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: March 31, 2005

¨	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 x NO ¨

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


22,952,982		as of April 29, 2005
(Amount Outstanding)		(Date)

MIKOHN GAMING CORPORATION

TABLE OF CONTENTS


		Page
Part I	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	1

	Consolidated Balance Sheets at March 31, 2005 (Unaudited) and December 31, 2004	1

	Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2005 and 2004	2

	Consolidated Statements of Comprehensive Loss (Unaudited) For the Three months ended March 31, 2005 and 2004	3

	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2005 and 2004	4

	Notes to Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4.	Controls and Procedures	32

Part II	OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders	33

Item 6.	Exhibits	33

Signatures/Certifications		34

PART I - FINANCIAL INFORMATION

Item 1. –

Consolidated Financial Statements

MIKOHN GAMING CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share amounts)


	March 31, 2005			December 31, 2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	6,552		$	12,305
Accounts receivable, net of allowance for doubtful accounts of $675 and $900		14,370			14,300
Contract sales receivable, net of allowance for doubtful accounts of $1,529 and $1,529		5,178			2,462
Inventories, net of reserves of $1,351 and $1,332		11,778			10,276
Prepaid expenses		4,836			2,572
Deferred tax asset		3,313			3,313

Total current assets		46,027			45,228

Property and equipment, net		9,156			9,975
Intangible assets, net		54,179			54,153
Goodwill		5,596			2,860
Other assets		4,778			5,304

Total assets	$	119,736		$	117,520

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	10,165		$	9,832
Customer deposits		3,018			3,047
Current portion of long-term debt and notes payable		309			368
Accrued liabilities		9,979			9,997
Deferred revenues and license fees		2,676			2,781

Total current liabilities		26,147			26,025

Long-term debt and notes payable, net of unamortized discount of $1,766 and $1,895		63,314			63,170
Other long-term liabilities		948			1,971
Deferred tax liability		16,114			16,114

Total liabilities		106,523			107,280

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 23,084,108 and 22,148,149 shares issued and outstanding		2,308			2,250
Additional paid-in capital		119,295			116,932
Other comprehensive loss		(550	)		(145	)
Accumulated deficit		(106,947	)		(107,904	)

Subtotal		14,106			11,133
Less treasury stock, 217,698 shares, at cost		(893	)		(893	)

Total stockholders’ equity		13,213			10,240

Total liabilities and stockholders’ equity	$	119,736		$	117,520

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 March 31,
	2005			2004
Revenues:
Slot and table games	$	9,978		$	9,525
Product sales		9,173			9,089
Systems		3,757			2,515

Total revenues		22,908			21,129

Cost of revenues:
Slot and table games		3,440			2,936
Product sales		5,027			5,325
Systems		1,874			1,481

Total cost of revenues		10,341			9,742

Gross profit		12,567			11,387

Selling, general and administrative expense		5,991			6,389
Slot rent expense		—			822
Research and development		1,767			1,530
Depreciation and amortization		1,548			2,544

		9,306			11,285

Operating income		3,261			102

Interest expense		(2,304	)		(2,480	)
Other income, net		—			25

Income (loss) before income tax provision		957			(2,353	)

Income tax provision		—			—

Net income (loss)	$	957		$	(2,353	)

Weighted average common shares:
Basic		22,567			21,731

Diluted		25,491			21,731

Basic and diluted earnings (loss) per share:
Net earnings (loss) per share	$	0.04		$	(0.11	)

See notes to unaudited consolidated financial statements.

MIKOHN GAMING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(Amounts in thousands)


	Three Months Ended March 31,
	2005			2004
Net income (loss)	$	957		$	(2,353	)

Other comprehensive income:
Foreign currency translation gain (loss)		(405	)		158

Comprehensive income (loss)	$	552		$	(2,195	)

See notes to unaudited consolidated financial statements.

MIKOHN GAMING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)


	Three Months Ended March 31,
	2005			2004
Cash flows from operating activities:
Net income (loss)	$	957		$	(2,353	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,145			2,055
Amortization		403			489
Provision for bad debts		(131	)		88
Provision for obsolete inventory		132			—
Amortization of debt discount and debt issue costs		362			394
Loss on disposition of assets		20			30
Other		134			50
Changes in assets and liabilities:
Accounts receivable		61			(215	)
Notes and installment sales receivable		(2,395	)		103
Inventories		(2,027	)		(625	)
Other assets		(2,293	)		(1,084	)
Trade accounts payable		332			(2,311	)
Accrued expenses		(17	)		3,409
Other liabilities		(1,158	)		689

