gaming industry, developing and manufacturing new products, establishing
        distribution networks for our products, marketing our products to the gaming
        industry, and commencing product sales. During such time, we have derived
        only
        limited revenues, which have been insufficient to sustain our operations.
        We may
        not generate sufficient revenue to sustain our operations. No independent
        organization has conducted market research providing management with independent
        assurance from which to estimate potential demand for our products. The overall
        market may not be receptive to our products, and we may not successfully
        compete
        in the target market for our products. ****
  ***Our
        leased shufflers are more susceptible to replacement by
        customers.*** All of
        our leased shufflers are placed with customers under short-term lease
        arrangements, which, unlike long-term leases or permanent sales of our products,
        can easily be terminated by a dissatisfied customer. The manner in which
        such
        short-term leases are structured puts our shufflers at greater risk of
        replacement due to pressure from competitors, changes in economic conditions,
        obsolescence and declining popularity. Casino operators may terminate the
        use of
        our products, and we may not be able to maintain and expand the number of
        installed shufflers through enhancement of existing shufflers, introduction
        of
        new shufflers, customer service or otherwise.
  ***We
        may be required to record a charge to sales returns and allowances related
        to
        our lease agreements and purchase contracts.*** Due
        to
        the competitive environment in which we operate, we have agreed to extended
        payment terms in a significant number of our leasing agreements and purchase
        contracts that permit the customer to return our products at any time with
        no
        further monetary obligation to us. If we have recorded all of the revenue
        that
        would have been received from the relevant leasing agreement or purchase
        contract, and the product is returned to us, we will then be required to
        record
        a charge against sales returns and allowances. As a result, our operating
        results for the relevant period in which the charge is taken will be adversely
        impacted.
  ***We
        may be unable to adequately protect our intellectual property
        right*** .
        Our
        success depends upon maintaining the confidentiality and proprietary nature
        of
        our intellectual property rights. Our ability to compete may be damaged,
        and our
        revenues may be reduced if we are unable to protect our intellectual property
        rights adequately. To protect these rights, we rely principally on a combination
        of:
  ·
              contractual
                  arrangements providing for non-disclosure and prohibitions on
                  use;
  ·
              patents
                  and pending patent applications;
  ·
              trade
                  secret, copyright and trademark laws;
                  and
  ·
              certain
                  built-in technical product
                  features.
  Patent,
        trade secret, copyright and trademark laws provide limited protection. The
        protections provided by laws governing intellectual property rights do not
        prevent our competitors from developing, independently, products similar
        or
        superior to our products and technologies. In addition, effective protection
        of
        copyrights, trade secrets, trademarks, and other proprietary rights may be
        unavailable or limited in certain foreign countries. We may be unaware of
        certain non-publicly available patent applications, which, if issued as patents,
        could relate to our services and products as currently designed or as we
        may
        modify them in the future. Legal or regulatory proceedings to enforce our
        patents, trademarks or copyrights could be costly, time consuming, and could
        divert the attention of management and technical personnel.
  —
            17
—
  ***Adverse
        results in current litigation could result in substantial monetary damages
        and
        impacts on the manufacture and sale of certain of our shuffler
        products*** .
        Shuffle
        Master, our principal competitor in the shuffler market, filed two lawsuits
        against us for patent infringement. The first suit has been settled (see
        Part II
        - Item 1. Legal Proceedings). The second lawsuit alleges that our PokerOneTM
        Shuffler violates one of its patents concerning the card moving mechanism.
