MIKOHN GAMING CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: September 30, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from to

Commission File Number: 000-22752

MIKOHN GAMING CORPORATION

(Exact name of registrant as specified in its charter)

Nevada

88-0218876

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification Number)

920 Pilot Road, Las Vegas, NV 89119

(Address of principal executive office and zip code)

(702) 896-3890

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 x NO ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) YES ¨ NO x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:


22,152,022	as of	November 12, 2004
(Amount Outstanding)		(Date)

MIKOHN GAMING CORPORATION

TABLE OF CONTENTS


			Page
Part I	FINANCIAL INFORMATION

	Item 1.	Consolidated Financial Statements	2

		Consolidated Balance Sheets at September 30, 2004 (Unaudited) and December 31, 2003	2

		Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2004 and 2003	3

		Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2004 and 2003	5

		Notes to Consolidated Financial Statements (Unaudited)	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

	Item 4.	Controls and Procedures	39

Part II	OTHER INFORMATION

	Item 4.	Submission of Matters to a Vote of Security Holders	40

	Item 6.	Exhibits	40

	Signatures/Certifications		41

MIKOHN GAMING CORPORATION

PART I - FINANCIAL INFORMATION

Item 1. – Consolidated Financial Statements

CONSOLIDATED BALANCE SHEETS


*(Amounts in thousands,* *except per share amounts)*	September 30, 2004			December 31, 2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,180		$	8,683
Accounts receivable, net of allowance for doubtful accounts of $1,065 and $1,996		12,521			11,497
Contract sales receivable, net of allowance for doubtful accounts of $1,529 and $1,500		3,668			501
Inventories, net of reserves of $3,799 and $4,479		8,880			6,258
Prepaid expenses		2,438			2,498
Deferred tax asset		3,313			3,313

Total current assets		43,000			32,750

Property and equipment, net		10,006			11,869
Intangible assets, net		54,299			55,506
Goodwill		2,860			2,860
Other assets		4,647			6,187

Total assets	$	114,812		$	109,172

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	7,814		$	6,176
Customer deposits		4,573			2,981
Current portion of long-term debt and notes payable		474			727
Accrued liabilities		11,206			8,696
Deferred revenues and license fees		2,557			1,027

Total current liabilities		26,624			19,607

Long-term debt and notes payable, net of unamortized discount of $2,024 and $2,412		63,019			62,989
Other long-term liabilities		2,834			3,073
Deferred tax liability		16,114			16,114

Total liabilities		108,591			101,783

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.10 par value, 5,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.10 par value, 100,000,000 shares authorized 22,194,338 and 21,910,611 shares issued and outstanding		2,219			2,191
Additional paid-in capital		114,991			114,325
Other comprehensive loss		(403	)		(253	)
Accumulated deficit		(109,874	)		(108,162	)

Subtotal		6,933			8,101
Less treasury stock, 194,913 shares, at cost		(712	)		(712	)

Total stockholders’ equity		6,221			7,389

Total liabilities and stockholders’ equity	$	114,812		$	109,172

See notes to unaudited consolidated financial statements.

MIKOHN GAMING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


*(Amounts in thousands,* *except per share amounts)*	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Revenues:
Slot and table games	$	12,631		$	9,766		$	29,803		$	32,515
Product sales		10,247			8,631			30,522			29,818
Systems		2,802			3,783			9,773			9,516

Total revenues		25,680			22,180			70,098			71,849

Cost of revenues:
Slot and table games		3,354			3,143			8,504			11,180
Product sales		5,670			5,815			17,809			19,138
Systems		1,521			1,747			5,057			4,714

Total cost of revenues		10,545			10,705			31,370			35,032

Gross profit		15,135			11,475			38,728			36,817

Selling, general and administrative expense		7,643			5,326			19,814			17,022
Slot rent expense		94			1,439			1,149			4,212
Research and development		1,492			1,358			4,520			3,787
Depreciation and amortization		1,985			3,719			7,160			10,451
Other expenses / asset write-downs		—			45			564			1,562

		11,214			11,887			33,207			37,034

Operating income (loss)		3,921			(412	)		5,521			(217	)

Interest expense		(2,398	)		(3,838	)		(7,320	)		(11,576	)
Other income, net		66			9			95			124

Income (loss) before income tax provision		1,589			(4,241	)		(1,704	)		(11,669	)

Income tax provision		—			(3	)		(9	)		(9	)

Net income (loss)	$	1,589		$	(4,244	)	$	(1,713	)	$	(11,678	)

Weighted average common shares:
Basic		21,830			13,129			21,779			12,973

Diluted		22,006			13,129			21,779			12,973

Basic and diluted earnings (loss) per share:
Net earnings (loss) per share	$	0.07		$	(0.32	)	$	(0.08	)	$	(0.90	)

See notes to unaudited consolidated financial statements.

MIKOHN GAMING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


*(Amounts in thousands)*	Three Months Ended September 30,						Nine months ended September 30,
*(Amounts in thousands)*	2004			2003			2004			2003
Net income (loss)	$	1,599		$	(4,244	)	$	(1,713	)	$	(11,678	)
Other comprehensive income:
Foreign currency translation gain (loss)		(15	)		29			(150	)		289

Comprehensive income (loss)	$	1,574		$	(4,215	)	$	(1,863	)	$	(11,389	)

See notes to unaudited consolidated financial statements.

MIKOHN GAMING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


*(Amounts in thousands)*	Nine Months Ended September 30,
*(Amounts in thousands)*	2004			2003
Cash flows from operating activities:
Net loss	$	(1,713	)	$	(11,678	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		5,705			8,323
Amortization		1,455			2,128
Provision for bad debts		187			(548	)
Provision for obsolete inventory		—			424
Amortization of debt discount and debt issue costs		1,182			1,732
Loss (gain) on disposition of assets		(20	)		162
Other		157			93
Changes in assets and liabilities:
Accounts receivable		(1,210	)		2,476
Notes and installment sales receivable		(3,106	)		—
Inventories		(2,312	)		2,167
Other assets		(269	)		2,416
Trade accounts payable		1,639			(3,625	)
Accrued expenses		2,062			134
Other liabilities		3,511			(2,206	)

Net cash provided by operating activities		7,268			1,998

Cash flows from investing activities:
Purchase of property and equipment		(583	)		(723	)
Purchase of inventory leased to others		(2,789	)		(3,269	)
Other		68			(141	)

Net cash used in investing activities		(3,304	)		(4,133	)

Cash flows from financing activities:
Principal payments on notes payable and long-term debt		(92	)		(119	)
Principal payments on capital leases		(515	)		(1,351	)
Principal payments of deferred license fees		(397	)		(361	)
Proceeds from issuance of common stock		537			1,633

Net cash used in financing activities		(467	)		(198	)

Increase (decrease) in cash and cash equivalents		3,497			(2,333	)

Cash and cash equivalents, beginning of period		8,683			16,275

Cash and cash equivalents, end of period	$	12,180		$	13,942

See notes to unaudited consolidated financial statements.

MIKOHN GAMING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)-(Continued)


*(Amounts in thousands)*	Nine Months Ended September 30,
*(Amounts in thousands)*	2004		2003
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	4,076	$	6,895

Federal and state income taxes	$	22	$	28

See notes to unaudited consolidated financial statements.

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. GENERAL

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete audited financial statements. Unless indicated otherwise, “Mikohn,” the “Company,” “we,” “us” and “our” refer to Mikohn Gaming Corporation. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal accruals and charges) necessary to present fairly the financial position of the Company at September 30, 2004, and the results of its operations fort the three and nine months ended September 30, 2004, and cash flows for the nine months ended September 30, 2004 and 2003. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the entire year.

Certain items reported in the prior year have been reclassified to follow the Company’s current reporting practice. Additionally, all intercompany activities have been eliminated.

Amounts disclosed in the accompanying footnote tables are shown in thousands except per share amounts, while amounts included in text are disclosed in actual amounts.

2. SIGNIFICANT ACCOUNTING POLICIES

Cash and cash equivalents. Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with original maturities of less than ninety (90) days. The Company on occasion places its cash and cash equivalents in money market instruments with high quality institutions. At September 30, 2004, the Company did not have any deposits with high quality institutions in excess of FDIC insured limits. The Company performs periodic evaluations of the relative credit standing of these financial institutions.

Receivables and allowance for doubtful accounts. We regularly evaluate the collectibility of our trade receivable balances based on a combination of factors. When a customer’s account becomes past due, we initiate dialogue with the customer to determine the cause. If we determine that the customer will be unable to meet its financial obligation to us, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting its business, we record a specific reserve for bad debt to reduce the related receivable we expect to recover given all information presently available. We also record reserves for bad debt for all other customers based on certain other factors including the length of time the receivables are past due and historical collection experience with individual customers. If circumstances related to specific customers change, our estimates of the recoverability of receivables could materially change.

Inventories. Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market.

Long-lived assets. Property and equipment are stated at cost and are depreciated by the straight-line method over the useful lives of the assets, which range from 3 to 15 years. Costs of major improvements are capitalized; costs of normal repairs and maintenance are charged to expense as incurred. Management requires long-lived assets that are held and used by the Company to be reviewed for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from related future undiscounted cash flows.

During a 2003 year-end valuation review of its operating assets, the Company determined that the assets described below no longer generated sufficient cash flow to support their carrying value. These assets are comprised of approximately 520 slot machines, and the related signs, meters and electronics, and certain non-branded assets including Mini Berthas^™ and Flip-It^™. The charge recorded in the fourth quarter of 2003 related to these assets totaled approximately $2.5 million. Additionally, the Company decided to write-down equipment in its manufacturing facility and corporate offices that it no longer uses and recorded a charge for approximately $0.8 million, in the fourth quarter of 2003. Consequently, the Company’s depreciation expense has decreased by approximately $2.4 million during the nine months ended September 30, 2004.

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

During 2003, the Company had determined that the useful life of its existing slot machines should be accelerated to fully depreciate by the end of 2004 as these assets were expected to be phased out and replaced by a different hardware platform. As of September 2004, the Company has not replaced its slot machine hardware platform and has subsequently invested in the refurbishment of these assets to be compliant with current industry standards and enhance their productivity. Management has determined that the useful life of these refurbished slot machines should be five years. Consequently, the Company’s depreciation expense has decreased by approximately $0.7 million during the three months ended September 30, 2004.

Patents and trademarks. The Company capitalizes the cost of registering and defending patents and trademarks. These costs are amortized over the useful life of the patent or trademark.

Intangible assets. Intangible assets, with definite and indefinite lives, consist of patent and trademark rights, goodwill, intellectual property rights, covenants not to compete, software costs, license fees and perpetual license. They are recorded at cost and are amortized, except goodwill and perpetual license, on a straight-line basis based on the period of time the asset is expected to contribute directly or indirectly to future cash flows, which range from 3 to 12 years.