Net cash provided by operating activities		(4,475	)		719

Cash flows from investing activities:
Purchase of property and equipment		(186	)		(245	)
Purchase of inventory leased to others		(170	)		(247	)
Increase in intangible assets		(3,164	)		—

Net cash used in investing activities		(3,520	)		(492	)

Cash flows from financing activities:
Principal payments on notes payable and long-term debt		(10	)		(4	)
Principal payments on capital leases		(34	)		(172	)
Principal payments of deferred license fees		—			(129	)
Proceeds from issuance of common stock		2,286			128

Net cash used in financing activities		2,242			(177	)

Increase (decrease) in cash and cash equivalents		(5,753	)		50

Cash and cash equivalents, beginning of period		12,305			8,683

Cash and cash equivalents, end of period	$	6,552		$	8,733

Supplemental disclosure of cash flow information:

Cash paid during the period for:
Interest	$	61		$	39

Federal and state income taxes	$	40		$	13

See notes to unaudited consolidated financial statements.

MIKOHN GAMING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2004. 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 March 31, 2005, and the results of its operations and cash flows for the three months ended March 31, 2005. The results of operations for the three months ended March 31, 2005 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.	ACQUISITIONS / DIVESTITURES

In December 2004, the Company entered into two strategic transactions to enhance its table games and table systems products. First, the Company acquired the table games management system, PitTrak^®, including its existing customer base from Hotel Systems Pty, Ltd. of Sydney, Australia. PitTrak^® has a similar functionality as the Company’s TableLink^® product and provided the Company with an existing installed base of over 400 tables and access to sell its management solutions worldwide. The Company also purchased patents related to player card image based recognition (IBR) and licensed the exclusive rights (under certain other patents) to develop and distribute an IBR card recognition shoe. The Company intends to market and distribute the IBR card recognition shoe as part of our table games systems products beginning in 2005. These transactions were completed in January 2005.

In connection with our focus on games content and technology the Company has realigned its interior sign division through a private buy-out by the division’s employees effective in May 2005. The net proceeds of the divestiture will be approximately $11.0 million. The Company retained a minority interest in the sign business and as

a result, will not present the reporting unit as a discontinued operation in accordance with Statement of Financial Accounting Standard (“SFAS”) 144 “Long Lived Assets and Assets to be Disposed Of”. The newly formed entity will retain the Mikohn brand. Accordingly, the Company filed ficticious name filings in all jurisdictions in which it does business to allow it to do business as Progressive Gaming International Corporation effective January 2005. In addition, the Company changed its NASDAQ ticker symbol to PGIC, effective January 5, 2005. The Company expects to change its legal name to Progressive Gaming International Corporation in 2005.

The Company also signed a definitive agreement in February 2005 to acquire VirtGame Corp. (VirtGame), a provider of open architecture gaming software primarily focused on the delivery of a central-server based slot games and centrally managed sports betting. The Company will issue 2.0 million shares of its common stock for all of the outstanding common stock, preferred stock, warrants and options of VirtGame, subject to certain adjustments as defined in the definitive agreement. The Company has also provided VirtGame with a secured credit facility of $2.5 million to fund their operations until the acquisition is complete. As of March 31, 2005, the Company advanced $1.4 million to VirtGame under this credit facility.

3.	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 March 31, 2005, 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.

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 15 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 related to Caribbean Stud^{^®}, 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, Inc. 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 $2.3 million and $2.5 million and security deposits for building and equipment leases of approximately $1.5 million and $1.7 million at March 31, 2005 and December 31, 2004, 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. 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.

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.

Royalty and license fee arrangements are evidenced by a signed contract and are recognized when earned.

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 March 31, 2005, 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”.


(Amounts in thousands, except per share amounts)	Three months ended March 31,
(Amounts in thousands, except per share amounts)	2005			2004
Net loss, as reported	$	957		$	(2,353	)
Add: Stock-based compensation expense		0			49
Deduct: Total stock-based employee compensation expense determined under fair value method		(447	)		(325	)

Pro forma net loss	$	510		$	(2,629	)

Loss per share:

As reported -
Basic	$	0.04		$	(0.11	)

Diluted	$	0.04		$	(0.11	)

Pro forma –
Basic	$	0.02		$	(0.12	)

Diluted	$	0.02		$	(0.12	)

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 March 31, 2005 was approximately 97,500.

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 three months ended March 31, 2005 and 2004.

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.

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.