        Shuffle Master seeks treble damages, which, if awarded, could result in us
        owing
        it substantial sums of money, and, if large enough, could have a material
        adverse effect on our liquidity and our ability to conduct operations. Although
        we believe our position to be meritorious, litigation of this nature is a
        drain
        on our cash resources and our management’s time. Although Shuffle Master has
        asserted patent infringement claims and we believe we have reasonable defenses
        to the same, we cannot determine whether we will prevail in the lawsuit,
        nor
        whether damages, if awarded, would significantly impact our ability to continue
        to manufacture and sell particular products within the United States and
        its
        territories. If we do not prevail, we will be unable to sell the PokerOneTM
        shuffler products in the United States unless we change certain components
        used
        in the shuffler or obtain appropriate licenses from Shuffle Master to use
        the
        playing card shuffler apparatus. The preliminary
        injunction that Shuffle Master obtained against us in  November
        2004 prevented us from selling our PokerOneTM Shuffler in the United States.
        An appellate court stayed the injunction in March 2005. Similarly, we cannot
        determine whether Shuffle Master will assert other litigation claims based
        upon
        other patents it may currently or in the future own, nor can we determine
        the
        likely outcome of any such litigation or whether any such substantial litigation
        would have a material adverse effect on our business as presently conducted
        or
        as anticipated.
  ***We
        believe that it is likely that our future products will be the subject of
        future
        patent litigation if the products are sold and installed in the United States
        and, if commenced, could subject us to continuing litigation costs and risks.*** Other
        than the allegations made by Shuffle Master discussed above, we are not aware
        of
        any claims or basis for our current products infringing on the proprietary
        rights of third parties. To the extent that we introduce new products that
        incorporate the same or similar technology, it is likely that Shuffle Master
        will bring one or more claims against us seeking damages, injunctive or other
        equitable relief, or both. We cannot predict the outcome of any future
        litigation that may occur.
  If
        our
        future products incorporate technology that infringes the proprietary rights
        of
        third parties and we do not secure licenses from them, we could be liable
        for
        substantial damages that would cause a material reduction in revenues and
        impair
        our prospects for achieving growth and profitability.
  In
        furtherance of the development of our services or products, we may need to
        acquire licenses for intellectual property to avoid infringement of third
        party
        rights or claims of infringement. These licenses may not be available on
        commercially reasonable terms, if at all. Claims for infringement, if made,
        could damage our business prospects, our results of operations and financial
        condition, whether or not the claims have merit, by:
  ·
              consuming
                  substantial time and financial resources required to defend against
                  them;
  ·
              diverting
                  the attention of management from growing our business and managing
                  operations;
  ·
              resulting
                  in costly litigation; and
  ·
              disrupting
                  product sales and shipments.
  —
            18
—
  If
        any
        third party prevails in an action against us for infringement of its proprietary
        rights, we could be required to pay damages and either enter into costly
        licensing arrangements or redesign our products so as to exclude the infringing
        technology. As a result, we would incur substantial costs and delays in product
        development, sales and shipments, our revenues may decline substantially
        and we
        may not be able to achieve the growth required for us to achieve profitability
  ***We
        rely*** ***on
        distributors in international markets, and our limited sales experience in
        foreign countries could cause us to lose sales.*** Substantially
        all sales of our products outside the United States are achieved through
        distributor relationships. We believe the distributors that we have engaged
        are
        experienced and reputable; however, if we are unable to manage these
        relationships, our ability to generate revenue and profits in the non-U.S.
        market may be adversely affected. To the extent that we engage in direct
        sales
        outside the United States, we have limited sales experience and history in
        foreign markets. On January 21, 2005, we entered into an exclusive five-year
        agreement with TCS to market and distribute our shuffler products outside
        of the
        United States. However, if TCS is unable to place our shuffler products outside
        of the United States, our liquidity will be adversely affected. In July 2005
        we
        entered into a contract with Simon Herbert to serve as our Vice President
        of
        International Sales. Mr. Simon is a 25 year senior gaming industry executive
        who
        is credited with building several multi-million dollar operations. Most notably,
        Mr. Herbert served as CEO of TCS Group. Mr. Herbert will oversee VendingData's
        international distribution partnerships.