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002. Under SFAS No. 142, goodwill and indefinite life intangible assets, such as the Company’s perpetual license, are no longer amortized but are subject to periodic impairment tests. Other intangible assets with definite lives, such as patents, software development costs, trademark and proprietary property rights and license and non-compete agreements continue to be amortized over their useful lives. Management monitors intangible assets for impairment on a periodic basis. On an annual basis, unless circumstances indicate impairment may have occurred between annual dates, management performs an impairment analysis of goodwill and its indefinite life intangible asset. On a quarterly basis, management reviews definite life intangible assets to determine if the carrying values of intangible assets are impaired. The purpose of these reviews is to identify any facts or circumstances, either internal or external, which may indicate that the carrying value of the assets may not be recoverable.

Deferred license fees. Shuffle Master licensed certain of its intellectual property to Mikohn including rights under its coin sensing patents and multi-tiered game wagering patents. For these rights, Mikohn agreed to pay Shuffle Master future noncancellable royalties of approximately $0.6 million per year over five years ending in 2004.

Customer deposits and product sales recognition. Deposit liabilities represent amounts collected in advance from customers pursuant to agreements under which the related sale of inventory has not been completed.

Other assets. Other long term assets represent primarily unamortized loan fees related to the Senior Secured Notes of approximately $2.8 million and $3.6 million and security deposits for building and equipment leases of approximately $0.5 million and $1.0 million at September 30, 2004 and December 31, 2003, respectively.

Commitments and contingencies. The Company is involved in various legal proceedings. It is the Company’s policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and the amount can be reasonably estimated.

Foreign currency translation. The Company classifies foreign currency gains/(losses) on its long-term investments in its foreign subsidiaries as adjustments to the equity section of the balance sheet.

Foreign subsidiaries report their financial results in U.S. dollars. Balance sheet amounts are reported using translation rates as of the balance sheet date, except for those accounts that are required to be reported at historical amounts. Statement of operations amounts are accumulated monthly and reported using the translation rate for the end of the month for each month in the reporting period.

Revenue recognition. The Company recognizes revenue depending on the line of business as follows:

Slot and table games revenues consist of: (i) lease fees, route income and royalties we receive from casinos who install our proprietary games, (ii) license fees we receive from third party manufacturers and distributors who incorporate our proprietary games and technology into their products.

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Slot and table game sales are executed by a signed contract or a customer purchase order. Revenue is recognized when the completed product is delivered. If the agreement calls for Mikohn to perform an installation after delivery, revenue related to the installation is recognized when the installation has been completed and accepted by the customer. License fees for slot and table game titles are recognized in accordance with Statement of Position 97-2 Software Revenue Recognition (“SOP 97-2”).

The leasing of proprietary table games to customers occurs under signed lease agreements. Table game lease contracts are typically for a 36-month period with a 30-day cancellation clause. The lease revenue is recognized on a monthly basis.

The leasing of proprietary slot machines occurs under signed lease agreements. These contracts will either be on participation or a fixed-rental basis. Slot machine lease contracts are typically for a one year period with a 30-day cancellation clause. On a participation basis, the Company earns a share of the revenue that the casino earns from these slot machines. On a fixed-rental basis, the Company charges a fixed amount per slot machine per day. Revenues from both types of lease arrangements are recognized on the accrual basis.

Product sales revenues consist primarily of sales of interior signage and related electronic components along with proceeds from the sale of slot machine hardware purchased or leased by us. Product sales are executed by a signed contract or customer purchase order. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured. If the agreement calls for Mikohn to perform an installation after delivery, revenue related to the installation is recognized when the installation has been completed and accepted by the customer.

Systems revenues are primarily comprised of software, hardware and support services. Sales consist of a suite of products (some of which are sold separately) that enable gaming entities to track customer gaming activity, account for slot machine and table game activity and operate progressive jackpot systems. There are proprietary hardware and software components to the systems. The Company accounts for system sales in accordance with SOP 97-2. System sales are considered multiple element arrangements because they include hardware, software, installation, training and post-sale customer support. System sales are evidenced by a signed contract or purchase order. Follow-up spare parts and hardware-only sales are evidenced by a purchase order. Revenue for system sales is recognized when: (i) there is a signed contract with a fixed determinable price; (ii) collectibility of the sale is probable; and (iii) the hardware and software have been delivered, installed, training has been completed and acceptance has occurred. Not all systems contracts require installation or training. Examples include sales of hardware only to (i) previous customers that are expanding their systems, (ii) customers that have multiple locations and perform the installation themselves and require an additional software license and hardware and (iii) customers purchasing spare parts.

Maintenance and support are sold under agreements with established vendor-specific objective evidence of price. These contracts are generally for a period of 12 months and revenue is recognized ratably over the contract service period. Further training is also sold under agreements with established vendor-specific objective evidence of price, which is based on daily rates and is recognized upon delivery.

Stock-based compensation. At September 30, 2004, the Company had stock-based employee and director compensation plans. The Company accounts for those plans in accordance with APB No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”.

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


*(Amounts in thousands,* *except per share amounts)*	Nine months ended September 30,
	2004			2003
Net loss, as reported	$	(1,713	)	$	(11,678	)
Add: Stock-based compensation expense		189			169
Deduct: Total stock-based employee compensation expense determined under fair value method		(1,025	)		(720	)

Pro forma net loss	$	(2,549	)	$	(12,229	)

Loss per share:
As reported -
Basic and diluted	$	(0.08	)	$	(0.90	)

Pro forma -
Basic and diluted	$	(0.12	)	$	(0.94	)

Equity instruments issued to consultants and vendors. The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of Emerging Issues Task Force (“EITF”) 96-18 - Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and EITF 00-18 - Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized as a charge to the statement of operations over the term of the consulting agreement. The Company has fully amortized all outstanding options issued to consultants. The number of uncancelled options issued to consultants at September 30, 2004 was approximately 108,000.

In addition, the Company has received from Hasbro, Inc. (Hasbro) and Ripley Entertainment, Inc. (Ripley) licensing rights to intellectual property, including rights to develop and market gaming devices and associated equipment under the trademarks Yahtzee®, Monopoly®, Battleship®, Trivial Pursuit® and Ripley’s Believe It or Not!®. In exchange for these license agreements, the Company granted Hasbro and Ripley warrants to purchase shares of the Company’s common stock for each license.

Software development capitalization. The Company previously capitalized costs related to the development of certain software products that meet the criteria under SFAS No. 86 – “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” The Company did not capitalize any costs during the nine months ended September 30, 2004 and 2003.

Income taxes. The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes”, pursuant to which the Company records deferred income taxes for temporary differences that are reported in different years for financial reporting and for income tax purposes. Such deferred tax liabilities and assets are classified into current and non-current amounts based on the classification of the related assets and liabilities.

Guarantees. In November 2002, the FASB issued FIN No. 45, (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others,” - an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN No. 34 - which disclosures are effective for financial statements issued after December 15, 2002. While the Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, these guarantees would result in immaterial increases in future costs, and do not represent significant or contingent liabilities of the indebtedness of others.

Use of estimates and assumptions. Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Certain of our accounting policies require that we apply significant estimates, judgments and assumptions, that we believe are reasonable, in calculating the reported amounts of certain assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. By their nature, these estimates are subject to an inherent degree of uncertainty. Our judgments are based on our historical experience, terms of existing contracts, our observance of known industry trends, and information available from outside sources, as appropriate. On a regular basis, we evaluate our estimates including those related to lives assigned to our assets, the determination of bad debts, inventory valuation reserves, asset impairment and self-insurance reserves. There can be no assurance that actual results will not materially differ from our estimates.

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Fair values of financial instruments. In accordance with reporting and disclosure requirements of the Statement of Financial Accounting Standards (“SFAS”) No. 107 – “Disclosures about Fair Values of Financial Instruments”, the Company calculates the fair value of financial instruments and includes this information in the Company’s Notes to Consolidated Financial Statements when the fair value is materially different than the book value of those financial instruments. When fair value is equal to book value, no disclosure is made. Fair value is determined using quoted market prices whenever available. When quoted market prices are not available, the Company uses alternative valuation techniques such as calculating the present value of estimated future cash flows utilizing discount rates commensurate with the risks involved.

3. RECEIVABLES AND INVENTORY

The following provides additional disclosure for selected balance sheet accounts:

Accounts receivable and contract sales receivable at September 30, 2004 and December 31, 2003 consist of the following:


*(Amounts in thousands)*	September 30, 2004			December 31, 2003
	(Unaudited)
Accounts receivable:
Trade receivables	$	13,586		$	13,493
Less: allowance for bad debts		(1,065	)		(1,996	)

	$	12,521		$	11,497

Contract sales receivable:
Contract sales receivable	$	5,233		$	2,098
Less: allowance for bad debts		(1,529	)		(1,500	)

	$	3,703		$	598

Inventories at September 30, 2004 and December 31, 2003 consist of the following:


*(Amounts in thousands)*	September 30, 2004			December 31, 2003
	(Unaudited)
Inventories:
Raw materials	$	8,088		$	8,278
Finished goods		3,185			1,773
Work-in-progress		1,406			686

Subtotal		12,679			10,737
Reserve for obsolete inventory		(3,799	)		(4,479	)

Total	$	8,880		$	6,258

4. GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with SFAS No. 142 and SFAS No. 144, management monitors intangible assets for impairment on a periodic basis. On an annual basis, unless circumstances indicate impairment may have occurred between annual dates, management performs an impairment analysis of goodwill and its indefinite life intangible asset. On a quarterly basis, management reviews definite life intangible assets to determine if the carrying values of intangible assets are impaired. The purpose of these reviews is to identify any facts and circumstances, either internal or external, which may indicate that the carrying values of the assets may not be recoverable. A third party valuation of goodwill and the indefinite life assets as of September 30, 2003, indicated no impairment. The Company’s internal review determined no impairment as of September 30, 2004.

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The net carrying value of goodwill and other intangible assets as of September 30, 2004 is comprised of the following:


	Net Amount Allocated by Segment
*(Amounts in thousands)*	Slot and Table Games		Product Sales		Corporate		Total
Goodwill	$	2,471	$	389	$	—	$	2,860
Indefinite life intangible asset (perpetual license)		50,533		—		—		50,533
Definite life intangible assets (see detail below)		2,277		301		1,188		3,766

Total	$	55,281	$	690	$	1,188	$	57,159

The net carrying value of goodwill ($2.9 million) as of September 30, 2004, is included in the geographic operations of North America ($2.5 million) and Australia / Asia ($0.4 million).

Definite life intangible assets as of September 30, 2004, subject to amortization, are comprised of the following:


*(Amounts in thousands)*	Gross Carrying Amount		Accumulated Amortization			Net
Patent / trademark rights	$	10,212	$	(7,645	)	$	2,567
Covenants not to compete		377		(371	)		6
Software development costs		2,158		(1,379	)		779
Proprietary rights / other		1,084		(670	)		414

Total	$	13,831	$	(10,065	)	$	3,766

Amortization expense for definite life intangible assets was approximately $1.2 million for the nine months ended September 30, 2004 compared to $1.9 million for the nine months ended September 30, 2003.