4.	RECEIVABLES AND INVENTORY

The following provides additional disclosure for selected balance sheet accounts:

Accounts receivable and contract sales receivable at March 31, 2005 and December 31, 2004 consist of the following:


*(Amounts in thousands)*	March 31, 2005			December 31, 2004
	(Unaudited)
Accounts receivable:
Trade receivables	$	15,045		$	15,200
Less: allowance for bad debts		(675	)		(900	)

	$	14,370		$	14,300

Contract sales receivable:
Contract sales receivable	$	7,641		$	5,066
Less: allowance for bad debts		(1,529	)		(1,529	)

	$	6,112		$	3,537

Inventories at March 31, 2005 and December 31, 2004 consist of the following:


*(Amounts in thousands)*	March 31, 2005			December 31, 2004
	(Unaudited)
Inventories:
Raw materials	$	7,947		$	7,651
Finished goods		4,777			3,618
Work-in-progress		405			339

Subtotal		13,129			11,608
Reserve for obsolete inventory		(1,351	)		(1,332	)

Total	$	11,778		$	10,276

5.	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. The Company’s internal review determined no impairment as of March 31, 2005.

The net carrying value of goodwill and other intangible assets as of March 31, 2005 is comprised of the following:


	Net Amount Allocated by Segment
*(Amounts in thousands)*	Slot and Table Games		Product Sales		Corporate		Total
Goodwill	$	2,471	$	3,125	$	—	$	5,596
Indefinite life intangible asset (perpetual license)		50,533		—		—		50,533
Definite life intangible assets (see detail below)		1,861		361		1,424		3,646

Total	$	54,865	$	3,486	$	1,424	$	59,775

Definite life intangible assets as of March 31, 2005, subject to amortization, are comprised of the following:


*(Amounts in thousands)*	Gross Carrying Amount		Accumulated Amortization			Net
Patent / trademark rights	$	10,619	$	(8,181	)	$	2,438
Covenants not to compete		377		(377	)		—
Software development costs		2,154		(1,513	)		641
Proprietary rights / other		1,334		(767	)		567

Total	$	14,484	$	(10,838	)	$	3,646

6.	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.

7.	LONG TERM DEBT

On May 2, 2005, CapitalSource Finance LLC (“CapSource”) accepted an assignment of the Loan and Security Agreement (the “Loan Agreement”) between the Company and Wells Fargo Foothill, Inc. (“WFF”). On the same day, the Company consented to the assignment of the Loan Agreement to CapSource, released WFF from any claims it may have against WFF, and entered into Amendment Number 6 (the “Amendment”) of the Loan Agreement. Under the terms of the Amendment, all the basic provisions of the Loan Agreement remain substantially the same, including the nature of the collateral, an interest rate based on 30-day LIBOR plus 3% and, upon the amendment and restatement of the Loan Agreement described below, the Company’s right to borrow up to $17,500,000 subject to a borrowing base formula. Amended terms include a consent to the sale of the assets related to the Company’s sign business, payment of certain fees, a covenant holiday until May 31, 2005 for the minimum excess availability financial covenant, and an agreement to amend and restate the Loan Agreement for a three-year term prior to June 1, 2005. If the Company does not enter into an amended and restated Loan Agreement with CapSource by June 1, 2005, it is required to repay all outstanding obligations.

8.	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 March 31, 2005:
Net income	$	957		$	957

Weighted average shares		22,567			25,491

Per share amount	$	0.04		$	0.04

For the three months ended March 31, 2004:
Net loss	$	(2,353	)	$	(2,353	)

Weighted average shares		21,731			21,731

Per share amount	$	(0.11	)	$	(0.11	)

Dilutive stock options and warrants of approximately 284,000 for the three months ended March 31, 2004 have not been included in the computation of diluted net loss per share as their effect would be antidilutive.

8.	SEGMENT REPORTING

The Company’s business consists of three reportable segments: (i) slot and table games, (ii) product sales and (iii) systems. The slot and table games business segment includes the development, licensing and distribution of proprietary slot and table games. Revenues are derived from leases, revenue sharing arrangements, royalty and license fee arrangements with casinos and gaming suppliers. The Company’s product sales business segment includes 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 segments are the same as those described in Notes 3—Summary of Significant Accounting Policies. All inter-segment transactions have been eliminated.

With respect to the current segments, the Company evaluates performance and allocates resources based upon profit or loss from operations before income taxes. Certain operating expenses, which are separately managed at the corporate level, are not allocated to the business segments. These unallocated costs include primarily the costs associated with executive administration, finance, human resources, legal, general marketing and information systems. The depreciation and amortization expense of identifiable assets not allocated to the business segments are also included in these costs.