  ***Our
        management holds a controlling interest in our common stock, giving our
        management the power to control all matters submitted to our stockholders.*** As
        of
        July 1, 2005, our executive officers and members of our board beneficially
        own
        approximately 8,099,563 shares of common stock, or approximately 34.8% of
        the
        outstanding shares of our common stock, assuming exercise or conversion of
        all
        options, warrants and convertible debentures held by our executive officers
        and
        members of our board that are exercisable within 60 days of July 1, 2005.
        Accordingly, these stockholders have the power to control all matters requiring
        approval by our stockholders, including the election of directors and approval
        of mergers and other significant corporate transactions. This concentration
        of
        ownership may make it more difficult for non management stockholders to effect
        substantial changes in our company, and also has the effect of delaying,
        preventing or expediting, as the case may be, a change in control of our
        company.
  **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 the six months ended June 30, 2005. This evaluation was done with
        the
        participation of Mark R. Newburg, our Executive Director and Treasurer, and
        Douglas H. Caszatt, our Acting Chief Financial Officer, Secretary and
        Controller. Disclosure controls and procedures are controls and other procedures
        that are designed to ensure that information required to be disclosed by
        us in
        the reports that we file or submit under the Exchange Act is recorded,
        processed, summarized and reported within the time periods specified in the
        SEC’s rules and forms. Disclosure controls and procedures include, without
        limitation, controls and procedures designed to ensure that information required
        to be disclosed by us in the reports that we file under the Exchange Act
        is
        accumulated and communicated to our management, as appropriate to allow timely
        decisions regarding required disclosure.
  Our
        management does not expect that our disclosure controls and procedures or
        our
        internal controls over financial reporting will prevent all error and all
        fraud.
        A control system, no matter how well conceived and operated, can provide
        only
        reasonable, but not absolute, assurance that the objectives of a control
        system
        are met. Further, any control system reflects limitations on resources, and
        the
        benefits of a control system must be considered relative to its costs. Because
        of the inherent limitations in all control systems, no evaluation of controls
        can provide absolute assurance that all control issues and instances of fraud,
        if any, have been detected. These inherent limitations include the realities
        that judgments in decision-making can be faulty and that breakdowns can occur
        because of simple error or mistake. Additionally, controls can be circumvented
        by the individual acts of some persons, by collusion of two or more people,
        or
        by management override of a control. The design of a control system is also
        based upon certain assumptions about the likelihood of future events, there
        can
        be no assurance that any design will succeed in achieving its stated goals
        under
        all potential future conditions; over time, controls may become inadequate
        because of changes in conditions, or the degree of compliance with the policies
        or procedures may deteriorate. Because of the inherent limitations in a
        cost-effective control system, misstatements due to error or fraud may occur
        and
        may not be detected.
  —
            19
—
  Based
        on
        this evaluation, we concluded that, subject to the limitations noted above,
        our
        disclosure controls and procedures are effective to ensure that information
        we
        are required to disclose in reports that we file or submit under the Exchange
        Act is recorded, processed, summarized, and reported within the time periods
        specified in the SEC’s rules and forms.
  (b)  *Changes
        in Disclosure Controls and Procedures.*  There
        were no changes in our internal controls over financial reporting that occurred
        during the three months ended June 30, 2005 that have materially affected,
        or
        are reasonably likely to materially affect, our internal controls over financial
        reporting.
  —
            20
—
 
 **PART
        II - OTHER INFORMATION**
  **Item
                1.**
              **Legal
                  Proceedings******
  On
        July
        12, 2005, we entered into a Settlement Agreement with Shuffle Master, Inc.,
        with
        respect to the legal proceeding filed on March 27, 2002, by Shuffle Master,
        Inc., against us in the United States District Court, District of Nevada
        (Case
        No. CV-S-02-0438-JCM-PAL). The complaint alleged, among other things, claims
        for
        patent infringement relating to two of Shuffle Master’s patents and requested
        treble damages and an injunction enjoining us from infringing on such patents.
        The Shuffle Master patents at issue are United States Patent Numbers 6,325,373
        and 6,068,258, regarding registering use of a playing card shuffler apparatus
        and the displaying of the use on a display. We had denied the claims and
        asserted counterclaims against Shuffle Master. The trial date for this matter
        was set for July 25, 2005.
 
 Pursuant
        to the Settlement Agreement, the parties have agreed to dismiss their claims
        and
        counter-claims in the particular action and Shuffle Master has agreed not
        to
        bring any claims against us for the infringement of the above-referenced
        patents
        for past or future use of the technology, with the exception of matters
        involving infringement of the following aspects of Patent No. 6,325,373:
        (i) a
        method of recovering from a card jam in an automatic card shuffler, as further
        described in Claim 6 of Patent No. 6,325,373; and (ii) an automatic card
        shuffler with a card moving mechanism to clear card jams, as further described
        in Claim 7 of Patent No. 6,325,373. In return, we will make settlement payments
        to Shuffle Master in the amount of $400,000 payable on or before July 14,
        2005,
        and $400,000 which is due on or before May 14, 2006.
 
 The
        Settlement Agreement extends only to the matters described above relating
        to
        Patent Numbers 6,325,373 and 6,068,258, and does not extend to the legal
        proceeding filed on October 5, 2004, by Shuffle Master, Inc., against us
        in the
        United States District Court, District of Nevada (Case No.
        CV-S-04-1373-JCM-LRL). Those litigation proceedings continue and are not
        affected by the Settlement Agreement. The second lawsuit alleges that our
        PokerOneTM Shuffler violates a Shuffle Master patent concerning the card
        moving mechanism. Shuffle Master seeks treble damages. If we do not prevail,
        we
        will be unable to sell the PokerOneTM shuffler products in the United States
        unless we change certain components used in the shuffler or obtain
        appropriate licenses from Shuffle Master to use the playing card shuffler
        apparatus. The preliminary injunction that Shuffle Master obtained against
        us in
        November 2004 prevented us from selling our PokerOneTM Shuffler in the United
        States. An appellate court stayed the injunction in March 2005.
 
 On
        June
        2, 2005, we received a summons and complaint in connection with an automobile
        accident involving a former employee of the company. The claim was filed
        in the
        Superior Court of California, County of San Francisco, and the amount of
        the
        lawsuit is in excess of $2 million. We have responded to the complaint and
        referred the case to our insurance carrier.
  **Item
                2.**
              **Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds**
  During
        the quarter ended June 30, 2005, we received $21,875 from three warrant holders
        who exercised warrants and received 12,500 shares.
  Pursuant
        to a repurchase agreement dated April 8, 2005, we repurchased 448,053 shares
        of
        common stock from certain investors for which the Company issued warrants
        allowing the investors to purchase an equal number of shares of our common
        stock
        at $0.01 per share. The warrants vest on April 8, 2006 and expire on April
        8,
        2010. We will hold the common stock as treasury shares. No payment was made
        to
        any parties as a result of this repurchase agreement.
  —
            21
—
  **Item
                6.**
              **Exhibits.**
  Exhibits .
  10.1
                Settlement
                      Agreement dated July 12, 2005 between VendingData Corporation
                      and Shuffle
                      Master, Inc
  31.1
              Certifications
                  Pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.
  31.2
              Certifications
                  Pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.
  32.1
              Certification
                  of Principal Executive Officer and Principal Financial Officer
                  pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
                  1350).
  —
            22
—
 
 **SIGNATURE**
  In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  **VendingData
                  Corporation**(Registrant)Date: August
                9, 2005
              By:
              /s/ Mark
                R. NewburgMark
                  R. NewburgExecutive
                  Director and Treasurer (Principal Executive
                  Officer)
 Date: August
                9, 2005
              By:
              /s/ Douglas
                H. CaszattDouglas
                H. CaszattActing
                  Chief Financial Officer, Secretary and Controller (Principal Financial
                  Officer)
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            23
—