5. COMMITMENTS AND CONTINGENCIES

The Company is involved in routine litigation, including bankruptcies, collection efforts, disputes with former employees and other matters in the ordinary course of its business operations. Management is not aware of any matter, pending or threatened, that in its judgment would reasonably be expected to have a material adverse effect on the Company or its operations.

During 2000 and 2001, the Company entered into a series of sale-leaseback transactions with various third party finance companies. These transactions involved slot machines with a fair value purchase option at the end of a 40- month lease term. In November 2003, the Company agreed to purchase the remaining slot machines on lease for $1,000 per machine, less any prepaid deposits. Subsequent to September 30, 2004, the Company is obligated to pay less than $0.1 million to purchase the leased machines.

A lease agreement for a building in Las Vegas, Nevada contains a minimum net worth requirement stating that if the net worth of the Company falls below a specified threshold, the Company must provide the landlord with a letter of credit to secure future rent payments. During the year ended December 31, 2003, the Company’s minimum net worth did not meet the requirements under the lease agreement. Accordingly, the Company placed in escrow a $1.1 million letter of credit to secure future rent payments, and potentially could be obligated to purchase an additional $1.9 million letter of credit if minimum net worth requirements are not met.

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

licensed aspects of its intellectual property to us for our games as well as for certain joint development. Under this agreement, the Company is committed to purchase from IGT a minimum of 600 slot machines with our game content ported on them over the life of the agreement.

6. EARNINGS (LOSS) PER SHARE

The following table provides a reconciliation of basic and diluted loss per share:


*(Amounts in thousands* *except per share amounts)*	Basic			Diluted
For the three months ended September 30, 2004:
Net income	$	1,589		$	1,589

Weighted average shares		21,830			22,006

Per share amount	$	0.07		$	0.07

For the three months ended September 30, 2003:
Net income (loss)	$	(4,244	)	$	(4,244	)

Weighted average shares		13,129			13,129

Per share amount	$	(0.32	)	$	(0.32	)

For the nine months ended September 30, 2004:
Net loss	$	(1,713	)	$	(1,713	)

Weighted average shares		21,779			21,779

Per share amount	$	(0.08	)	$	(0.08	)

For the nine months ended September 30, 2003:
Net loss	$	(11,678	)	$	(11,678	)

Weighted average shares		12,973			12,973

Per share amount	$	(0.90	)	$	(0.90	)

Dilutive stock options and warrants of approximately 735,000 for the three months ended September 30, 2003 have not been included in the computation of diluted net loss per share as their effect would be antidilutive. Dilutive stock options and warrants of approximately 193,000 and 164,000 for the nine months ended September 30, 2004 and 2003, respectively, have not been included in the computation of diluted net loss per share as their effect would be antidilutive.

7. RELATED PARTY TRANSACTIONS

The Company is a party to post-employment agreements entered into in December 2003 with a former director/executive officer and in January 2004 with its former CFO to provide cash payments of approximately $0.6 million and $0.5 million, respectively, plus medical costs through December 2005. The agreements require quarterly payments to these individuals through December 2005 in the amount of approximately $0.2 million. Subsequent to December 2005 through December 2006, the Company is required to make quarterly payments of approximately $0.1 million.

The Company entered into a Post-Employment Agreement (“Agreement”) with Denny Garcia effective January 1, 2004. Under the terms of the Agreement, Mikohn agreed to pay Mr. Garcia $0.6 million (“Settlement Sum”) over a thirty-six month period, interest free. The Agreement also calls for Mr. Garcia to personally retain his health insurance benefit. In entering into this Agreement, Mikohn was relieved of its obligation under Mr. Garcia’s previous Employment Agreement, which was set to expire on December 31, 2006. Mr. Garcia remains a consultant to Mikohn.

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

granted to him in August 2002 and March 2003, until such time as those option grants expire in accordance with their terms. Mr. Garner also has the option after February 1, 2005 to buy out, in a lump sum fashion, the remaining unpaid Settlement Sum at a 10% discount to the remaining balance. The Agreement supersedes Mr. Garner’s Employment Agreement, which had extended through August 2005.

8. SEGMENT REPORTING

Our business consists of three reportable segments: (i) slot and table games, (ii) product sales and (iii) systems. These business units offer different products and services. In 2003, we re-evaluated our reportable segments and determined that the above segments were more in accord with our business operations than the previous segmentation into gaming operations and product sales. With respect to our current segments, we evaluate performance and allocate resources based upon profit or loss from operations before income taxes.

The slot and table games business segment was established to develop, acquire, manufacture and distribute proprietary games, and these games have become increasingly important to our business. Mikohn owns or licenses the rights to several categories of proprietary games, which it places in casinos under lease arrangements. These leases either provide for a fixed rental payment or a participation in the game’s operating results. Sales of proprietary games are reflected in the reported results of the Company’s product sales business segment, while revenues derived from leases are included in the results of its slot and table games business segment.

The Company’s product sales business segment has been providing gaming products and equipment around the world since 1987. Initially, the Company sold progressive jackpot systems and then expanded to manufacturing signs, jackpot meters, and related products. The Company’s gaming products are found in almost every major gaming jurisdiction and include: interior casino signage and electronic components used in progressive jackpot systems and gaming machines.

The systems business segment sells or leases electronic player tracking and slot machine and table game monitoring systems.

The accounting policies of the business segments are the same as those described in Footnote 2. Certain operating expenses, which are separately managed at the corporate level, are allocated to the business segments based on usage or other factors based on the nature of the activity. These expenses include primarily the costs associated with executive administration, finance, human resources, legal, general marketing and information systems. The depreciation and amortization expense of assets not specifically assigned to a business segment are also allocated. Prior period amounts have been reclassified to conform to the current management view and presentation.

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Business segment information for the three and nine months ended September 30, 2004 and 2003 consists of:


*(Amounts in thousands)*	Three Months Ended September 30,						Nine months ended September 30,
Business Unit Segments	2004			2003			2004			2003
Revenues:
Slot and table games	$	12,631		$	9,766		$	29,803		$	32,515
Product sales		10,247			8,631			30,522			29,818
Systems		2,802			3,783			9,773			9,516

Total	$	25,680		$	22,180		$	70,098		$	71,849

Operating income/(loss):
Slot and table games	$	3,438		$	(971	)	$	3,574		$	(1,376	)
Product sales		1,063			166			2,673			1,051
Systems		(580	)		393			(726	)		108

Total	$	3,921		$	(412	)	$	5,521		$	(217	)

Depreciation and amortization
Slot and table games	$	1,591		$	3,097		$	5,873		$	8,632
Product sales		324			468			1,041			1,456
Systems		70			154			246			363

Total	$	1,985		$	3,719		$	7,160		$	10,451

The Company attributes revenue and expenses to a geographic area based on the location from which the product was shipped or the service was performed. Geographic segment information for the three and nine months ended September 30, 2004 and 2003 consists of:


*(Amounts in thousands)*	Three Months Ended September 30,						Nine months ended September 30,
Geographic Operations	2004			2003			2004			2003
Revenues:
North America	$	22,239		$	18,404		$	60,291		$	60,340
Australia / Asia		1,317			2,033			3,555			3,906
Europe		2,124			1,743			6,252			7,603

Total	$	25,680		$	20,180		$	70,098		$	71,849

Operating income (loss):
North America	$	3,747		$	(1,105	)	$	5,768		$	(1,011	)
Australia / Asia		253			379			(106	)		(469	)
Europe		(79	)		314			(141	)		1,263

Total	$	3,921		$	(412	)	$	5,521		$	(217	)

Depreciation and amortization
North America	$	1,933		$	3,672		$	7,011		$	10,324
Australia / Asia		19			17			50			37
Europe		33			30			99			90

Total	$	1,985		$	3,719		$	7,160		$	10,451

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

9. GUARANTOR FINANCIAL STATEMENTS

The Company’s domestic subsidiaries are 100% owned and have provided full and unconditional guarantees on a joint and several basis on the payment of the 11.875% Senior Secured Notes due 2008. The financial statements for the guarantor subsidiaries follow:

CONDENSED CONSOLIDATING BALANCE SHEETS


*(Amounts in thousands)*	September 30, 2004
*(Amounts in thousands)*	Parent		Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash	$	9,855	$	1	$	2,324		$	—		$	12,180
Accounts and contract sales receivable, net		12,297		2,181		1,711			—			16,189
Inventories, net		5,375		2,223		1,282			—			8,880
Intercompany transactions		7,068		—		—			(7,068	)		—
Other current assets		2,222		3,279		250			—			5,751

Total current assets		36,817		7,684		5,567			(7,068	)		43,000

Property and equipment, net		4,897		4,540		569			—			10,006
Goodwill and intangible assets		51,436		5,334		389			—			57,159
Investments in subsidiaries		9,325		—		—			(9,325	)		—
Other assets		4,273		374		—			—			4,647

Total assets	$	106,748	$	17,932	$	6,525		$	(16,393	)	$	114,812

LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities	$	20,633	$	3,820	$	2,171		$	—		$	26,624
Intercompany transactions		—		1,998		5,071			(7,069	)		—

Total current liabilities		20,633		5,818		7,242			(7,069	)		26,624

Long-term debt, net		63,019		—		37			—			63,019
Other liabilities, long term		2,775		22		—			—			2,834
Deferred tax liability		14,100		2,014		—			—			16,114

Stockholders’ equity (deficit)		6,221		10,078		(754	)		(9,324	)		6,221

Total liabilities and stockholders’ equity (deficit)	$	106,748	$	17,932	$	6,525		$	(16,393	)	$	114,812

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEETS


*(Amounts in thousands)*	December 31, 2003
*(Amounts in thousands)*	Parent		Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash	$	6,011	$	1	$	2,671		$	—		$	8,683
Accounts and contract sales receivable, net		6,419		2,952		2,627			—			11,998
Inventories, net		3,643		988		1,627			—			6,258
Intercompany transactions		21,180		—		—			(21,180	)		—
Other current assets		2,539		3,002		270			—			5,811

Total current assets		39,792		6,943		7,195			(21,180	)		32,750

Property and equipment, net		5,384		5,893		592			—			11,869
Goodwill and intangible assets		52,627		5,350		389			—			58,366
Investments in subsidiaries		142		—		—			(142	)		—
Other assets		5,004		1,183		—			—			6,187

Total assets	$	102,949	$	19,369	$	8,176		$	(21,322	)	$	109,172

LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities	$	15,486	$	1,720	$	2,401		$	—		$	19,607
Intercompany transactions		—		15,050		6,130			(21,180	)		—

Total current liabilities		15,486		16,770		8,531			(21,180	)		19,607

Long-term debt, net		62,900		28		61			—			62,989
Other liabilities, long term		3,073		—		—			—			3,073
Deferred tax liability		14,101		2,013		—			—			16,114