In December 2004, the Company announced its intent to focus the business on game content and technology and completed several strategic transactions immediately following this decision (see Note 2 – Acquisitions / Divestitures). The Company will revise its business segment reporting in the second quarter of 2005 as a result of the realignment of the business.

Business segment information for the three months ended March 31, 2005 and 2004 consists of:


*(Amounts in thousands)*	Three months ended March 31,
*(Amounts in thousands)*	2005			2004
Business Unit Segments
Revenues:
Slot and table games	$	9,978		$	9,525
Product sales		9,173			9,089
Systems		3,757			2,515

Total	$	22,908		$	21,129

Operating income/(loss):
Slot and table games	$	3,654		$	1,695
Product sales		3,480			2,001
Systems		409			(177	)
Corporate		(4,282	)		(3,417	)

Total	$	3,261		$	102

Depreciation and amortization
Slot and table games	$	1,021		$	1,925
Product sales		84			154
Systems		2			13
Corporate		441			452

Total	$	1,548		$	2,544

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 months ended March 31, 2005 and 2004:


*(Amounts in thousands)*	Three months ended March 31,
*(Amounts in thousands)*	2005			2004
Geographic Operations
Revenues:
North America	$	20,503		$	18,439
Australia / Asia		821			801
Europe		1,584			1,889

Total	$	22,908		$	21,129

Operating income (loss):
North America	$	3,769		$	441
Australia / Asia		66			(296	)
Europe		(574	)		(43	)

Total	$	3,261		$	102

Depreciation and amortization
North America	$	1,455		$	2,494
Australia / Asia		56			16
Europe		37			34

Total	$	1,548		$	2,544

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 (Unaudited)


*(Amounts in thousands)*	March 31, 2005
*(Amounts in thousands)*	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash	$	5,023		$	—		$	1,529		$	—		$	6,552
Accounts and contract sales receivable, net		11,271			6,269			2,008			—			19,548
Inventories, net		6,007			4,216			1,555			—			11,778
Other current assets		7,097			568			484			—			8,149

Total current assets		29,398			11,053			5,576			—			46,027
Property and equipment, net		4,162			4,377			617			—			9,156
Goodwill and intangible assets		53,086			3,564			3,125			—			59,775
Investments in subsidiaries		18,257			—			—			(18,257	)		—
Other assets		3,742			1,059			(23	)		—			4,778

Total assets	$	108,645		$	20,053		$	9,295		$	(18,257	)	$	119,736

LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities	$	23,672		$	604		$	1,854		$	—		$	26,130
Intercompany transactions		(6,523	)		(2,012	)		8,552			—			17

Total current liabilities		17,149			(1,408	)		10,406			—			26,147
Long-term debt, net		63,233			—			81			—			63,314
Other liabilities, long term		948			—			—			—			948
Deferred tax liability		14,102			2,012			—			—			16,114

Stockholders’ equity (deficit)		13,213			19,449			(1,192	)		(18,257	)		13,213

Total liabilities and stockholders’ equity (deficit)	$	108,645		$	20,053		$	9,295		$	(18,257	)	$	119,736

CONDENSED CONSOLIDATING BALANCE SHEETS


*(Amounts in thousands)*	December 31, 2004
*(Amounts in thousands)*	Parent		Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash	$	7,532	$	1	$	4,772		$	—		$	12,305
Accounts and contract sales receivable, net		12,126		2,259		2,377			—			16,762
Inventories, net		5,710		2,676		1,890			—			10,276
Intercompany transactions		5,624		3,034		—			(8,658	)		—
Other current assets		2,536		3,081		268			—			5,885

Total current assets		33,528		11,051		9,307			(8,658	)		45,228
Property and equipment, net		4,498		4,847		630			—			9,975
Goodwill and intangible assets		51,294		5,329		390			—			57,013
Investments in subsidiaries		14,764		—		—			(14,764	)		—
Other assets		5,032		272		—			—			5,304

Total assets	$	109,116	$	21,499	$	10,327		$	(23,422	)	$	117,520

LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities	$	19,695	$	4,463	$	1,867		$	—		$	26,025
Intercompany transactions		—		—		8,657			(8,657	)		—

Total current liabilities		19,695		4,463		10,524			(8,657	)		26,025
Long-term debt, net		63,108		—		62			—			63,170
Other liabilities, long term		1,971		—		—			—			1,971
Deferred tax liability		14,102		2,012		—			—			16,114

Stockholders’ equity		10,240		15,024		(259	)		(14,765	)		10,240

Total liabilities and stockholders’ equity	$	109,116	$	21,499	$	10,327		$	(23,422	)	$	117,520

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended March 31, 2005
*(Amounts in thousands)*	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	14,940		$	5,562	$	2,406		$	—		$	22,908
Cost of sales		6,035			2,792		1,514			—			10,341
Selling, general and admin expenses		5,789			2,118		1,399			—			9,306

Operating income (loss)		3,116			652		(507	)		—			3,261
Equity in earnings of subsidiaries		147			—		—			(147	)		—
Interest expense		(2,306	)		—		2			—			(2,304	)
Other income (expense)		—			—		—			—			—

Income (loss) before income tax provision		957			652		(505	)		(147	)		957
Income tax provision		—			—		—			—			—

Net income (loss)	$	957		$	652	$	(505	)	$	(147	)	$	957

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended March 31, 2004
*(Amounts in thousands)*	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	12,789		$	6,076		$	2,690		$	(426	)	$	21,129
Cost of sales		5,649			2,632			1,887			(426	)		9,742
Selling, general and admin expenses		6,319			3,824			1,142			—			11,285

Operating income (loss)		821			(380	)		(339	)		—			102
Equity in earnings of subsidiaries		(693	)		—			—			693			—
Interest expense		(2,459	)		(16	)		(5	)		—			(2,480	)
Other income		(22	)		1			46			—			25

Income (loss) before income tax provision		(2,353	)		(395	)		(298	)		693			(2,353	)
Income tax provision		—			—			—			—			—

Net income (loss)	$	(2,353	)	$	(395	)	$	(298	)	$	693		$	(2,353	)

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS (Unaudited)


	For the three months ended March 31, 2005
*(Amounts in thousands)*	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	(4,279	)	$	185		$	(381	)	$	—	$	(4,475	)

Cash flows from investing activities:
Purchase of property and equipment		(63	)		(15	)		(108	)		—		(186	)
Purchase of inventory leased to others		—			(170	)		—			—		(170	)
Other		(429	)		—			(2,735	)		—		(3,164	)

Net cash used in investing activities		(492	)		(185	)		(2,843	)		—		(3,520	)

Cash flows from financing activities:
Principal payments on long-term debt and capital leases		(34	)		—			(10	)		—		(44	)
Principal payments of deferred license fees		—			—			—			—		—
Proceeds from issuance of common stock		2,286			—			—			—		2,286

Net cash provided by (used in) financing activities		2,252			—			(10	)		—		2,242
Increase (decrease) in cash and cash equivalents		(2,519	)		—			(3,234	)		—		(5,753	)
Cash and cash equivalents, beginning of period		7,533			—			4,772			—		12,305

Cash and cash equivalents, end of period	$	5,014		$	—		$	1,538		$	—	$	6,552

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS (Unaudited)


	For the three months ended March 31, 2004
*(Amounts in thousands)*	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	1,049		$	161		$	(491	)	$	—	$	719

Cash flows from investing activities:
Purchase of property and equipment		(226	)		(1	)		(18	)		—		(245	)
Purchase of inventory leased to others		(136	)		—			(111	)		—		(247	)
Other		—			—			—			—		—

Net cash used in investing activities		(362	)		(1	)		(129	)		—		(492	)

Cash flows from financing activities:
Principal payments on long-term debt and capital leases		(11	)		(160	)		(5	)		—		(176	)
Principal payments of deferred license fees		(129	)		—			—			—		(129	)
Proceeds from issuance of common stock		128			—			—			—		128

Net cash provided by (used in) financing activities		(12	)		(160	)		(5	)		—		(177	)

Increase (decrease) in cash and cash equivalents		675			—			(625	)		—		50
Cash and cash equivalents, beginning of period		6,011			1			2,671			—		8,683

Cash and cash equivalents, end of period	$	6,686		$	1		$	2,046		$	—	$	8,733

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 March 31, 2005

Revenues and cost of revenues:


					Change
*(Amounts in thousands)*	2005		2004		Amount			%
Revenues
Slot and table games	$	9,978	$	9,525	$	453		4.8
Product sales		9,173		9,089		84		0.9
Systems		3,757		2,515		1,242		49.4

Total revenues	$	22,908	$	21,129	$	1,779		8.4

Cost of revenues:
Slot and table games	$	3,440	$	2,936	$	504		17.2
Product sales		5,027		5,325		(298	)	(5.6	)
Systems		1,874		1,481		393		26.5

Total cost of revenues	$	10,341	$	9,742	$	599		6.1

Gross profit	$	12,567	$	11,387	$	1,180		10.4

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 $10.0 million, an increase of $.5 million from the 2004 period. This increase was due primarily to an increase in the installed base of slot contracts under periodic license fee agreements and licensing agreements with third parties, partially offset by a decrease in the installed base of slot contracts under daily license fee agreements.