Stockholders’ equity (deficit)		7,389		558		(416	)		(142	)		7,389

Total liabilities and stockholders’ equity (deficit)	$	102,949	$	19,369	$	8,176		$	(21,322	)	$	109,172

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)


*(Amounts in thousands)*	Three Months Ended September 30, 2004
*(Amounts in thousands)*	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	13,454		$	9,191		$	3,441		$	(406	)	$	25,680
Cost of sales		6,251			2,620			2,080			(406	)		10,545
Selling, general and admin expenses		7,467			2,560			1,187			—			11,214

Operating income (loss)		(264	)		4,011			174			—			3,921

Equity in earnings of subsidiaries		4,243			—			—			(4,243	)		—
Interest expense		(2,389	)		(6	)		(3	)		—			(2,398	)
Other income (expense)		(1	)		1			66			—			66

Income (loss) before income tax provision		1,589			4,006			237			(4,243	)		1,589

Income tax provision		—			—			—			—			—

Net income (loss)	$	1,589		$	4,006		$	237		$	(4,243	)	$	1,589

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended September 30, 2003
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	12,003		$	6,723		$	3,777		$	(323	)	$	22,180
Cost of sales		5,631			3,110			2,287			(323	)		10,705
Selling, general and admin expenses		5,305			5,741			796			—			11,842
Other expense / asset write-down		45			—			—			—			45

Operating income (loss)		1,022			(2,128	)		694			—			(412	)

Equity in earnings of subsidiaries		(1,518	)		—			—			1,518			—
Interest expense		(3,749	)		(26	)		(63	)		—			(3,838	)
Other income		4			2			3			—			9

Income (loss) before income tax provision		(4,241	)		(2,152	)		634			1,518			(4,241	)

Income tax provision		(3	)		—			—			—			(3	)

Net income (loss)	$	(4,244	)	$	(2,152	)	$	634		$	1,518		$	(4,244	)

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


*(Amounts in thousands)*	Nine months ended September 30, 2004
*(Amounts in thousands)*	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	42,198		$	19,614		$	9,807		$	(1,521	)	$	70,098
Cost of sales		18,972			7,444			6,475			(1,521	)		31,370
Selling, general and admin expenses		19,325			9,738			3,580			—			32,643
Other expense / asset write-down		564			—			—			—			564

Operating income (loss)		3,337			2,432			(248	)		—			5,521

Equity in earnings of subsidiaries		2,262			—			—			(2,262	)		—
Interest expense		(7,277	)		(33	)		(10	)		—			(7,320	)
Other income (expense), net		(26	)		52			69			—			95

Income (loss) before income tax provision		(1,704	)		2,451			(189	)		(2,262	)		(1,704	)

Income tax provision		(9	)		—			—			—			(9	)

Net income (loss)	$	(1,713	)	$	2,451		$	(189	)	$	(2,262	)	$	(1,713	)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


*(Amounts in thousands)*	Nine months ended September 30, 2003
*(Amounts in thousands)*	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	37,779		$	23,855		$	11,510		$	(1,295	)	$	71,849
Cost of sales		17,066			11,877			7,384			(1,295	)		35,032
Selling, general and admin expenses		16,334			15,898			3,240			—			35,472
Other expense / asset write-down		1,412			58			92			—			1,562

Operating income (loss)		2,967			(3,978	)		794			—			(217	)

Equity in earnings of subsidiaries		(3,347	)		—			—			3,347			—
Interest expense		(11,281	)		(111	)		(184	)		—			(11,576	)
Other income (expense), net		(8	)		(6	)		138			—			124

Income (loss) before income tax provision		(11,669	)		(4,095	)		748			3,347			(11,669	)

Income tax provision		(9	)		—			—			—			(9	)

Net income (loss)	$	(11,678	)	$	(4,095	)	$	748		$	3,347		$	(11,678	)

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS


	For the Nine months ended September 30, 2004
*(Amounts in thousands)*	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	4,639		$	2,768		$	(139	)	$	—	$	7,268

Cash flows from investing activities:
Purchase of property and equipment		(345	)		(168	)		(70	)		—		(583	)
Purchase of inventory leased to others		(487	)		(2,192	)		(110	)		—		(2,789	)
Other		14			54			—			—		68

Net cash used in investing activities		(818	)		(2,306	)		(180	)		—		(3,304	)

Cash flows from financing activities:
Principal payments on long-term debt and capital leases		(117	)		(462	)		(28	)		—		(607	)
Principal payments of deferred license fees		(397	)		—			—			—		(397	)
Proceeds from issuance of common stock		537			—			—			—		537

Net cash provided by (used in) financing activities		23			(462	)		(28	)		—		(467	)

Increase (decrease) in cash and cash equivalents		3,844			—			(347	)		—		3,497
Cash and cash equivalents, beginning of period		6,011			1			2,671			—		8,683

Cash and cash equivalents, end of period	$	9,855		$	1		$	2,324		$	—	$	12,180

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS


	For the Nine months ended September 30, 2003
*(Amounts in thousands)*	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	(2,558	)	$	3,875		$	681		$	—	$	1,998

Cash flows from investing activities:
Purchase of property and equipment		(552	)		(27	)		(144	)		—		(723	)
Purchase of inventory leased to others		(463	)		(2,722	)		(84	)		—		(3,269	)
Other		(144	)		3			—			—		(141	)

Net cash used in investing activities		(1,159	)		(2,746	)		(109	)		—		(4,133	)

Cash flows from financing activities:
Principal payments on long-term debt and capital leases		(333	)		(1,113	)		(24	)		—		(1,470	)
Principal payments of deferred license fees		(361	)		—			—			—		(361	)
Proceeds from issuance of common stock		1,633			—			—			—		1,633

Net cash provided by (used in) financing activities		939			(1,113	)		(24	)		—		(198	)

Increase (decrease) in cash and cash equivalents		(2,778	)		16			429			—		(2,333	)
Cash and cash equivalents, beginning of period		14,444			(14	)		1,845			—		16,275

Cash and cash equivalents, end of period	$	11,666		$	2		$	2,274		$	—	$	13,942

11. OTHER EXPENSES / ASSET WRITE-DOWNS

Included in other expense / asset write-downs in the Consolidated Statement of Operations for the nine months ended September 30, 2004 is approximately $0.6 million of employee severance costs which primarily was due to the separation of the Company’s former CFO. At September 30, 2004, approximately $0.3 million of this severance expense remains to be paid.

Included in other expense / asset write-downs in the Consolidated Statement of Operations for the nine months ended September 30, 2003 is approximately $0.6 million of employee severance costs for approximately 80 terminated employees principally from reductions in service, international and management personnel. At September 30, 2003, approximately $0.1 million of these expenses remained unpaid.

In addition, the legal expenses incurred by the former CEO in connection with licensing issues in several jurisdictions in the amount of approximately $0.8 million, and audit fees related to the reaudit of the Company’s 2000 and 2001 financial statements in the amount of approximately $0.2 million were included in other expense / asset write-down for the nine months ended September 30, 2003.

MIKOHN GAMING CORPORATION

Item 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTICE

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements sometimes include the words “may,” “will,” “estimate,” “intend,” “continue,” “expect,” or “anticipate,” and other similar words. Statements expressing expectations regarding our future (including pending gaming and patent approvals) and projections relating to products, sales, revenues and earnings are typical of such statements.

All forward-looking statements, although reasonable and made in good faith, are subject to the risks and uncertainties inherent in predicting the future. Our actual results may differ materially from those projected, stated or implied in these forward-looking statements as a result of many factors, including, but not limited to, overall industry environment, customer acceptance of the Company’s new products, delay in the introduction of new products, the further approvals of regulatory authorities, adverse court rulings, production and/or quality control problems, the denial, suspension or revocation of privileged operating licenses by governmental authorities, competitive pressures and general economic conditions, the Company’s financial condition and debt service obligations. These and other factors that may affect our results are discussed more fully in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

Forward-looking statements speak only as of the date they are made. Readers are warned that we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, and are urged to review and consider disclosures we make in this and other reports that discuss factors germane to our business. See particularly our reports on Forms 10-K, 10-K/A, 10-Q, 10-Q/A and 8-K filed from time to time with the Securities and Exchange Commission.

GENERAL INFORMATION

Amounts disclosed in the accompanying tables are shown in thousands except per share amounts, while amounts included in text are disclosed in actual amounts. All percentages reported are based on those rounded numbers.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2004 and 2003

Revenues and cost of revenues:


*(Amounts in thousands)*					Change
*(Amounts in thousands)*	2004		2003		Amount			%
Revenues
Slot and table games	$	12,631	$	9,766	$	2,865		29.3
Product sales		10,247		8,631		1,616		18.7
Systems		2,802		3,783		(981	)	(25.9	)

Total revenues	$	25,680	$	22,180	$	3,500		15.8

Cost of revenues:
Slot and table games	$	3,354	$	3,143	$	211		6.7
Product sales		5,670		5,815		(145	)	(2.5	)
Systems		1,521		1,747		(226	)	(12.9	)

Total cost of revenues	$	10,545	$	10,705	$	(160	)	(1.5	)

Gross profit	$	15,135	$	11,475	$	3,660		31.9

Slot and table games. Slot and table games revenues consist of: (i) lease fees, route income and royalties we receive from casinos who install our proprietary games, (ii) license fees we receive from third party manufacturers and distributors who incorporate our proprietary games and technology into their products.

Revenues from our slot and table games business were approximately $12.6 million, an increase of $2.8 million from the 2003 period. This increase was due primarily to an increase in the installed base of slot contracts under periodic license fee agreements, partially offset by a decrease in the installed base of slot contracts under daily license fee agreements. Increased competition with other suppliers for limited casino floor space resulted in a decline in the number of slot game contracts outstanding. In addition, there was a modest decrease in the average net win per day (net win produced by a slot machine is defined as the gross revenue minus all jackpots, payouts, fills and any approved claims) in the 2004 quarter as compared to the 2003 quarter. Delays in our ability to offer technological specifications offered by competitors, such as ticket-in, ticket-out and multi-denominational pay tables, also contributed to the decrease in the slot contacts under daily fee agreements for the three months ended September 30, 2004. However, as of July 31, 2004, we had approval for the final version of ticket-in-ticket-out in all primary jurisdictions except Nevada. There was also a slight decrease in the number of table games contracts during the three months ended September 30, 2004 compared to the prior year quarter, but there was no significant change in win per day from table games between quarters.

Product sales. Product sales revenues consist primarily of sales of interior signage and related electronic components along with proceeds from the sale of slot machine hardware. During the 2004 quarter, product sales revenues were approximately $10.2 million, an increase of 18.7% from the 2003 quarter. This improvement was due primarily to increases in signage and electronic sales and slot glass sales in North America partially offset by decreases in sales of signage and electronic products in the Australian and European markets. This decrease was due primarily to the elimination of selling these products in Australia and Europe.