Product sales. Product sales revenues consist primarily of sales of interior signage and related electronic components. During the 2005 quarter, product sales revenues were approximately $9.2 million, an increase of .9% from the 2004 quarter. This improvement was due primarily to increases in signage and electronic sales and slot glass sales in North America.

Systems. Systems revenues increased over 49% in the first quarter of fiscal 2005 as compared to the same period in 2004 due primarily to the demand for the Company’s table management system. We expect the demand for our Table Link product to continue to increase as we migrate to our next generation table management system, complete with RFID bet recognition (with a higher speed microchip) and an image based recognition player card shoe.

Condensed Statement of Operations


*(Amounts in thousands, except per share amounts)*							Change
*(Amounts in thousands, except per share amounts)*	2005			2004			Amount			%
Total revenue	$	22,908		$	21,129		$	1,779		8.4
Cost of revenue		10,341			9,742			599		6.1

Gross profit		12,567			11,387			1,180		10.4
SG&A expense		5,991			6,389			(398	)	(6.2	)
Slot rent expense		—			822			(822	)	—
R&D expense		1,767			1,530			237		15.5
Depreciation and amortization		1,548			2,544			(996	)	(39.2	)

		9,306			11,285			(1,979	)	(17.5	)

Income (loss) from operations		3,261			102			3,159		96.9
Interest expense		(2,304	)		(2,480	)		(176	)	(7.1	)
Other income, net		—			25			(25	)	—

Income (loss) before income tax provision		957			(2,353	)		3,310		140.7
Income tax provision		—			—			—		—

Net income (loss)	$	957		$	(2,353	)	$	3,310		—

Net income (loss) per share	$	0.04		$	(0.11	)	$	0.15		—

Selling, general and administrative expense (“SG&A”). SG&A decreased by approximately $.4 million during the three months ended March 31, 2005 compared to the 2004 period. The decrease in SG&A is primarily attributable to adjustments to our liabilities as a result of changes to our business model partially offset by higher salaries and benefits expense resulting from our initiatives to upgrade our human capital.

Slot rent expense. Slot rent expense is the use of operating leases to finance the purchase and placement of slot machines. As of December 31, 2004, substantially all of our slot leases have expired or been terminated. We expect slot rent expense to cease in 2005 due to the expiration of our remaining leases.

Research and development expense (“R&D”). R&D consists primarily of personnel and related costs across all of our product lines. Our R&D spending continued to increase as a result of our focus on the development of technology and content. R&D expense is expected to increase during the remainder of 2005 as a result of these initiatives.

Depreciation and amortization. Depreciation and amortization decreased by 39.2% in the 2005 quarter due to a significant reduction in the carrying value of our long-lived assets in early 2004 as a result of changes to our business model.

Interest expense. Our interest expense consists primarily of interest and amortization of loan fees associated with our senior subordinated notes. Interest expense in 2005 was consistent with 2004.

Income taxes. During the three months ended March 31, 2005, the Company did not record an income tax provision due to the utilization of previously reserved net operating loss carryforwards.

Earnings (Loss) per share. The basic and diluted earnings per share for the three months ended March 31, 2005 were $0.04 on basic and diluted weighted average common shares outstanding of 22.6 million and 25.5 million shares, respectively. Both basic and diluted loss per share for the three months ended March 31, 2004 were ($0.11) on basic and diluted weighted average common shares outstanding of 21.7 million.

LIQUIDITY AND CAPITAL RESOURCES

For the three months ended March 31, 2005, the Company’s cash and cash equivalents decreased $5.8 million primarily due to investments in working capital, purchases of technology-based intellectual property and the acquisition of PitTrak^®. These increases were partially offset by increases in the proceeds from the exercise of stock options and warrants.

Cash flows used in operations were $4.5 million for the first quarter of 2005 compared to positive cash flow from operations of $.7 million in the prior year period. This decline in operating cash flows is attributable to investments in our working capital, including an increase of $2.4 million in contracts receivable, related to new licensing arrangements; $2.0 million in inventory, resulting from the timing of purchases; and $2.3 million in prepaid expenses and other assets related primarily to advances to VirtGame. Cash flows used in investing activities were $3.6 million in the current quarter and included investments in technology-based intellectual property and the acquisition of PitTrak^®.