Systems. Systems revenues are primarily comprised of software, hardware and support services. Revenues of approximately $2.8 million for the three months ended September 30, 2004 decreased approximately $1.0 million over the three months ended September 30, 2003. The decrease was due primarily to a number of large contracts that were signed during the third quarter of 2004 where the installation will actually occur during the fourth quarter of 2004. This includes the TableLink^® contracts previously announced with the Hard Rock Hotel and Casino and Pinnacle Entertainment, Inc.

Condensed Statement of Operations


*(Amounts in thousands, except per share amounts)*							Change
*(Amounts in thousands, except per share amounts)*	2004			2003			Amount			%
Total revenue	$	25,680		$	22,180		$	3,500		15.8
Cost of revenue		10,545			10,705			(160	)	(1.5	)

Gross profit		15,135			11,475			3,660		31.9

SG&A expense		7,643			5,326			2,317		43.5
Slot rent expense		94			1,439			(1,345	)	(93.5	)
R&D expense		1,492			1,358			134		9.9
Depreciation and amortization		1,985			3,719			(1,734	)	(46.6	)
Other expense/asset write-downs		—			45			(45	)	**

		11,214			11,887			(673	)	(5.7	)

Income (loss) from operations		3,921			(412	)		4,333		**

Interest expense		(2,398	)		(3,838	)		1,440		37.5

Other income, net		66			9			57		**

Income (loss) before income tax provision		1,589			(4,241	)		5,830		137.5
Income tax provision		—			(3	)		3		**

Net income (loss)	$	1,589		$	(4,244	)	$	5,833		137.4

Net income (loss) per share	$	0.07		$	(0.32	)	$	0.39		121.9

Selling, general and administrative expense (“SG&A”). SG&A increased by approximately $2.3 million during the three months ended September 30, 2004 compared to the 2003 period. The increase was due primarily to additional legal and compliance costs necessary to continue to achieve our regulatory approvals, costs incurred in connection with the documentation and testing of our business processes under the new corporate governance requirements and continued investments in upgrading our human capital. In addition, in the prior period there was a decrease in costs due to the reversal of a previously written off bad debt of approximately $0.5 million.

Slot rent expense. Slot rent expense is the use of operating leases to finance the purchase and placement of slot machines. The decrease in slot rent expense in the 2004 quarter compared to the 2003 quarter was due primarily to the expiration of several operating leases during the current quarter.

Research and development expense (“R&D”). R&D consists primarily of personnel and related costs across all of our product lines. We have continued to invest in new product development, including new games to be developed for licensing to third parties, as well as next generation player tracking and controller technology. Our R&D spending increased by 9.9% during the three months ended September 30, 2004 over the comparable 2003 period primarily due to our increased focus on developing game content licensed to third parties. We expect R&D to increase as a percentage of revenue during fiscal 2004 and into fiscal 2005 as part of this change in our business model. In August of 2004, we established a partnership with a major manufacturer and distributor of slot hardware to license segments of our extensive patent portfolio of technology and to develop video slot games based on our content.

Depreciation and amortization. Depreciation and amortization decreased by 46.6% in the 2004 quarter due primarily to the write-down of the value of inactive slot machines and related equipment and certain other fixed assets in December 2003 that are no longer being depreciated. In addition, we extended the estimated useful lives of our slot machines in the field as a result of a significant refurbishment of these machines to upgrade them to industry standards. These slot machines continue to generate revenue for the Company.

Other expense / asset write-downs. There were no costs associated with other expense / asset write-downs for the three months ended September 30, 2004.

Included in other expense / asset write-downs in the three months ended September 30, 2003 is less than $0.1 million for legal expenses incurred by the former CEO in connection with licensing issues in several jurisdictions.

Interest expense. Interest expense decreased during the three months ended September 30, 2004 compared to the three months ended September 30, 2003 due to the retirement of $40.0 million of Senior Secured Notes in October 2003, resulting in a reduction in interest expense for the quarter ended September 30, 2004 of approximately $1.4 million.

Other income. Other income net of expenses was less than $0.1 million during both of the three months ended September 30, 2003 and 2004. The primary components consist of interest income and gains and losses on foreign currency transactions and dispositions of assets.

Income taxes. During the three months ended September 30, 2004 the Company did not record an income tax provision or benefit, compared to an income tax provision of less than $0.1 million for the prior year quarter. The primary component for the income tax provision for the prior year quarter was related to minimum payments required by certain state taxing authorities.

Earnings (Loss) per share. The basic and diluted earnings per share for the three months ended September 30, 2004 were $0.07 on basic weighted average common shares outstanding of approximately 21,830,000 and diluted weighted average common shares outstanding of approximately 22,006,000. Both basic and diluted loss per share for the three months ended September 30, 2003 were $0.32 on basic and diluted weighted average common shares outstanding of approximately 13,129,000. Dilutive stock options have not been included in the computations of diluted net loss per share for the three months ended September 30, 2003, as their effect would be antidilutive.

Nine months ended September 30, 2004 and 2003

Revenues and cost of revenues:


*(Amounts in thousands)*					Change
*(Amounts in thousands)*	2004		2003		Amount			%
Revenues
Slot and table games	$	29,803	$	32,515	$	(2,712	)	(8.3	)
Product sales		30,522		29,818		704		2.4
Systems		9,773		9,516		257		2.7

Total revenues	$	70,098	$	71,849	$	(1,751	)	(2.4	)

Cost of revenues:
Slot and table games	$	8,504	$	11,180	$	(2,676	)	(23.9	)
Product sales		17,809		19,138		(1,329	)	(6.9	)
Systems		5,057		4,714		343		7.3

Total cost of revenues	$	31,370	$	35,032	$	(3,662	)	(10.5	)

Gross profit	$	38,728	$	36,032	$	2,696		7.5

Slot and table games. During the nine months ended September 30, 2004, revenues from slot and table games were approximately $29.8 million, a decrease of $2.7 million, compared to revenues of approximately $23.5 million in the prior year period.

Revenues from our slot and table games business were approximately $29.8 million, a decrease of $2.7 million from the 2003 period. This decrease was due primarily to a decrease in the installed base of slot contracts under daily license fee agreements, partially offset by an increase the installed base of slot contracts under periodic license fees. Increased competition with other suppliers for limited casino floor space resulted in a decline in the number of slot game contracts outstanding. In addition, there was a modest decrease in the average net win per day (net win produced by a slot machine is defined as the gross revenue minus all jackpots, payouts, fills and any approved claims) did not materially change in the 2004 six month period as compared to 2003. Delays in our ability to offer technological specifications offered by competitors, such as ticket-in, ticket-out and multi-denominational pay tables, also contributed to the decrease in the slot contacts under daily fee agreements for the nine months ended September 30, 2004. However, as of October 31, 2004, we had approval for the final version of ticket-in-ticket-out in all primary jurisdictions except Nevada. There was also a slight decrease in the number of table games contracts during the nine months ended September 30, 2004 compared to the prior year period but there was no significant change in win per day from table games between periods.

Product sales. Product sales revenues consist primarily of sales of interior signage and related electronic components. During the nine months ended September 30, 2004, product sales revenues were approximately $30.5 million, an increase of 2.4% from the same period in 2003. This increase was due primarily to increases in sales of electronic displays and slot glass in North America, partially offset by decreases in sales of signage and electronic products in the Australian and European markets. This decrease was due primarily to the elimination of selling these products in Australia and Europe.

Systems. Systems revenues are primarily comprised of software, hardware and support services. Revenues of approximately $9.8 million for the nine months ended September 30, 2004 increased approximately $0.3 million over the nine months ended September 30, 2003. The increase is due to higher sales of our TableLink^® systems, partially offset by a number of large contracts that were signed during the third quarter of 2004 where the installation will actually occur during the fourth quarter of 2004.

Condensed Statement of Operations


*(Amounts in thousands, except per share amounts)*							Change
*(Amounts in thousands, except per share amounts)*	2004			2003			Amount			%
Total revenue	$	70,098		$	71,849		$	(1,751	)	(2.4	)
Cost of revenue		31,370			35,032			(3,662	)	(10.5	)

Gross profit		38,728			36,032			2,696		7.5

SG&A expense		19,814			17,023			2,791		16.4
Slot rent expense		1,149			4,212			(3,063	)	(72.7	)
R&D expense		4,520			3,787			733		19.4
Depreciation and amortization		7,160			10,451			(3,291	)	(31.5	)
Other expense/asset write-downs		564			1,562			(998	)	(63.9	)

		33,207			37,035			(3,828	)	(10.3	)

Income (loss) from operations		5,521			(217	)		5,738		**

Interest expense		(7,320	)		(11,576	)		4,256		36.8
Other income, net		95			124			(29	)	(23.4	)

Loss before income tax provision		(1,704	)		(11,669	)		9,965		85.4
Income tax provision		(9	)		(9	)		—		—

Net loss	$	(1,173	)	$	(11,678	)	$	10,505		90.0

Net loss per share	$	(0.08	)	$	(0.90	)	$	0.82		91.1

Selling, general and administrative expense (“SG&A”). SG&A increased by approximately 16.4% during the nine months ended September 30, 2004 compared to the 2003 period. The increase was due primarily to additional legal and compliance costs necessary to continue to achieve our regulatory approvals, costs incurred in connection with the documentation and testing of our business processes under the new corporate governance requirements and continued investments in upgrading our human capital, and an increase to the provision for doubtful receivables.

Slot rent expense. Slot rent expense is the use of operating leases to finance the purchase and placement of slot machines. The decrease in slot rent expense in the nine months ended September 30, 2004 compared to the same period in 2003 was due primarily to the expiration of several operating leases during the current period.

Research and development expense (“R&D”). R&D consists primarily of personnel and related costs across all of our product lines. We have continued to invest in new product development, including new games to be developed for licensing to third parties, as well as next generation player tracking and controller technology. Our R&D spending increased by 19.4% during the nine months ended September 30, 2004 over the comparable 2003 period primarily due to our increased focus on developing game content licensed to third parties. We expect R&D to increase as a percentage of revenue during fiscal 2004 and into fiscal 2005 as part of this change in our business model. In August of 2004, we established a partnership with a major manufacturer and distributor of slot hardware to license segments of our extensive patent portfolio of technology and to develop video slot games based on our content.

Depreciation and amortization. Depreciation and amortization decreased by 31.5% in the nine months ended September 30, 2004 compared to the prior year period due primarily to the write-down of the value of inactive slot machines and related equipment and certain other fixed assets in December 2003 that are no longer being depreciated. In addition, we extended the estimated useful lives of our slot machines in the field as a result of a significant refurbishment of these machines to upgrade them to industry standards. These slot machines continue to generate revenue for the Company.

Other expense / asset write-downs. Included in other expense / asset write-downs for the nine months ended September 30, 2004 is approximately $0.6 million of employee severance costs associated with the separation of the Company’s former CFO and other staff, primarily from reductions in administrative personnel.

Included in other expense / asset write-downs in the nine months ended September 30, 2003 is approximately $0.6 million of employee severance costs for approximately 80 terminated employees principally from reductions in service, international and management personnel.

Interest expense. Interest expense decreased during the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 due to the retirement of $40.0 million of Senior Secured Notes in October 2003, resulting in a reduction in interest expense of approximately $4.3 million.

Other income. Other income net of expenses for both the 2004 and 2003 periods were approximately $0.1 million. The primary components consist of interest income and gains and losses on foreign currency transactions and dispositions of assets.

Income taxes. During both of the nine months ended September 30, 2004 and 2003 the Company recorded an income tax provision of less than $0.1 million. The primary component for these income tax provisions was related to minimum payments required by certain state taxing authorities.

Loss per share. Both basic and diluted loss per share for the nine months ended September 30, 2004 were $0.08 on basic and diluted weighted average common shares outstanding of approximately 21,779,000. Both basic and diluted loss per share for the nine months ended September 30, 2003 were $0.90 on basic and diluted weighted average common shares outstanding of approximately 12,973,000. Dilutive stock options have not been included in the computations of diluted net loss per share as their effect would be antidilutive.

LIQUIDITY AND CAPITAL RESOURCES

For the nine months ended September 30, 2004, the Company incurred a net loss of approximately $1.7 million. Net cash and cash equivalents at September 30, 2004 were $12.2 million and at December 31, 2003 were $8.7 million. Working capital increased to $16.4 million at September 30, 2004 from $13.1 million at December 31, 2003. This working capital increase was due principally to increases in accounts and installment sales receivables of approximately $4.2 million and inventory of approximately $2.6 million and the increase in cash of approximately $3.5 million, partially offset by increases in trade accounts payable of approximately $1.6 million, accrued liabilities of approximately $2.5 million, customer deposits of approximately $1.6 million and deferred revenues and license fees of approximately $1.5 million.

Cash provided by operating activities was approximately $7.3 million for the nine months ended September 30, 2004. The significant items affecting this amount were a net loss of approximately $1.7 million offset by non-cash charges of approximately $7.0 million for depreciation and amortization and $1.2 million for amortization of debt discount and issue costs. Significant changes in operating assets and liabilities also affecting cash provided by operating activities were increases in trade accounts payable, accrued and other liabilities, partially offset by increases in inventories, accounts and installment sales receivables and other current assets.

Cash used in investing activities was approximately $3.3 million during the nine months ended September 30, 2004 due primarily to purchases of property and equipment of approximately $0.6 million and inventory leased to others of approximately $2.8 million.

Cash used in financing activities was approximately $0.5 million during the nine months ended September 30, 2004, primarily as a result of principal payments on debt, deferred license fees and capital leases of approximately $1.0 million offset, in part, by proceeds of approximately $0.5 million from the issuance of common stock.

The following table summarizes the Company’s contractual obligations at September 30, 2004, for long-term debt, capital leases, operating leases, license fees, slot machine purchases and employment agreements for the periods shown:


*(Amounts in thousands)*	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Contractual Obligations

Long-term debt	$	65,366	$	329	$	37	$	65,000		—
Interest		33,030		7,660		15,222		10,148		—
Operating leases		18,336		3,000		5,214		4,269		5,853
Capital leases		151		145		6		—		—
License fees		138		138		—		—		—
Purchase of slot machines		60		60		—		—		—
Employment agreements		2,371		1,859		512		—		—

Total	$	119,513	$	13,252	$	20,990	$	79,417	$	5,853

The above table includes accretion of debt discount of approximately $2.0 million.

In August 2004, the Company signed a five-year strategic partnership agreement with International Game Technology (“IGT”) to license segments of our extensive patent portfolio of technology and to develop video slot games based on our content. The new games will be developed on IGT’s game platform and distributed by us. IGT also licensed aspects of its intellectual property to us for our games as well as for certain joint developments. Under this agreement, the Company is committed purchase from IGT a minimum of 600 slot machines with our game content ported on them over the life of the agreement.

Employment Agreements

We have entered into employment contracts, with durations of up to three years, with our corporate officers and certain other key employees. Significant contract provisions include minimum annual base salaries, healthcare benefits, life insurance benefits, bonus compensation if performance measures are achieved, change in control and non-compete provisions. These contracts are primarily “at will” employment agreements, under which we or the employee may terminate employment. If we terminate any of these employees without cause, then we are obligated to pay the employee severance benefits as specified in the employee’s individual contract.

Purchase Commitments

From time to time, we enter into commitments with our vendors to purchase inventory at fixed prices or in guaranteed quantities. These commitments are not material. From time to time we also enter into certain intellectual property license arrangements that require upfront payments upon signing and/or additional payments upon our election to renew the licenses. These upfront and/or renewal payments are not material. In addition, we may choose to negotiate and renew licenses upon their normal expiration. No assurances can be given as to the terms of such renewals, if any.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements with unconsolidated entities or other persons, other than the contractual obligations disclosed above.

Capital Expenditures and Other

During the nine months ended September 30, 2004, the Company spent approximately $0.6 million for purchases of property and equipment. The Company presently plans to spend less for capital expenditures in 2004 than the amount spent in 2003.

In February 2002, the Company completed the acquisition of a $17.5 million working capital revolving line of credit facility (the “Facility”) with Foothill Capital Corporation (“Foothill”). During 2003, the working capital facility was amended, due to EBITDA covenant restrictions, which reduced the available capacity of the facility to $12.5 million. Once we have achieved annual EBITDA of $20.0 million for three consecutive quarters, the capacity of the facility will revert to the entire $17.5 million. Each of these steps is intended to give us greater flexibility to execute our business plan.

As of December 31, 2003, the Company was not in compliance with its covenant to maintain minimum amounts of annual EBITDA of $20.0 million for the twelve months ended December 31, 2003. Foothill and the Company have executed amendments, which reduce the annual EBITDA requirement to $8,000,000 for each of the 12-month periods ending December 31, 2003 and September 30, 2004, respectively. As of September 30, 2004, the Company was in compliance with the EBITDA requirements as agreed to between the parties in these amendments. The Company has not drawn on the Facility.

The Company is pursuing outsourcing arrangements for the delivery of our game content on third-party gaming platforms. However, the Company can give no assurances that such arrangements will be achieved and may continue to operate its slot business using existing slot machines which may require as much as $4,000 per device to upgrade to technologically current specifications.

The Company is a party to Post-Employment Agreements entered into in August 2002 with its former CEO and CFO to provide cash payments of approximately $2.8 million and $0.8 million respectively. The agreements require aggregate payments subsequent to December 31, 2002 of approximately $2.0 million plus medical costs through August 2006. In March 2003, the Company reached an agreement with its former CEO whereby he resigned from the Company’s board of directors and specifically as chairman of the board. In March 2003, the Company paid its former CEO all outstanding future payments totaling approximately $1.4 million and agreed to pay certain legal costs incurred by the former CEO in the approximate amount of $0.5 million.

The Company entered into a Post-Employment Agreement (“Agreement”) with Denny Garcia effective January 1, 2004. Under the terms of the Agreement, Mikohn agreed to pay Mr. Garcia $0.6 million (“Settlement Sum”) over a thirty-six month period, interest free. The Agreement also calls for Mr. Garcia to personally retain his health insurance benefit. In entering into this Agreement, Mikohn was relieved of its obligation under Mr. Garcia’s previous Employment Agreement, which was not set to expire until December 31, 2006. Mr. Garcia remains a consultant to Mikohn.

The Company entered into a Post-Employment Agreement (“Agreement”) with John Garner effective February 1, 2004. The Agreement calls for payments to Mr. Garner in the amount of $0.4 million over a twenty-two month period, interest free. The Agreement also calls for Mikohn to pay for healthcare coverage for Mr. Garner and his family through November 2005. Mr. Garner is additionally entitled to retain 75,000 stock options that had been previously granted to him in August 2002 and March 2003, until such time as those option grants expire in accordance with their terms. Mr. Garner also has the option after February 1, 2005 to buyout, in a lump sum fashion, the remaining unpaid Settlement Sum at a 10% discount to the remaining balance. The Agreement supersedes Mr. Garner’s Employment Agreement, which had extended through August 2005.

Share Repurchase Plan

On August 13, 2002 the Company’s Board of Directors authorized the purchase of up to $2.0 million of the Company’s common stock. The purchases will be made from time to time in the open market. The timing and actual number of shares to be purchased will depend on market conditions. The Company did not purchase any shares of its common stock during the three months ended September 30, 2004. Through September 30, 2004, the Company has purchased approximately 76,000 shares of its common stock for approximately $0.2 million. Additionally, during 2002, the Company acquired 100,000 shares as the result of foreclosures or forfeitures on obligations owed to the Company which were secured by the shares. As of September 30, 2004, the Company held approximately 195,000 shares of common stock in treasury.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Certain of our accounting policies, including the estimated lives assigned to our assets, the

determination of bad debts, inventory valuation reserves and asset impairment require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are inherently subject to a degree of uncertainty. Our judgments are based on our historical experience, terms of existing contracts, our observance of known industry trends, information provided by or gathered from our customers and information available from other outside sources, as appropriate. There can be no assurance that actual results will not materially differ from our estimates.

Revenue recognition. The Company recognizes revenue depending on the line of business as follows:

The Company has and may continue to enter into multiple element licensing and development arrangements with manufacturers and distributors within the gaming supplier industry. The guiding accounting pronouncements for these arrangements are SOP 97-2 and EITF 00-21. These arrangements are complex in nature consisting of long-term and multi-faceted terms and conditions, resulting in alternative methods for revenue recognition. For example, the

Company entered into one such arrangement in August 2004. The licensing and other fees included in this arrangement will be recognized on a straight-line basis over five years. If a different interpretation of these pronouncements had been made, which could have been permissible within the guidelines as defined in SOP 97-2 and EITF 00-21, operating income and net income (loss) for the three and nine months ended September 30, 2004 would have been approximately $4.6 million and $6.2 million, and approximately $2.3 million and $(1.0) million, respectively.

RISK FACTORS

You should consider carefully the following risk factors, together with all of the other information included in this Quarterly Report on Form 10-Q. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock.

Risks Related to Our Business Operations

If we are unable to develop or introduce innovative products that gain market acceptance and satisfy consumer preferences, our current and future revenues will be adversely affected.

Our future performance is dependent upon the continued popularity of our existing products and our ability to develop and introduce products that gain market acceptance and satisfy customer preferences. The popularity of any of our gaming products may decline over time as customer preferences change or as new competing games, many incorporating new technology are introduced by our competitors. If we are unable to develop or market innovative products or systems in the future, or if our current products or systems become obsolete or otherwise noncompetitive, our ability to sustain current revenues from our existing customers or to generate additional revenues from existing or new customers would be adversely affected, which, in turn, could materially reduce our profitability and growth potential. In addition, the introduction of new and innovative products by our competitors that are successful in meeting customer preferences also could materially reduce our competitiveness and adversely affect our revenues and our business.

The development of new games requires a significant investment by us prior to any of the games becoming available to be licensed. These new games and refresher versions of our existing games may not gain popularity with gaming patrons, or may not maintain any popularity achieved, and we may be unable to recover the cost of developing these games. Each of these games also requires separate regulatory approval in each market in which we do business, and this regulatory approval may either not be granted or not be granted in a timely manner, for reasons substantially outside of our control. A lack of market or regulatory acceptance of our new games or refresher versions of our existing games, or delays in obtaining necessary regulatory approvals, will adversely affect our revenues and business prospects.

In addition to requiring a strong pipeline of proprietary games, our success is dependent upon other new product development and technological advancements, including the development of cashless technology. The markets in which we compete are subject to frequent technological changes, and one or more of our competitors may develop alternative technologies for bonusing, progressive jackpots, slot accounting, cashless technology, player tracking or game promotions, or a superior game platform which may not be made available to us. While we expend a significant amount of resources on research and development and on product enhancement, we may not be able to continue to improve and market our existing products or develop and market new products, or technological developments may cause our products or technology to become obsolete or noncompetitive.

If our license agreements with Hasbro and other content providers are terminated or are not renewed or if we breach our obligations under any license agreement, our revenues could be reduced.

Any termination or failure to renew a license agreement with our branded content providers could have a material adverse effect on our revenues and operations. Revenues from our slot and table games segment are derived primarily from the popularity of our Yahtzee®, Battleship®, Clue®, Ripley’s Believe It or Not!® and Trivial Pursuit® slot machines. We developed these slot machines under multi-year license agreements, which contain options to renew, with Hasbro, Ripley and other branded content providers. We are also in the process of developing additional games under similar agreements with separate licensors for additional branded content, including an agreement with Paws, Inc. for use of the Garfield® property.

Each license agreement contains provisions that obligate us to perform in a certain manner. If we breach these obligations, the licensor may terminate the license agreement within a specified period that varies from immediate termination to thirty (30) days, depending upon the agreement and the type of breach. In addition, any breach of our obligations may adversely affect our relationship with the licensor, as well as deter the licensor and other third parties from licensing additional brands to us. Our ability to renew our license agreements with Hasbro, Paws, Inc. and/or Ripley Entertainment for an additional term is conditioned upon our having paid minimum royalties to the licensor during the applicable initial term. If we do not generate sufficient revenues to pay the minimum royalties or otherwise are unable to renew any of our license agreements with the licensor, our future revenues may be materially reduced.

We depend upon our intellectual property, and our failure to protect our existing intellectual property or secure and enforce such rights for new proprietary technology could adversely affect our future growth and success.

Our ability to successfully protect our proprietary methods of play and other technology is essential to our success. Our failure to effectively protect our intellectual property could significantly impair our competitive advantage and adversely affect our revenues and the value of our common stock.

Our future success is also dependent upon our ability to secure our rights in any new proprietary technology that we develop. We file trademark and patent applications to protect intellectual property rights for many of our trademarks, proprietary games, gaming products and improvements to these products. For example, we applied for patents for our knowledge-based bonus features and other game enhancements which have been utilized in our Think Big® game series, which includes our Ripley’s Believe It or Not!®, Clue® and Trivial Pursuit® games. The U.S. Patent and Trademark Office has not acted upon all of these applications and may determine not to issue patents or trademark registrations on some or all of our pending patent and trademark applications. Our failure to obtain federal protection for our trademarks and patents could cause us to become subject to additional competition and could have a material adverse effect on our future revenues and operations.

If we are unable to effectively promote our trademarks, our revenues and results of operations may be materially adversely affected.

We believe that our trademarks provide us with a competitive advantage. We intend to promote our trademarks in order to capitalize on this advantage and to build goodwill with our customers, which promotion efforts will require certain expenditures on our part. However, our efforts may be unsuccessful and these trademarks may not result in the competitive advantage that we anticipate. In such event, our revenues and results of operations may be materially adversely affected by the costs and expenses related to the promotion of such trademarks.

Our competitors may develop non-infringing products that adversely affect our future growth and revenues.

It is possible that our competitors will produce proprietary games or gaming products similar to ours without infringing on our intellectual property rights. As a result, our future growth and revenues may be adversely affected.

We may incur significant litigation expenses protecting our intellectual property or defending our use of intellectual property, which may have a material adverse effect on our cash flow.

Competitors and other third parties may infringe on our intellectual property rights or may allege that we have infringed on their intellectual property rights, resulting in significant litigation expenses, which would reduce our cash flow.

If we are found to be infringing a third-party’s intellectual property rights, we may be forced to discontinue certain products or obtain a license to use the intellectual property, either of which may adversely affect our future growth and revenues.

If we are found to be infringing another party’s intellectual property rights, we may be forced to discontinue certain products, which may have a material adverse effect on our future growth and revenues. Alternatively, if the company holding the applicable patent is willing to give us a license that allows us to develop, manufacture or market our products, we may be required to obtain a license from them. Such a license will require the payment of a license, royalty or similar fee or payment and may limit our ability to market new products, which would adversely affect our future growth and revenues.

We depend upon our ability to obtain licenses for popular intellectual properties on acceptable terms and our failure to secure such licenses could adversely affect our future growth and success.

Our future success also depends upon our ability to obtain licenses for popular intellectual properties. We may not be successful in doing so. Even if we are successful in these efforts, we may not be successful in adapting or deploying them for the development of casino games, as to the timing or cost of such development efforts or as to the commercial success of the resulting games.

Our cash flow from operations and available credit may not be sufficient to meet our capital requirements and, as a result, we could be dependent upon future financing, which may not be available.

Historically, we have not consistently generated sufficient cash flow from operations to satisfy our capital requirements and have relied upon financing arrangements to satisfy such requirements. Should such financing arrangements be required but unavailable in the future, this will pose a significant risk to our liquidity and our ability to meet operational and other cash requirements.

The gaming operations segment has historically been capital-intensive and may remain so depending on a number of factors, including, but not limited to, (a) our ability to continue to use the existing slot machines we own or lease from a third party, (b) our ability to provide popular and innovative game content ideas for slot machines such that a manufacturer of slot machines would be induced to provide slot machines in exchange for a portion of revenues earned from the sale or leasing arrangement with a casino or (c) our ability to generate sufficient cash flow from operations or from debt or equity transactions to acquire technologically competitive slot machines or to upgrade existing slot machines to technologically required standards. If we are not successful in these areas, among others, we may be required to continue expending significant capital outlays related to this business segment.

Any additional debt financing that we incur in the future will increase the amount of our outstanding indebtedness, our debt service requirements and the related risks we currently face, including the annual interest requirements of approximately $7.7 million related to our 11.875% Senior Secured Notes due in 2008, of which $65 million is outstanding. See “Risks Related to Our Substantial Debt.” Moreover, any increase to our indebtedness may reduce future operating cash flow. We may not be able to generate the sources of liquidity, if needed, either through operations or debt or equity financing, and we may not be able to develop or enhance our products, take advantage of future opportunities or respond to changing demands of customers and competitors.

We maintain a $17.5 million working capital revolving line of credit facility with Foothill Capital Corporation. We have not drawn on this credit facility, but any borrowing will also increase our indebtedness and the related risks we currently face. We may not be in compliance with quarterly financial covenants to be able to borrow under this credit facility should it be deemed necessary. We have negotiated with Foothill Capital Corporation amendments to our covenant related to the generation of EBITDA. We are in compliance with the EBITDA covenant at this time.

If casino operators cancel the placement of our games or do not agree to recurring revenue arrangements, our recurring revenues and our growth could be adversely affected.

Under the terms of our current arrangements with casino operators, our installed base of games may be replaced by competing products under some circumstances, thus ending the recurring revenue stream or arrangement with such operators. Such replacement may result from competition, changes in economic conditions, technological requirements, obsolescence or declining popularity. A decrease in our installed base of games will adversely affect our revenues and future growth. In addition, if customers replace our games and bonusing systems, our efforts to maintain and expand the number of installed proprietary games through enhancement of existing games and bonusing systems, introduction of new games and bonusing systems and other features and the provision of superior customer service may not be successful. See “If we are unable to develop or introduce innovative products that gain market acceptance and satisfy consumer preferences, our current and future revenues will be adversely affected.”

Furthermore, prominent placement of our games on the casino floor is necessary in order to maximize the amount of recurring revenues derived from each of our games. Our leases do not require the casino operators to place our games in prominent locations. If we fail to maintain the prominent locations in the casinos that we currently enjoy, our games may not be played, resulting in a reduction of our recurring revenues.

We have historically placed our proprietary games in casinos primarily under leases which provide for a fixed rental payment or on the basis of revenue participation in the game’s operating results. Most of these lease agreements are for 12 to 36 months and are subject to cancellation by the operator that may involve a 30- or 60-day notice.

We operate in highly competitive markets and may be unable to successfully compete.

The markets for our products are highly competitive and are characterized by the rapid development of new technologies and the continuous introduction of new products. We compete with a number of developers, manufacturers and distributors of similar products. Some of our competitors have greater access to capital, marketing and product development resources than we have. New competitors also may enter our key markets. Numerous factors may affect our ability to successfully compete and thus affect our future performance, including:

•

the relative popularity of our existing products and our ability to develop and introduce appealing new products;

•

our ability to obtain adequate space and favorable placement on casino gaming floors;

•

our ability to maintain existing regulatory approvals and to obtain further regulatory approvals as needed; and

•

our ability to enforce our existing intellectual property rights and to adequately secure and protect rights for new products.

Larger competitors may have more resources to devote to research and development and may be able to more efficiently and effectively obtain regulatory approval. In addition, competitors with a larger installed base of games have an advantage in retaining the most space and best placement. These competitors may also have the advantage of being able to convert their installed games to newer models in order to maintain their share of casino floor space. Our business and revenues will be negatively affected if we are unable to compete effectively in the markets in which our products are sold.

Failure to comply with applicable regulations could result in the loss of licenses necessary for our operations.

The manufacture and distribution of gaming products and the conduct of gaming operations are extensively regulated by various domestic and foreign gaming authorities. Although the laws of different jurisdictions vary in their technical requirements and are amended from time-to-time, virtually all jurisdictions in which we operate require registrations, licenses, findings of suitability, permits and other approvals, as well as documentation of qualifications, including evidence of the integrity of our officers, directors, major stockholders and key personnel. If we fail to comply with the laws and regulations to which we are subject, the applicable domestic or foreign gaming authority may impose significant penalties and restrictions on our operations, resulting in a material adverse effect on our revenues and future business.

Future authorizations or regulatory approvals may not be granted in a timely manner or at all which would adversely affect our results of operations.

Future authorizations or approvals required by domestic and foreign gaming authorities may not be granted at all or as timely as we would like, and current or future authorizations may not be renewed. In addition, we may be unable to obtain the authorizations necessary to operate new games or to operate our current games in new markets. In either case, our results of operations would likely be adversely affected. Gaming authorities also could place burdensome conditions and limits on future authorizations and approvals. If we fail to maintain or obtain a necessary registration, license, approval or finding of suitability, we may be prohibited from selling our games for use in the jurisdiction, or we may be required to sell them through other licensed entities at a reduced profit.

The continued growth of markets for our products is contingent upon regulatory approvals by various federal, state, local and foreign gaming authorities. We cannot predict which new jurisdictions or markets, if any, will accept and which authorities will approve the operation of our gaming products, the timing of any such approvals or the level of our penetration in any such markets.

Our business is closely tied to the casino industry and factors that negatively impact the casino industry may also negatively affect our ability to generate revenues.

Casinos and other gaming operators represent a significant portion of our customers. Therefore, factors that may negatively impact the casino industry may also negatively impact our future revenues. If casinos experience reduced patronage, our games may not perform well and may be removed from the casino floor or earn less revenue for us while on the casino floor. In either event, there would be a materially negative impact on our revenue performance.

The level of casino patronage, and therefore our revenues, is affected by a number of factors beyond our control, including:

•

general economic conditions;

•

levels of disposable income of casino patrons;

•

acts of terrorism and anti-terrorism efforts;

•

increased transportation costs resulting in decreased travel by patrons;

•

local conditions in key gaming markets, including seasonal and weather-related factors;

•

the growth and number of legalized gaming jurisdictions;

•

changes or proposed changes to the tax laws;

•

increases in gaming taxes or fees;

•

legal and regulatory issues affecting the development, operation and licensing of casinos;

•

the availability and cost of capital to construct, expand or renovate new and existing casinos;

•

competitive conditions in the gaming industry and in particular gaming markets, including the effect of such conditions on the pricing of our games and products;

•

the relative popularity of entertainment alternatives to casino gaming that compete for the leisure dollar; and

•

the level of new casino construction and the renovation schedules of existing casinos.

These factors significantly impact the demand for our products.

Holders of our common stock are subject to the requirements of the gaming laws of all jurisdictions in which we are licensed.

Pursuant to applicable laws, gaming regulatory authorities in any jurisdiction in which we are subject to regulation may, in their discretion, require a holder of any of our securities to provide information, respond to questions, make filings, be investigated or be licensed, qualified or found suitable to own our securities. Moreover, the holder of the securities making any such required application is generally required to pay all costs of the investigation, licensure, qualification or finding of suitability.

If any holder of our securities fails to comply with the requirements of any gaming authority, we have the right, at our option, to require such holder to dispose of such holder’s securities within the period specified by the applicable gaming authority or to redeem the securities to the extent required to comply with the requirements of the applicable gaming authority.

Additionally, if a gaming authority determines that a holder is unsuitable to own our securities, such holder will have no further right to exercise any voting or other right conferred by the securities, to receive any dividends, distributions or other economic benefit or payments with respect to the securities or to continue its ownership or economic interest in us. We can be sanctioned if we permit any of the foregoing to occur, which may include the loss of our licenses.

Anti-takeover provisions in our organizational documents, our stockholder rights plan and Nevada law could make a third-party acquisition of us difficult and therefore could affect the price investors may be willing to pay for our common stock.

The anti-takeover provisions in our articles of incorporation, our bylaws, our stockholder rights plan and Nevada law could make it more difficult for a third party to acquire us without the approval of our board of directors. Under these provisions, we could delay, deter or prevent a takeover attempt or third-party acquisition that certain of our stockholders may consider to be in their best interests, including a takeover attempt that may result in a premium over the market price for shares of our common stock. In addition, these provisions may prevent the market price of our common stock from increasing substantially in response to actual or rumored takeover attempts and also may prevent changes in our management. Because these anti-takeover provisions may result in being perceived as a potentially more difficult takeover target, this may affect the price investors are willing to pay for shares of our common stock.

Risks Related to Our Substantial Debt

We have substantial debt and debt service requirements, which could have an adverse impact on our business and the value of our common stock.

On September 30, 2004, our total outstanding debt was approximately $66 million. In addition to this existing debt, we may incur additional debt in the future. This debt may make it more difficult for us to operate and effectively compete in the gaming industry. The degree to which we and/or one or more of our subsidiaries are leveraged could have important adverse consequences on the value of Mikohn as follows:

•

difficulty for us to make payments on our outstanding indebtedness;

•

a significant portion of our cash flows from operations must be dedicated to debt service and will not be available for other purposes that would otherwise be operationally value-enhancing uses of such funds;

•

our ability to borrow additional amounts for working capital, capital expenditures, potential acquisition opportunities and other purposes may be limited;

•

we may be limited in our ability to withstand competitive pressures and may have reduced financial flexibility in responding to business changes, regulatory and economic conditions in the gaming industry;

•

we may be at a competitive disadvantage because we may be more highly leveraged than our competitors and, as a result, more restricted in our ability to invest in our growth and expansion; and

•

may cause us to fail to comply with applicable debt covenants and could result in an event of default that could result in all of our indebtedness being immediately due and payable (See “We may not be able to generate sufficient cash flow to meet our debt service requirements”).

If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify. See “Risks Related to Our Business Operations.” Our cash flow from operations and available credit may not be sufficient to meet our capital requirements, and, as a result, we could be dependent upon future financing, which may not be available.

We may be forced to reduce or delay growth initiatives and capital expenditures, obtain additional equity capital or restructure our debt if we are unable to generate sufficient cash flow to meet our debt service requirements.

Our ability to generate cash flow from operations sufficient to make scheduled payments on our debts as they become due (our 11.875% Senior Secured Notes mature August 2008) will depend upon our future performance and our ability to successfully implement our business strategy.

See “Risks Related to Our Business Operations.” Our cash flow from operations and available credit may not be sufficient to meet our capital requirements, and, as a result, we could be dependent upon future financing, which may not be available. Our performance will be affected by prevailing economic conditions and financial, business, regulatory and other factors. Many of these factors are beyond our control. Our debt service requirements are currently estimated to be approximately $7.7 million for fiscal year 2004.

If our future cash flows and capital resources are insufficient to meet our debt obligations and commitments, we may be forced to reduce or delay activities and capital expenditures, obtain additional equity capital or restructure or refinance our debt. In the event that we are unable to do so, we may be left without sufficient liquidity and we may not be able to meet our debt service requirements. In such a case, an event of default would occur under our credit facility and indenture and could result in all of our indebtedness becoming immediately due and payable. As a result, some or all of our lenders would be able to foreclose on our assets.

Our lenders have imposed numerous debt covenants that include financial and operating restrictions that may adversely affect how we conduct our business and potentially reduce our revenues and affect the value of our common stock.

We are subject to numerous covenants in our debt agreements that impose financial and operating restrictions on our business. These restrictions may affect our ability to operate our business, may limit our ability to take advantage of potential business opportunities as they arise, and may adversely affect the conduct and competitiveness of our current business, which could in turn reduce our revenues and thus affect the value of our common stock. Specifically, these covenants place restrictions on our ability to, among other things:

•

incur more debt;

•

pay dividends, redeem or repurchase our stock or make other distributions;

•

make acquisitions or investments;

•

use assets as security in other transactions;

•

enter into transactions with affiliates;

•

merge or consolidate with others;

•

dispose of assets or use asset sale proceeds;

•

create liens on our assets; and

•

extend credit.

The terms of our indebtedness require that we meet a number of financial ratios and tests. Our ability to meet these ratios and tests and to comply with other provisions governing our indebtedness may be affected by changes in economic or business conditions or other events beyond our control. Our failure to comply with our debt-related obligations could result in an event of default which, if not cured or waived, could result in an acceleration of our indebtedness, including without limitation, our senior secured notes. This could have a material adverse effect on our operations, our revenues and thus our common stock value.

Additionally, the covenants governing our indebtedness restrict the operations of our subsidiaries, including, in some cases, limiting the ability of our subsidiaries to make distributions to us, and these limitations could impair our ability to meet such financial ratios and tests.

Lastly, we are required by our senior secured notes and by our credit facility to offer to repurchase or make certain payments on our debt at times when we may lack the financial resources to do so, such as upon a change of control. These expenditures may materially and adversely affect our liquidity and our ability to maintain or grow our business as payments to satisfy the debt will be diverted away from any investment in the growth of our business, thus potentially affecting the value of our common stock.

The pledge of substantially all of our assets to our creditors may result in such creditors seizing these assets in a foreclosure proceeding, which would materially reduce the assets available for distribution to holders of our common stock upon our liquidation or recapitalization.

Substantially all of our assets are pledged as security to holders of our senior secured notes, as well as to the lender under our credit facility. The ability of holders of shares of our common stock to participate in the distribution of our assets upon our liquidation or recapitalization will be subject to the prior claims of our creditors. Any foreclosure on our assets by such creditors will materially reduce the assets available for distribution to holders of shares of common stock.

MIKOHN GAMING CORPORATION

Item 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Part I, Item 7A, of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2003. There have been no material changes in market risks since the fiscal year end.

Item 4. – CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. These disclosure controls and procedures are designed and maintained by or under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, as required by the rules of the SEC. The Company’s Chief Executive Officer and Chief Financial Officer are responsible for evaluating the effectiveness of the disclosure controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that the Company is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.

During the quarter ended September 30, 2004, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

MIKOHN GAMING CORPORATION

PART II - OTHER INFORMATION

Item 4 - Submission of Matters to a Vote of Security Holders

We held our Annual Stockholders Meeting on August 10, 2004, and four matters were voted upon. A description of each matter and tabulation of votes are as follows:

1. The following two Class 3 directors were elected to hold office until the 2007 Annual Meeting of Stockholders or until their successors are elected and qualified:


Director	Votes For	Votes Withheld
Terrance W. Oliver	16,525,488	867,337
Rick L. Smith	16,607,110	785,715

The following individuals’ term of office as a director continued after the meeting: Peter G. Boynton, Russel H. McMeekin, James E. Meyer and Douglas M. Todoroff.

2. The Company’s Stock Option Plan, as amended, was approved. The voting for the proposal was as follows:


Votes For	Votes Against	Abstentions	Broker Non-Votes
5,717,092	2,796,525	29,050	8,850,158

3. The Company’s Director Stock Option Plan, as amended, was approved. The voting for the proposal was as follows:


Votes For	Votes Against	Abstentions	Broker Non-Votes
6,055,782	2,450,010	36,875	8,850,158

4. The selection by the Audit Committee of the Board of Directors of BDO Seidman, LLP as independent auditors of the Company for its fiscal year ending December 31, 2004 was ratified. The voting for the proposal was as follows:


Votes For	Votes Against	Abstentions	Broker Non-Votes
17,299,082	64,817	28,926	—

Item 6 – Exhibits


31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized.


MIKOHN GAMING CORPORATION, Registrant

By:		/s/ MICHAEL A. SICURO
		Michael A. Sicuro
		Executive Vice President, Treasurer and
		Chief Financial Officer (on behalf of the
		Registrant and as principal financial and accounting officer)
		November 12, 2004