Cash flows from financing activities increased in the first quarter of 2005 compared to the first quarter of 2004. During the first three months in 2005, proceeds from the exercise of stock options and warrants were $2.3 million, compared to $.1 million in the same period in 2004.

Capital Expenditures and Other

During the three months ended March 31, 2005, the Company spent approximately $0.2 million for purchases of property and equipment and $.2 million in inventory purchased for leases. We expect modest increases in our level of capital spending for the remainder of fiscal 2005.

Critical Accounting Policies

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 differ from our estimates.

We have identified the following policies as critical to our business operations and the understanding of our results of operations: revenue recognition, receivables and allowance for doubtful accounts, inventories and obsolescence, and long-lived asset impairment. To provide an understanding of the methodology we apply these and other significant accounting policies discussed below and where appropriate in the notes to our consolidated financial statements.

Revenue Recognition

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

Product sales are executed by a signed contract or 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.

System 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 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 Statement of Position 97- 2—Software Revenue Recognition (“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. 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. Examples include sales of hardware only to (i) previous customers that are expanding their systems, (ii) customers that have multiple locations and do the installation themselves and require an additional software license and hardware and (iii) customers purchasing spare parts.

The leasing of proprietary table games to casino 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 revenue participation or a fixed-rental basis. Slot machine lease contracts are typically for a month-to-month 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.

Inventory and Obsolescence

We routinely evaluate the realizability of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated service period, product end of life dates, estimated current and future market values, service inventory requirements and new product introductions, as well as other factors. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure. Raw materials and work in progress with quantities in excess of forecasted usage are reviewed at least quarterly by our engineering and operating personnel for obsolescence. Such raw material and work in progress write-downs are typically caused by engineering change orders or product end of life adjustments. Finished goods are reviewed at least quarterly by product marketing and operating personnel to determine if inventory carrying costs exceed market selling prices. Service inventory is systematically reserved for based on the estimated remaining service life of the inventory. We record reserves for inventory based on the above factors and take into account worldwide quantities and demand in our analysis.

Long-Lived Asset Impairment

Long-lived assets and intangible assets with determinable lives are reviewed for impairment quarterly or whenever events or circumstances indicate that the carrying amount of assets may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Such reviews assess the fair value of the assets based upon our estimates of the future cash flows we expected the assets to generate. In response to changes in industry and market conditions, we may be required to strategically realign our resources in the future, which could result in an impairment of long-lived assets.

For indefinite-lived assets including perpetual licenses and goodwill, an independent valuation is performed at least annually to determine if any impairment has occurred.

Recently Issued Accounting Standards

In November 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs—an amendment of ARB No. 43, Chapter 4.” The amendment clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for our fiscal year beginning on January 1, 2006. The adoption of this amendment is not expected to have a material impact to our overall results of operations or financial position.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, that focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Beginning with our quarterly period that begins January 1, 2006, we will be required to expense the fair value of employee stock options and similar awards. As a public company, we are allowed to select from two alternative transition methods, each having different reporting implications. While we have not yet completed our evaluation of this statement, we expect that the adoption of this statement will have a material impact to our results of operations. Because the recording of non-cash stock option expense involves equity-based compensation transactions, the adoption of this statement will have no effect on our financial position.

Risk Factors -

You should consider carefully the following risk factors, together with all of the other information included in this Annual Report on Form 10-K. 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 consumer preferences. The popularity of any of our gaming products may decline over time as consumer 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 consumer 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 for lease. 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 primarily 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 continued development of cashless technology, table player tracking technologies and integrated management systems. 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, Inc. 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 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 Entertainment 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. (for the use of the Garfield^® property) 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.

By way of example, Hasbro declined to renew the Yahtzee ^® brand with us as of December 15, 2004. While we are confident that we will be able to replace this content prior to the timed contractual requirement to remove these devices from the field, our failure to do so could materially affect our future revenues.

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 effected 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 such as is the case with Paltronics table game and electronics offerings over which we have infringement actions pending in Federal District Court in Nevada, 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 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 slot and table games business 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 ⁷/8% Senior Secured Notes due 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 CapitalSource Finance, LLC. Any borrowing will also increase our indebtedness and the related risks we currently face.

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 operator. Such replacement may result from competition, changes in economic conditions, technological requirements, obsolescence or declining popularity. A decrease in our installed base of games would 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.

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 will continue to follow this model to the extent that there is interest amongst our customers.

We operate in a highly competitive market 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 taken off of the casino floor or simply 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, are 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 law or to redeem the securities to the extent required to comply with the requirements of the applicable gaming law.

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 our 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.

We may not realize the benefits we expect from the pending acquisition of VirtGame.

The integration of the VirtGame technology may be time consuming and expensive, and may disrupt our business. After the acquisition, we will need to overcome significant challenges in order to realize any benefits or synergies from the proposed merger. These challenges include the timely, efficient and successful execution of a number of post-transaction integration activities, including:

•

integrating the technologies of the two companies;

•

successfully completing the development of VirtGame’s technology and developing commercial products based on that technology;

•

retaining and assimilating the key personnel of each company;

•

attracting additional customers for products based on VirtGame’s technology; and

•

implementing and maintaining uniform standards, controls, processes, procedures, policies and information systems.

The process of integrating operations and technology could cause an interruption of, or loss of momentum in, the activities of one or more of our businesses and the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with the acquisition and the integration of VirtGame’s technology could have an adverse effect on our business, results of operations or financial condition. We may not succeed in addressing these risks or any other problems encountered in connection with the transaction. The inability to successfully integrate the technology and personnel of VirtGame, or any significant delay in achieving integration, could have a material adverse effect on us and, as a result, on the market price of our common stock.

Whether or not the VirtGame acquisition is completed, we will incur substantial costs

We will incur substantial costs related to the transaction with VirtGame whether or not the transaction is completed. These costs include fees for financial advisors, attorneys and accountants, filing fees and financial printing costs. In addition, if either party terminates the merger agreement, it may be obligated to pay a termination fee and expenses to the other party under certain circumstances. We have also provided VirtGame with a secured credit facility of $2.5 million to bridge their operations until the acquisition is complete.

Failure to complete the VirtGame acquisition could negatively affect our stock prices and future business and operations.

If the acquisition transaction with VirtGame is not completed for any reason, the price of our common stock may decline to the extent that the current market price of our common stock reflects a positive market assumption that the transaction will be completed. In addition, if the merger agreement is terminated, we may be unable to find a third party willing to engage in a similar transaction on terms as favorable as those set forth in the merger agreement, or at all. This could limit our ability to pursue our strategic goals in an atmosphere of increased uncertainty.

Future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources.

As part of our business strategy, we intend to continue to seek to acquire businesses, services and technologies that we believe could complement or expand our business, augment our market coverage, enhance our technical capabilities, provide us with valuable customer contacts or otherwise offer growth opportunities. If we fail to achieve the anticipated benefits of any acquisitions we complete, our business, operating results, financial condition and prospects may be impaired. Acquisitions and investments involve numerous risks, including:

•

Difficulties in integrating operations, technologies, services, accounting and personnel;

•

Difficulties in supporting and transitioning customers of our acquired companies to our technology platforms and business processes;

•

Diversion of financial and management resources from existing operations;

•

Potential loss of key employees;

•

Inability to generate sufficient revenues to offset acquisition or investment costs; and

•

Potential write-offs of acquired assets.

Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could harm our operating results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted. Such dilution could adversely affect the market price of our stock. It is also possible that at some point in the future we may decide to enter new markets, thus subjecting ourselves to new risks associated with those markets.

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 March 31, 2005, our total outstanding debt was approximately $65 million. In addition to this existing debt, we may incur additional debt in the future. Substantial 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 the Company as follows:

•

it may be difficult 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 changing business, 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

•

it 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.

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.

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 $8.0 million for fiscal year 2005.

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 in turn 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 of 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, 2004. 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 March 31, 2005, there have been no changes in the Company’s internal control 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

Not applicable.

Item 6 –

Exhibits



2.1		Agreement and Plan of Merger and Reorganization, dated as of February 19, 2005, by and among Mikohn Gaming Corporation, d/b/a Progressive Gaming International Corporation, Viking Acquisition Sub, Inc., Viking Merger Subsidiary, LLC and VirtGame Corp., incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 23, 2005.

10.5		Amended and Restated Employment Agreement dated as of January 1, 2005. between the Company and Russel H. McMeekin, incorporated by reference to Exhibit 99.2 of the Company’s Current Report Form 8-K filed on February 17, 2005.

10.11		Secured Promissory Note, dated February 19, 2005, executed by VirtGame Corp. in favor of Mikohn Gaming Corporation, d/b/a Progressive Gaming International Corporation, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on February 23, 2005.

10.13		Summary of Registrant’s 2005 Incentive Compensation Plan.

10.15		Summary of cash compensation paid to non-employee directors of the Registrant.

10.16		Registrant’s New Hire Equity Incentive Plan, incorporated by reference to Exhibit 99.1 of the Company’s Current Report Form 8-K filed on February 17, 2005.

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

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 officer) May 10, 2005

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents