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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-QSB



(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended December 31, 2003



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------



For the transition period from
 to



Commission File Number: 0-11532



VENTURE CATALYST INCORPORATED

(Exact
name of small business issuer as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Utah                                                           |  | 33-0618806                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



591 Camino De La
Reina, Suite 418, San Diego, California 92108

(Address of principal executive offices)



(858) 385-1000

(Issuers telephone number)



Not Applicable

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



Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ̈



State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: as of January 31, 2004,
7,206,598 shares of common stock, $.001 par value per share, were outstanding.



Transitional Small Business Disclosure Format (check one):



Yes ̈No x



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VENTURE CATALYST INCORPORATED

FORM 10-QSB

FOR THE PERIOD ENDED DECEMBER 31, 2003



TABLE OF CONTENTS



|                                                                                                   |  |           
|-------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                   |  | PageNumber
|PART I - FINANCIAL INFORMATION                                                                     |  |           
|                                                                                                   | 
|Item 1. Financial Statements                                                                       |  |           
|Consolidated Balance Sheets - December 31, 2003 and June 30, 2003                                  |  | 1         
|Consolidated Statements of Operations - Three months ended December 31, 2003 and December 31, 2002 |  | 2         
|Consolidated Statements of Operations - Six months ended December 31, 2003 and December 31, 2002   |  | 3         
|Consolidated Statements of Cash Flows - Six months ended December 31, 2003 and December 31, 2002   |  | 4         
|Notes to Consolidated Financial Statements                                                         |  | 5         
|Item 2.
Managements Discussion and Analysis or Plan of Operation                                  |  | 13        
|Item 3.
Controls and Procedures                                                                    |  | 23        
|                                                                                                   | 
|PART II - OTHER INFORMATION                                                                        |  |           
|                                                                                                   | 
|Item 4.
Submission of Matters to a Vote of Security Holders                                        |  | 24        
|Item 6.
Exhibits and Reports on Form 8-K                                                           |  | 24        
|Signatures                                                                                         |  | 25        



FORWARD-LOOKING
STATEMENTS



This Quarterly Report on Form 10-QSB contains
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, reflecting managements current expectations. Examples of such
forward-looking statements include our expectations with respect to our strategy. Although we believe that our expectations are based upon reasonable assumptions, there can be no assurances that our financial goals will be realized. Such
forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Numerous factors may affect our actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of us. For this
purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words, believes, anticipates, plans,
expects and similar expressions are intended to identify forward-looking statements. The important factors discussed under the caption Factors That May Affect Future Results in Part I. Item 2 - Managements Discussion
and Analysis or Plan of Operation, herein, among others, would cause actual results to differ materially from those indicated by forward-looking statements made herein and represent managements current expectations and are inherently
uncertain. Investors are warned that actual results may differ from managements expectations. We assume no obligation to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking
information.





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PART I - FINANCIAL INFORMATION



|Item 1. | Financial Statements.
|------- | ---------------------



VENTURE CATALYST INCORPORATED

CONSOLIDATED BALANCE SHEETS



|                                                                                         |  |                              |             |   |               |   |             |  
|---------------------------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ------------- | - | ----------- | -
|                                                                                         |  | December 31, 2003(unaudited) |             |   | June 30, 2003 |  
|ASSETS                                                                                   |  |                              |             |   |               |   |             |  
|Current Assets:                                                                          |  |                              |             |   |               |   |             |  
|Cash and cash equivalents                                                                |  | $                            | 7,005,259   |   |               | $ | 6,835,190   |  
|Prepaid expenses and other current assets                                                |  |                              | 344,107     |   |               |   | 195,867     |  
|Accounts receivable, net                                                                 |  |                              | 88,744      |   |               |   | 21,897      |  
|Cost in excess of billings, software contracts                                           |  |                              | 25,000      |   |               |   |            |  
|                                                                                         |  |                              |             |   |               |   |             |  
|Total current assets                                                                     |  |                              | 7,463,110   |   |               |   | 7,052,954   |  
|                                                                                         |  |                              |             |   |               |   |             |  
|Non-Current Assets:                                                                      |  |                              |             |   |               |   |             |  
|Property, plant and equipment, net                                                       |  |                              | 125,783     |   |               |   | 150,197     |  
|Capitalized software, net                                                                |  |                              | 31,820      |   |               |   | 95,469      |  
|Deposits and other assets                                                                |  |                              | 8,321       |   |               |   | 8,321       |  
|                                                                                         |  |                              |             |   |               |   |             |  
|Total non-current assets                                                                 |  |                              | 165,924     |   |               |   | 253,987     |  
|                                                                                         |  |                              |             |   |               |   |             |  
|Total assets                                                                             |  | $                            | 7,629,034   |   |               | $ | 7,306,941   |  
|                                                                                         |  |                              |             |   |               |   |             |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                                    |  |                              |             |   |               |   |             |  
|Current Liabilities:                                                                     |  |                              |             |   |               |   |             |  
|Advances of future consulting fees-Barona Tribe                                          |  | $                            | 3,069,828   |   |               | $ | 3,076,746   |  
|Accounts payable and accrued expenses                                                    |  |                              | 460,411     |   |               |   | 533,978     |  
|Estimated loss, uncompleted software contracts                                           |  |                              | 25,000      |   |               |   |            |  
|Billings in excess of costs, software contracts                                          |  |                              |            |   |               |   | 71,140      |  
|                                                                                         |  |                              |             |   |               |   |             |  
|Total current liabilities                                                                |  |                              | 3,555,239   |   |               |   | 3,681,864   |  
|Long-term debt                                                                           |  |                              | 11,414,291  |   |               |   | 10,881,330  |  
|                                                                                         |  |                              |             |   |               |   |             |  
|Total liabilities                                                                        |  |                              | 14,969,530  |   |               |   | 14,563,194  |  
|                                                                                         |  |                              |             |   |               |   |             |  
|Commitments and Contingencies                                                            |  |                              |            |   |               |   |            |  
|Shareholders Deficit:                                                                   |  |                              |             |   |               |   |             |  
|Common stock, $.001 par value, 100,000,000 shares authorized and 7,206,598 shares issued |  |                              | 7,207       |   |               |   | 7,207       |  
|Additional paid-in-capital                                                               |  |                              | 11,947,236  |   |               |   | 11,946,978  |  
|Deferred compensation                                                                    |  |                              | (878        | ) |               |   | (1,680      | )
|Retained deficit                                                                         |  |                              | (19,294,061 | ) |               |   | (19,208,758 | )
|                                                                                         |  |                              |             |   |               |   |             |  
|Total shareholders deficit                                                              |  |                              | (7,340,496  | ) |               |   | (7,256,253  | )
|                                                                                         |  |                              |             |   |               |   |             |  
|Total liabilities and shareholders deficit                                              |  | $                            | 7,629,034   |   |               | $ | 7,306,941   |  
|                                                                                         |  |                              |             |   |               |   |             |  



The accompanying notes
are an integral part of these statements.



1



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VENTURE CATALYST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

( UNAUDITED)



|                                                               |  |                                        |           |   |      |   |           |  
|-------------------------------------------------------------- |  | -------------------------------------- | --------- | - | ---- | - | --------- | -
|                                                               |  | For the three monthsended December 31, |          
|                                                               |  | 2003                                   |           |   | 2002 |  
|Revenues:                                                      |  |                                        |           |   |      |   |           |  
|Consulting services                                            |  | $                                      | 1,950,900 |   |      | $ | 357,000   |  
|Software products and services                                 |  |                                        | 882       |   |      |   |          |  
|                                                               |  |                                        |           |   |      |   |           |  
|Total revenues                                                 |  |                                        | 1,951,782 |   |      |   | 357,000   |  
|Cost of revenues:                                              |  |                                        |           |   |      |   |           |  
|Consulting services                                            |  |                                        | 727,797   |   |      |   | 15,634    |  
|Anticipated contract loss                                      |  |                                        |          |   |      |   | (408,827  | )
|Software products and services                                 |  |                                        | 292,998   |   |      |   | 176,122   |  
|                                                               |  |                                        |           |   |      |   |           |  
|Total cost of revenues                                         |  |                                        | 1,020,795 |   |      |   | (217,071  | )
|                                                               |  |                                        |           |   |      |   |           |  
|Gross profit                                                   |  |                                        | 930,987   |   |      |   | 574,071   |  
|                                                               |  |                                        |           |   |      |   |           |  
|Operating expenses:                                            |  |                                        |           |   |      |   |           |  
|General and administrative                                     |  |                                        | 639,140   |   |      |   | 728,838   |  
|Sales and marketing                                            |  |                                        | 90,955    |   |      |   | 49,058    |  
|Research and development                                       |  |                                        | 12,015    |   |      |   | 154,145   |  
|                                                               |  |                                        |           |   |      |   |           |  
|Total operating expenses                                       |  |                                        | 742,110   |   |      |   | 932,041   |  
|                                                               |  |                                        |           |   |      |   |           |  
|Operating profit (loss)                                        |  |                                        | 188,877   |   |      |   | (357,970  | )
|                                                               |  |                                        |           |   |      |   |           |  
|Other income (expense):                                        |  |                                        |           |   |      |   |           |  
|Interest income                                                |  |                                        | 14,206    |   |      |   | 30,231    |  
|Interest expense                                               |  |                                        | (277,586  | ) |      |   | (254,851  | )
|Other gains                                                    |  |                                        |          |   |      |   | 12,800    |  
|                                                               |  |                                        |           |   |      |   |           |  
|Other expense, net                                             |  |                                        | (263,380  | ) |      |   | (211,820  | )
|                                                               |  |                                        |           |   |      |   |           |  
|Net loss                                                       |  |                                        | (74,503   | ) |      |   | (569,790  | )
|                                                               |  |                                        |           |   |      |   |           |  
|Basic and diluted loss per share:                              |  |                                        |           |   |      |   |           |  
|Net loss per share - basic and diluted                         |  | $                                      | (.01      | ) |      | $ | (.08      | )
|                                                               |  |                                        |           |   |      |   |           |  
|Weighted average common shares outstanding - basic and diluted |  |                                        | 7,206,598 |   |      |   | 7,206,598 |  
|                                                               |  |                                        |           |   |      |   |           |  



The accompanying notes
are an integral part of these statements.



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VENTURE CATALYST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

( UNAUDITED)



|                                                               |  |                                      |           |   |      |   |            |  
|-------------------------------------------------------------- |  | ------------------------------------ | --------- | - | ---- | - | ---------- | -
|                                                               |  | For the six monthsended December 31, |          
|                                                               |  | 2003                                 |           |   | 2002 |  
|Revenues:                                                      |  |                                      |           |   |      |   |            |  
|Consulting services                                            |  | $                                    | 3,901,800 |   |      | $ | 2,552,000  |  
|Software products and services                                 |  |                                      | 2,698     |   |      |   |           |  
|                                                               |  |                                      |           |   |      |   |            |  
|Total revenues                                                 |  |                                      | 3,904,498 |   |      |   | 2,552,000  |  
|Cost of revenues:                                              |  |                                      |           |   |      |   |            |  
|Consulting services                                            |  |                                      | 1,330,950 |   |      |   | 2,217,051  |  
|Anticipated contract loss                                      |  |                                      |          |   |      |   | 529,873    |  
|Software products and services                                 |  |                                      | 529,735   |   |      |   | 285,395    |  
|                                                               |  |                                      |           |   |      |   |            |  
|Total cost of revenues                                         |  |                                      | 1,860,685 |   |      |   | 3,032,319  |  
|                                                               |  |                                      |           |   |      |   |            |  
|Gross profit (loss)                                            |  |                                      | 2,043,813 |   |      |   | (480,319   | )
|                                                               |  |                                      |           |   |      |   |            |  
|Operating expenses:                                            |  |                                      |           |   |      |   |            |  
|General and administrative                                     |  |                                      | 1,268,909 |   |      |   | 1,522,718  |  
|Sales and marketing                                            |  |                                      | 329,561   |   |      |   | 204,464    |  
|Research and development                                       |  |                                      | 25,730    |   |      |   | 315,179    |  
|                                                               |  |                                      |           |   |      |   |            |  
|Total operating expenses                                       |  |                                      | 1,624,200 |   |      |   | 2,042,361  |  
|                                                               |  |                                      |           |   |      |   |            |  
|Operating profit (loss)                                        |  |                                      | 419,613   |   |      |   | (2,522,680 | )
|                                                               |  |                                      |           |   |      |   |            |  
|Other income (expense):                                        |  |                                      |           |   |      |   |            |  
|Interest income                                                |  |                                      | 28,044    |   |      |   | 60,528     |  
|Interest expense                                               |  |                                      | (532,961  | ) |      |   | (484,511   | )
|Other gains                                                    |  |                                      |          |   |      |   | 15,300     |  
|                                                               |  |                                      |           |   |      |   |            |  
|Other expense, net                                             |  |                                      | (504,917  | ) |      |   | (408,683   | )
|                                                               |  |                                      |           |   |      |   |            |  
|Net loss                                                       |  |                                      | (85,304   | ) |      |   | (2,931,363 | )
|                                                               |  |                                      |           |   |      |   |            |  
|Basic and diluted loss per share:                              |  |                                      |           |   |      |   |            |  
|Net loss per share - basic and diluted                         |  | $                                    | (.01      | ) |      | $ | (.41       | )
|                                                               |  |                                      |           |   |      |   |            |  
|Weighted average common shares outstanding - basic and diluted |  |                                      | 7,206,598 |   |      |   | 7,206,598  |  
|                                                               |  |                                      |           |   |      |   |            |  



The accompanying notes
are an integral part of these statements.



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VENTURE CATALYST INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                          |  |                                      |           |   |      |   |            |  
|----------------------------------------------------------------------------------------- |  | ------------------------------------ | --------- | - | ---- | - | ---------- | -
|                                                                                          |  | For the Six Months EndedDecember 31, |          
|                                                                                          |  | 2003                                 |           |   | 2002 |  
|Increase (decrease) in cash:                                                              |  |                                      |           |   |      |   |            |  
|Cash flows provided by (used in) operating activities:                                    |  |                                      |           |   |      |   |            |  
|Net loss                                                                                  |  | $                                    | (85,304   | ) |      | $ | (2,931,363 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                                      |           |   |      |   |            |  
|Depreciation and amortization                                                             |  |                                      | 105,175   |   |      |   | 116,544    |  
|Amortization of stock-based compensation                                                  |  |                                      | 1,060     |   |      |   | 522        |  
|Gain on disposal of assets, net                                                           |  |                                      |          |   |      |   | (15,300    | )
|Anticipated contract loss                                                                 |  |                                      |          |   |      |   | 529,873    |  
|Cost of revenues related to the 1996 Consulting Agreement                                 |  |                                      |          |   |      |   | 1,057,430  |  
|Interest expense, long-term debt                                                          |  |                                      | 532,961   |   |      |   | 484,511    |  
|Changes in operating assets and liabilities                                               |  |                                      | (366,711  | ) |      |   | (384,824   | )
|                                                                                          |  |                                      |           |   |      |   |            |  
|Net cash provided by (used in) operating activities                                       |  |                                      | 187,181   |   |      |   | (1,142,607 | )
|                                                                                          |  |                                      |           |   |      |   |            |  
|Cash flows used in investing activities:                                                  |  |                                      |           |   |      |   |            |  
|Release of restricted cash                                                                |  |                                      |          |   |      |   | 133,000    |  
|Purchase of furniture and equipment                                                       |  |                                      | (17,112   | ) |      |   | (26,331    | )
|                                                                                          |  |                                      |           |   |      |   |            |  
|Net cash (used in) provided by investing activities                                       |  |                                      | (17,112   | ) |      |   | 106,669    |  
|                                                                                          |  |                                      |           |   |      |   |            |  
|Net increase (decrease) in cash                                                           |  |                                      | 170,069   |   |      |   | (1,035,938 | )
|Cash at beginning of period                                                               |  |                                      | 6,835,190 |   |      |   | 8,908,095  |  
|                                                                                          |  |                                      |           |   |      |   |            |  
|Cash at end of period                                                                     |  | $                                    | 7,005,259 |   |      | $ | 7,872,157  |  
|                                                                                          |  |                                      |           |   |      |   |            |  
|Supplemental disclosures of cash flow information:                                        |  |                                      |           |   |      |   |            |  
|Interest expense paid                                                                     |  | $                                    |          |   |      | $ |           |  
|                                                                                          |  |                                      |           |   |      |   |            |  
|Income taxes paid                                                                         |  | $                                    | 395       |   |      | $ | 4,442      |  
|                                                                                          |  |                                      |           |   |      |   |            |  



The accompanying notes
are an integral part of these statements.



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VENTURE CATALYST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003



Note 1. Basis of Presentation and Description of Business



Basis of Presentation



The unaudited financial statements for Venture Catalyst Incorporated have been prepared by us in conformity with generally accepted accounting principles
for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission. As used in this Report, the terms we, us, our and VCAT refer to Venture Catalyst
Incorporated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations.



In the opinion of management, these financial statements reflect all normal,
recurring adjustments and disclosures which are necessary for a fair presentation. The interim unaudited consolidated financial statements should be read in conjunction with our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2003
(fiscal 2003). Certain items in the financial statements for fiscal 2003 have been reclassified to conform to the current years presentation. Current and future financial statements may not be directly comparable to our historical
financial statements. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year.



Description of Business



VCAT is a provider of consulting services and technology in the gaming and hospitality industry. We operate two business divisions: consulting services
and software. Our consulting services division offers comprehensive gaming and hospitality consulting services, financial advisory services, public and governmental relations, strategic planning, technology solutions and professional and technical
expertise. We currently have one client in our consulting services division, the Barona Group of Capitan Grande Band of Mission Indians (the Barona Tribe), a federally recognized, sovereign Native American tribe. We have provided
services to the Barona Tribe since 1991. Consulting services are currently provided to the Barona Tribe pursuant to an Amended and Restated Consulting Agreement dated April 29, 1996, as modified on February 17, 1998 (the 1996 Consulting
Agreement or the Consulting Agreement), which expires March 31, 2004, unless renewed or extended. We currently provide services to the Barona Tribe in connection with their operation of the Barona Valley Ranch Resort & Casino
(the Barona Valley Ranch), a destination resort that was completed in December 2002. The Barona Valley Ranch consists of the Barona Casino, a 397-room hotel, an 18-hole championship golf course, convention space and an events center. The
Barona Valley Ranch is located in Lakeside, California, near San Diego.



Our software division is dedicated to the ongoing product and business development of Mariposa, an enterprise level customer relationship management (CRM) and marketing software product for license to businesses in the gaming
and hospitality industry. Mariposa consists of a suite of applications designed to operate in conjunction with existing player tracking and other data systems. The various Mariposa modules provide data warehousing, data mining and modeling, On-line
Analytical Processing, campaign management, customer contact management and data visualization. The applications can be licensed individually or as a fully-integrated system.



Note 2. Summary of Significant Accounting Policies



Revenue Recognition



Consulting Services.Revenue from the Barona Tribe is recorded as earned under the terms of the 1996 Consulting Agreement. Under the Consulting
Agreement, subject to the limitations discussed below, the Barona Tribe has the right to draw a minimum income stream from the net operating income of the Barona Valley Ranch (the Tribal Draw), which consists of a base amount plus
certain additional amounts calculated as a percentage of various components of the revenues of the Barona Valley Ranch.



The amount earned by and payable to us in a given month, which we refer to as the consulting fee, is determined through a series of
calculations. First, a gross consulting fee for the month is calculated in accordance with the formula set forth in the Consulting Agreement, consisting of a monthly base fee of $475,000, plus additional fees if the net operating income of the
Barona Valley Ranch, including certain adjustments in accordance with the terms of the agreement, exceeds a fixed base amount.



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VENTURE CATALYST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003



Next, our consulting fee is determined. The consulting fee is the gross consulting fee adjusted
upward or downward, if applicable, as a result of accommodating the Tribal Draw, as described below. Under the Consulting Agreement, our consulting fee for a given month is limited to the lesser of (a) the gross consulting fee calculated in
accordance with the formula described above or (b) the net operating income of the Barona Valley Ranch after the Tribal Draw is made. To the extent the net operating income of the Barona Valley Ranch is insufficient to cover both our gross
consulting fee and the Tribal Draw for a given month, the net operating income is allocated first to the Tribal Draw and our gross consulting fee is reduced accordingly. The amount by which our gross consulting fee is reduced becomes a
deferred fee which we could, under certain circumstances, be entitled to recover in subsequent months to the extent the net operating income for the Barona Valley Ranch exceeds the sum of the Tribal Draw and our gross consulting fee.
Deferred fees would have to be made up within a contract year, which is a 12 month period from April to March. If the deferred fees are not made up within the contract year, they are lost permanently.



Since our monthly consulting fee cannot be less than zero, if in a given
month the net operating income of the Barona Valley Ranch is less than the amount of the Tribal Draw, the gross consulting fee will be adjusted downward, our consulting fee for that month will be zero and a shortfall with respect to the Tribal Draw
will be created. Once a Tribal Draw shortfall has been created, the net operating income of the Barona Valley Ranch for a given month is allocated as follows: first to pay the Tribal Draw for the current month; next to eliminate the Tribal Draw
shortfall from prior months; and, finally, to our consulting fees. If the net operating income from the Barona Valley Ranch is less than the sum of the Tribal Draw for the current month and a Tribal draw shortfall exists from prior months, the
balance of the Tribal Draw shortfall is increased to the extent the net operating income was less than the Tribal Draw for the month and the Tribal Draw shortfall is carried forward indefinitely until it is eliminated in subsequent months where the
net operating income is sufficient to cover the current Tribal Draw plus any accumulated Tribal Draw shortfall. Accordingly, in any month where a Tribal Draw shortfall exists, our consulting fees are zero.



We have not earned any consulting fees pursuant to the formula under the
Consulting Agreement since October 2002 and we do not anticipate earning fees pursuant to the formula under the Consulting Agreement through the end of its current term in March 2004. However, during the three and six months ended December 31, 2003
we earned $1,951,000 and $3,902,000, respectively, in consulting fees in connection with the performance of consulting services for the Barona Tribe, which were fees voluntarily paid to us by the Barona Tribe as a sign of their good faith in the
ongoing negotiations relating to the restructuring of our Consulting Agreement. Revenue with respect to these good faith payments is recognized when the services with respect to which the payments were made were rendered, provided that we have
received indications from the Barona Tribe that they intend to make a good faith payment for that period. Based on indications from the Barona Tribe, we anticipate that they will continue to make good faith payments of $650,000 to us through the end
of the term of the Consulting Agreement in March 2004.



Software.We derive a portion of our revenues from licensing Mariposa and the sale of related services, including integration, installation, training (collectively, professional services) and maintenance and support
services (support services). We recognize revenue from software licensing and related professional services in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition,as amended by SOP 98-9. If
the arrangement between us and the purchaser does not require significant production, modification or customization of software, we will generally recognize revenue when all of the following criteria are met, as set forth in paragraph 8 of SOP 97-2:



| |  | persuasive evidence of an arrangement exists;
| | - | ---------------------------------------------



| |  | delivery has occurred;
| | - | ----------------------



| |  | the fee is fixed or determinable; and
| | - | -------------------------------------



| |  | collectibility is probable.
| | - | ---------------------------



Our standard license arrangements are multiple element arrangements that include both software products and professional services. The professional
services are essential to the functionality of the software products, which require significant modification to meet the customers purpose; therefore, in accordance with paragraph 69 of SOP 97-2, ARB No. 45 and SOP 81-1, contract accounting is
applied to both the software and service elements of the arrangement. The final determination for revenue recognition and related accounting issues is made based on the specific details for each license arrangement, which could result in the
application of alternative revenue recognition policies for individual arrangements.



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VENTURE CATALYST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003



We have been in the software business since November 2002 and, as of December 31, 2003, we have
successfully completed two full installations of Mariposa. Mariposa is a complex enterprise level software system that, in order to meet the customers functionality, must work in conjunction with the customers player tracking system and
a number of other customer data systems. Initially, as a result of the difficulty in making dependable estimates, the inherent risks associated with new technologies and our ability to fulfill our obligations under the license arrangements, we are
using the completed contract method of accounting and will recognize revenue and cost of revenues for each license arrangement at the time of completion of all elements of a multiple element arrangement. Provisions for contract adjustments and
losses are recorded in the period such items are identified. During the three months ended December 31, 2003, we recorded a loss on uncompleted software contracts of $41,000 which is included in cost of revenues, software products and services.



Billings and costs related to our software contracts are
accumulated on the balance sheet. When accumulated costs exceed related billings to date, they are recorded as an asset called costs in excess of billings, software contracts. If billings to date exceed related costs incurred, a
liability is recorded called billings in excess of costs, software contracts. Contracts are segregated for purposes of recording related assets and liabilities.



Services not included in our software contracts are billed on a time and materials or fixed fee basis and revenues related
to the additional services are recorded as services are provided.



Support services are provided pursuant to a separate contractual arrangement. Fees for support services are recognized ratably over the term of the support period. Deferred revenues are recorded when billings for support services exceed
revenues recognized to date.



We recognize revenues related to
certain out-of-pocket expenses in accordance with EITF No. 01-14 Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred (EITF 01-14). EITF 01-14 requires that certain
out-of-pocket expenses rebilled to customers be recorded as revenue versus an offset to the related expense. The out-of-pocket expenses rebilled to customers are included in revenues and are not significant.



Stock Based Compensation



Employee stock options are accounted for using the intrinsic value method
under APB No. 25 and related interpretations. Effective March 31, 2003, we adopted Statement of Financial Accounting Standards (SFAS) 148 Accounting for Stock Based Compensation Transition and Disclosure an amendment of SFAS
123 Accounting for Stock Based Compensation. SFAS 148 requires pro forma disclosure of net income or loss per share as if the fair value method of accounting for stock-based compensation has been applied for both employee and
non-employee stock option grants. It also requires disclosure of option status on a more frequent basis. The exercise price of each option equals the market price of our common stock on the date of grant; accordingly, under APB No. 25, no
compensation costs for employee grants were recognized for the options. Had compensation cost for the options been determined based on the fair value of the options at the grant dates, our net loss and loss per share would have increased to the pro
forma net loss and loss per share amounts indicated below:



|                                                                                                                                                   |  |                                |          |   |      |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                                   |  | Three months endedDecember 31, |         
|                                                                                                                                                   |  | 2003                           |          |   | 2002 |  
|Net loss:                                                                                                                                          |  |                                |          |   |      |   |          |  
|As reported                                                                                                                                        |  | $                              | (74,503  | ) |      | $ | (569,790 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all option grants, net of related tax
effects |  | $                              | (73,030  | ) |      |   | (140,014 | )
|                                                                                                                                                   |  |                                |          |   |      |   |          |  
|Pro forma                                                                                                                                          |  | $                              | (147,533 | ) |      | $ | (709,804 | )
|                                                                                                                                                   |  |                                |          |   |      |   |          |  
|Net loss per share:                                                                                                                                |  |                                |          |   |      |   |          |  
|As reported                                                                                                                                        |  | $                              | (.01     | ) |      | $ | (.08     | )
|Pro forma                                                                                                                                          |  | $                              | (.02     | ) |      | $ | (.10     | )



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VENTURE CATALYST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003



|                                                                                                                                                   |  |                              |          |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | ---------- | -
|                                                                                                                                                   |  | Six months endedDecember 31, |         
|                                                                                                                                                   |  | 2003                         |          |   | 2002 |  
|Net loss:                                                                                                                                          |  |                              |          |   |      |   |            |  
|As reported                                                                                                                                        |  | $                            | (85,304  | ) |      | $ | (2,931,363 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all option grants, net of related tax
effects |  |                              | (153,688 | ) |      |   | (294,857   | )
|                                                                                                                                                   |  |                              |          |   |      |   |            |  
|Pro forma                                                                                                                                          |  | $                            | (238,992 | ) |      | $ | (3,226,220 | )
|                                                                                                                                                   |  |                              |          |   |      |   |            |  
|Net loss per share:                                                                                                                                |  |                              |          |   |      |   |            |  
|As reported                                                                                                                                        |  | $                            | (.01     | ) |      | $ | (.41       | )
|Pro forma                                                                                                                                          |  | $                            | (.03     | ) |      | $ | (.45       | )



For the above
calculation, the fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with no expected dividends. The following table shows the weighted average assumptions for stock options:



|                         |  |                                |   |  |      |  
|------------------------ |  | ------------------------------ | - |  | ---- | -
|                         |  | Three months endedDecember 31, |  
|                         |  | 2003                           |   |  | 2002 |  
|Risk-free interest rate  |  | 2.9                            | % |  | 2.9  | %
|Expected life (in years) |  | 5                              |   |  | 7    |  
|Expected volatility      |  | 2.5                            |   |  | 2.2  |  
|                         | 
|                         |  | Six months endedDecember 31,   |  
|                         |  | 2003                           |   |  | 2002 |  
|Risk-free interest rate  |  | 2.8                            | % |  | 3.0  | %
|Expected life (in years) |  | 5                              |   |  | 7    |  
|Expected volatility      |  | 2.5                            |   |  | 2.2  |  



The Black-Scholes
option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in
our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. The pro forma calculations are not indicative of current or future operating results. The stock option exercise
date determines when the benefits may be recorded.



Capitalized Software



We account for software development costs in accordance
with SFAS 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (SFAS 86). Under SFAS 86, software costs incurred in connection with creating computer software products, which are to be
marketed, are expensed until completion of a working model. Thereafter, all software development



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VENTURE CATALYST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003



costs are capitalized until the product is completed and ready for sale. The capitalized software costs are subsequently reported at the lower of unamortized
cost or estimated net realizable value. Capitalized software costs are amortized based on current and future revenues for each product with an annual minimum equal to the straight-line amortization over the remaining estimated useful life of the
product. We periodically review capitalized software costs for impairment where the estimated fair value is less than the carrying value.



During fiscal 2002, we capitalized $247,000 of our software development costs related to Mariposa. Mariposa was completed on June 30, 2002 and no further
capitalization is expected. We are amortizing the capitalized software development costs on a straight-line basis over the estimated useful life of two years. Amortization of the capitalized software development costs, which is included in cost of
revenues, was $32,000 during the three months ended December 31, 2003 and 2002 and $64,000 during the six months ended December 31, 2003 and 2002.



Note 3. Agreements with the Barona Tribe



We have provided services to the Barona Tribe since 1991. Consulting services are currently provided to the Barona Tribe pursuant to the 1996 Consulting
Agreement, which expires March 31, 2004, unless renewed or extended.



Under the Consulting Agreement, the amount, if any, that we are paid by the Barona Tribe for services rendered is determined using a complex series of calculations that take into account (a) the monthly gross revenues of the Barona Valley
Ranch; (b) the monthly cash and non-cash expenses (and capitalized interest of the Barona Tribe related to its operations during the development project); (c) the funds that the Barona Tribe draws from the gross revenues of the Barona Valley Ranch
for the month; and (d) certain adjustments related to deferred consulting fees or distributions to the Barona Tribe from prior months. For a detailed explanation of the consulting fee calculation, see Note 2, Summary of Significant Accounting
Policies - Revenue Recognition.



During the three and six
months ended December 31, 2003 we earned $1,951,000 and $3,902,000, respectively, in consulting fees in connection with the performance of consulting services for the Barona Tribe, which were fees voluntarily paid to us by the Barona Tribe as a sign
of their good faith in the ongoing negotiations relating to the restructuring of our Consulting Agreement. Although we have been receiving good faith payments from the Barona Tribe, we have not earned any consulting fees pursuant to the Consulting
Agreement since October 2002 and we do not anticipate earning fees pursuant to the formula under the Consulting Agreement through the end of its current term in March 2004. However, based on indications from the Barona Tribe, we anticipate that they
will continue to make good faith payments of $650,000 to us through the end of the term of the Consulting Agreement in March 2004.



In January 2003, as a sign of our good faith intentions in our ongoing discussions to restructure our business relationship with the Barona Tribe and in
return for use of the Barona Tribes gaming operations as a testing and marketing platform for Mariposa, we:



| |  | granted to the Barona Tribe a perpetual, royalty-free, non-exclusive and non-transferable license to use Mariposa at the Barona Valley Ranch including all upgrades, maintenance and
support;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | entered into a profit sharing arrangement with the Barona Tribe, whereby, so long as we have a consulting agreement in place with the Barona Tribe, we will share a percentage of any
net profits generated by Mariposa on a quarterly basis, starting January 1, 2003, based on the following sliding scale:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 25% percent of the first $250,000 of the net profits per quarter;
| | - | -----------------------------------------------------------------



| |  | 30% percent of the second $250,000 of the net profits per quarter;
| | - | ------------------------------------------------------------------



| |  | 35% percent of the net profits in excess of $500,000 per quarter; and
| | - | ---------------------------------------------------------------------



| |  | agreed never to provide Mariposa or future related software products developed by us to any Native American tribe in San Diego County or within sixty-five miles of the Barona Valley
Ranch.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The operation of any type of gaming
casino on Native American land is subject to extensive Federal, state and tribal regulation. The regulatory environment regarding Native American gaming is evolving rapidly. Changes in Federal, state, or tribal law or regulations may limit or
otherwise affect Native American gaming and could therefore have a material adverse effect on our operations. In March 1999, the NIGC commenced a preliminary review of our relationship with the Barona Tribe, including a review



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VENTURE CATALYST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003



of the 1996 Consulting Agreement. The review is currently pending. In August 2003, we submitted an application for a suitability determination to the
California Gambling Control Commission. That review also is pending.



Note
4. Business Concentration and Dependence on Key Personnel



Historically, a significant portion of our revenue has been earned from the Barona Tribe. Although we expect to generate revenues from licensing Mariposa, we expect the majority of our revenues to be generated from the Barona Tribe for the
foreseeable future. During the three months ended December 31, 2003 and 2002, revenues from the Barona Tribe were $1,951,000 and $357,000, respectively, and during the six months ended December 31, 2003 and 2002, revenues from the Barona Tribe were
$3,902,000 and $2,552,000, respectively, representing substantially all of our total revenues.



Our success largely depends upon the continued contributions of L. Donald Speer, II, our Chairman of the Board and Chief Executive Officer. We have not entered into an employment agreement with Mr. Speer. The loss of
Mr. Speers services, for any reason, would have a material adverse effect on our success and prospects.



Note 5. Advances of Future Consulting Fees



We currently have an obligation called advances of future consulting fees due to the Barona Tribe of $3,070,000. These advances represent payments made to us in excess of consulting fees earned and are
unsecured and non-interest bearing. We are currently negotiating a possible new business relationship with the Barona Tribe that could, among other things, result in the release of all liabilities between the two parties, including the advances of
future consulting fees.



Note 6. Cash and Cash Equivalents



For purposes of the balance sheet and the statement of cash flows, cash
equivalents include time deposits and all highly liquid debt instruments with original maturities of three months or less.



We maintain our cash in bank deposit and checking accounts that, at times, may exceed federally insured limits. To date, we have not experienced any
losses in such accounts. Our cash equivalents consist of commercial paper and certificate of deposit instruments with maturities ranging from three weeks to three months. Interest rates earned during the six months ended December 31, 2003 on such
investments ranged from .89% to 1.17%, as compared to a range from 1.16% to 1.52% earned during the six months ended December 31, 2002.



Note 7. Net Loss Per Share



At December 31, 2003, options to purchase 5,693,250 shares of our common stock, at prices ranging from $0.13 to $12.50 per share, were not included in the
computation of diluted EPS because they were anti-dilutive for that purpose. The options expire on various future dates through December 2013. At December 31, 2002, options to purchase 4,795,312 shares of our common stock, at prices ranging from
$0.13 to $12.50 per share, were not included in the computation of diluted EPS because they were anti-dilutive for that purpose.



Note 8. Stock Options



The following table summarizes stock option activity under our 1995 Stock Option Plan and 1996 Non-employee Directors Stock Option Plan (collectively the
Plans) for the six months ended December 31, 2003:



|                               |  |                     |   |  |                        |             
|------------------------------ |  | ------------------- | - |  | ---------------------- | ------------
|                               |  | Options Outstanding |   |  | Options PricePer Share
|Outstanding, July 1, 2003      |  | 5,693,250           |   |  | $                      | 0.13 -$12.50
|Granted                        |  | 10,000              |   |  |                        | .20         
|Exercised                      |  |                    |   |  |                        |            
|Cancelled                      |  | (10,000             | ) |  | $                      | 4.00        
|                               |  |                     |   |  |                        |             
|Outstanding, December 31, 2003 |  | 5,693,250           |   |  | $                      | 0.13 -$12.50



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VENTURE CATALYST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003



Note 9. Segment Reporting



During the second quarter of fiscal 2003, we changed the way we manage our business and now operate with two business
divisions, consulting services and software, which comprise our segments. We do not allocate operating expenses, including general and administrative, sales and marketing and research and development, to our two business divisions. We have prepared
operating segment information in accordance with SFAS No. 131 Disclosures About Segments of an Enterprise and Related Information to report components that are evaluated regularly by our decision making group in deciding how to allocate
assets and resources and in assessing performance.



We do not
evaluate performance based on return on assets at the segment level and do not identify or allocate our assets by operating segments. As such, segment asset information is not disclosed. Information on segments and a reconciliation to the operating
profit (loss) before other expense for the three and six months ended December 31, 2003 and 2002 is as follows:



|                                      |  |                    |           |   |          |   |          |                              |  |   |            |   |  |   |            |  
|------------------------------------- |  | ------------------ | --------- | - | -------- | - | -------- | ---------------------------- |  | - | ---------- | - |  | - | ---------- | -
|                                      |  | ConsultingServices |           |   | Software |   |          | UnallocatedOperatingExpenses |  |   | Total      |  
|Three months ended December 31, 2003: |  |                    |           |   |          |   |          |                              |  |   |            |   |  |   |            |  
|Revenues                              |  | $                  | 1,950,900 |   |          | $ | 882      |                              |  |   |           |   |  | $ | 1,951,782  |  
|Operating profit (loss)               |  | $                  | 1,223,103 |   |          | $ | (292,116 | )                            |  | $ | (742,110   | ) |  | $ | 188,877    |  
|Three months ended December 31, 2002: |  |                    |           |   |          |   |          |                              |  |   |            |   |  |   |            |  
|Revenues                              |  | $                  | 357,000   |   |          | $ |         |                              |  |   |           |   |  | $ | 357,000    |  
|Operating profit (loss)               |  | $                  | 750,193   |   |          | $ | (176,122 | )                            |  | $ | (932,041   | ) |  | $ | (357,970   | )
|                                      |  |                    |           |  
|                                      |  | ConsultingServices |           |   | Software |   |          | UnallocatedOperatingExpenses |  |   | Total      |  
|Six months ended December 31, 2003:   |  |                    |           |   |          |   |          |                              |  |   |            |   |  |   |            |  
|Revenues                              |  | $                  | 3,901,800 |   |          | $ | 2,698    |                              |  |   |           |   |  | $ | 3,904,498  |  
|Operating profit (loss)               |  | $                  | 2,570,850 |   |          | $ | (527,037 | )                            |  | $ | (1,624,200 | ) |  | $ | 419,613    |  
|Six months ended December 31, 2002:   |  |                    |           |   |          |   |          |                              |  |   |            |   |  |   |            |  
|Revenues                              |  | $                  | 2,552,000 |   |          | $ |         |                              |  |   |           |   |  | $ | 2,552,000  |  
|Operating loss                        |  | $                  | (194,924  | ) |          | $ | (285,395 | )                            |  | $ | (2,042,360 | ) |  | $ | (2,522,679 | )



Note 10. Stock Repurchase/
Long-Term Debt



In September 1996, we entered into a Stock
Purchase and Settlement and Release Agreement with two of our shareholders, including a former director (the Stock Purchase Agreement). The terms of the Stock Purchase Agreement included (a) an aggregate cash payment of $200,000 to such
shareholders at the closing; (b) the issuance of two unsecured promissory notes in the aggregate principal amount of $3,500,000, with interest at the rate of 10% per annum, payments of interest only for the first three years commencing September 30,
1997, followed by three equal annual installments of principal repayment, with interest on the remaining balance, commencing September 30, 2000; (c) a contingent obligation (the Initial Contingent Obligations) to issue an aggregate
principal amount of $9,856,000 in unsecured promissory notes to such shareholders including $2,000,000 in principal amount of notes each year for four years and $1,856,000 in principal amount of notes to be issued in a fifth year, each note with
interest at 10%, payment of interest only for three years, followed by three equal annual installments of principal plus interest on the remaining principal balance; and (d) another contingent obligation (the Second Contingent
Obligation) to issue an additional aggregate principal amount of $3,000,000 in unsecured promissory notes (or cash, if we have closed a firm commitment underwritten public offering of securities of not less than $35,000,000 prior to the
contingencies being met). The contingent obligations will be recorded as the additional cost of the repurchase of our common stock, as each contingency or condition is met.



The Initial Contingent Obligations are contingent upon our retained earnings balance, with certain adjustments, being at
least $4,000,000 for the fiscal year ending immediately prior to the date the notes are to be issued. The test is to be made each year for eight successive years that commenced with the fiscal year ended June 30, 1997. The Initial Contingent
Obligation was met for the first four test periods; accordingly, $2,000,000 in obligations were recorded at each of June 30, 1997, 1998, 1999 and 2000, and were treated as



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VENTURE CATALYST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003



additional consideration for the common stock repurchased under the Stock Purchase Agreement. The retained earnings balance test was not met on June 30,
2001, 2002 or 2003; accordingly, we did not record the issuance of any additional notes during those fiscal years.



The Second Contingent Obligation is subject to the following conditions (a) the Barona Tribe enters into a Class III Gaming Compact with the State of
California which permits the operation of video gaming machines at the Barona Casino in San Diego County; (b) at the time that the Barona Tribe enters into a compact, we have a consulting agreement or similar contractual arrangement with the Barona
Tribe; and (c) consulting fees paid to us by the Barona Tribe relating to the Barona Casino for any consecutive 12-month period within five years after the Barona Tribe has entered into the Compact, equal or exceed one and one-half times the
consulting fees for the fiscal year ended June 30, 1996. To date, only (a) and (b) above have been satisfied; accordingly, we have not recorded the issuance of any note pursuant to the Second Contingent Obligation.



In April 2000, VCAT and the two note holders announced that $3,069,000 of
current and future corporate indebtedness would be exchanged for equity prior to its maturity. Pursuant to the terms of the exchange, a total of 579,000 shares of our restricted stock and warrants to acquire an additional 145,000 shares of our
common stock at $5.89 per share were issued to retire the debt. The warrants expired in April 2003, unexercised.



All payments pursuant to the Stock Purchase Agreement and the notes are due in September of each year and are subject to our ability to meet certain
financial tests and compliance with certain state law provisions and our Articles of Incorporation concerning repurchase transactions. Because of our current financial position, we were not required to make payments under the notes in 2003, 2002 or
2001. This does not constitute a default under the notes. However, pursuant to the terms of the stock purchase agreement and the applicable notes, interest accrued during each of 2003, 2002 and 2001 in the amounts of $1,009,000, $918,000 and
$843,000, respectively; such amounts were added to the principal amount of the debt which continues to accrue interest pending certain other events, including the permissibility of us to make payments in the future.



The remaining principal amount of the debt and accrued interest related to
this stock repurchase (including the accrued interest that was added to principal as a result of VCAT not making the scheduled payments in September 2003, 2002 and 2001) was $11,414,000 as of December 31, 2003. Based upon our current financial
position and our current sources of revenue, we do not expect that such payments will be required for the foreseeable future; therefore all amounts have been classified as non-current liabilities. However, if we are successful in
restructuring and extending our business relationship with the Barona Tribe or if we generate significant revenue under the Consulting Agreement or from Mariposa or other sources, it is possible that a portion of the long-term debt and related
interest due to the note holders will be paid in the future. In such case, we will classify the respective amount as a current liability at the time we believe such amount becomes current.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis or Plan of Operation
|------- | ---------------------------------------------------------



Overview



We are a provider of consulting services and technology in the gaming and hospitality industry. Since the second quarter of fiscal 2003, we have operated
two business divisions: consulting services and software. Our consulting services division offers comprehensive gaming and hospitality consulting services, financial advisory services, public and governmental relations, strategic planning,
technology solutions and professional and technical expertise and our software division is dedicated to the ongoing product and business development of Mariposa. As used in this Report, the terms we, us, our and
VCAT refer to Venture Catalyst Incorporated. This discussion and analysis should be read in conjunction with Managements Discussion and Analysis or Plan of Operation set forth in our Annual Report on Form 10-KSB for the year ended
June 30, 2003 (fiscal 2003).



Our Consulting
Services Division



We currently have one client in our
consulting services division, the Barona Group of Capitan Grande Band of Mission Indians (the Barona Tribe). We provide services to the Barona Tribe in connection with their operation of the Barona Valley Ranch Resort & Casino (the
Barona Valley Ranch), pursuant to an Amended and Restated Consulting Agreement dated April 29, 1996 (effective March 27, 1996), as modified on February 17, 1998 (the 1996 Consulting Agreement or the Consulting
Agreement). The Consulting Agreement expires March 31, 2004.



Under the Consulting Agreement, the amount, if any, that we are paid by the Barona Tribe for services rendered is determined using a complex series of calculations that take into account (a) the monthly gross revenues of the Barona Valley
Ranch; (b) the monthly cash and non-cash expenses (and capitalized interest of the Barona Tribe related to its operations during the development project); (c) the funds that the Barona Tribe draws from the gross revenues of the Barona Valley Ranch
for the month; and (d) certain adjustments related to deferred consulting fees or distributions to the Barona Tribe from prior months.



Under the Consulting Agreement, the Barona Tribe has the right to draw a minimum income stream from the net operating income of the Barona Valley Ranch
(the Tribal Draw), which consists of a base amount plus certain additional amounts calculated as a percentage of various components of the revenues of the Barona Valley Ranch. The amount earned by and payable to us in a given month,
which we refer to as the consulting fee, is determined through a series of calculations. First, a gross consulting fee for the month is calculated in accordance with the formula set forth in the Consulting Agreement, consisting of a
monthly base fee of $475,000, plus additional fees if the net operating income of the Barona Valley Ranch, including certain adjustments in accordance with the terms of the agreement, exceeds a fixed base amount. Next, our consulting fee is
determined. The consulting fee is the gross consulting fee adjusted upward or downward, if applicable, as a result of accommodating the Tribal Draw, as described below. Under the Consulting Agreement, our consulting fee for a given month is limited
to the lesser of the gross consulting fee calculated in accordance with the formula described above or the net operating income of the Barona Valley Ranch after the Tribal Draw is made. To the extent the net operating income of the Barona Valley
Ranch is insufficient to cover both our gross consulting fee and the Tribal Draw for a given month, the net operating income is allocated first to the Tribal Draw and our gross consulting fee is reduced accordingly. The amount by which our gross
consulting fee is reduced becomes a deferred fee which we could, under certain circumstances, be entitled to recover in subsequent months to the extent the net operating income for the Barona Valley Ranch exceeds the sum of the Tribal
Draw and our gross consulting fee. Deferred fees would have to be made up within a contract year, which is a 12 month period from April to March. If the deferred fees are not made up within the contract year, they are lost permanently.



Since our monthly consulting fee cannot be less than zero, if
in a given month the net operating income of the Barona Valley Ranch is less than the amount of the Tribal Draw, the gross consulting fee will be adjusted downward, our consulting fee for that month will be zero and a shortfall with respect to the
Tribal Draw will be created. Once a Tribal Draw shortfall has been created, the net operating income of the Barona Valley Ranch for a given month is allocated as follows: first to pay the Tribal Draw for the current month; next to eliminate the
Tribal Draw shortfall from prior months; and, finally, to our consulting fees. If the net operating income from the Barona Valley Ranch is less than the sum of the Tribal Draw for the current month and a Tribal draw shortfall exists from prior
months, the balance of the Tribal Draw shortfall is increased to the extent the net operating income was less than the Tribal Draw for the month and the Tribal Draw shortfall is carried forward indefinitely until it is eliminated in subsequent
months where the net operating income is sufficient to cover the current Tribal Draw plus any accumulated Tribal Draw shortfall. Accordingly, in any month where a Tribal Draw shortfall exists, our consulting fees are zero.



We have not earned any consulting fees pursuant to the formula under the
Consulting Agreement since October 2002 and we do not anticipate earning fees pursuant to the formula under the Consulting Agreement through the end of its current term in March 2004. However, during the six months ended December 31, 2003 we earned
$3,902,000 in consulting fees (which included six payments of $650,000) in connection with the performance of consulting services for the Barona Tribe. These fees were



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voluntarily paid to us by the Barona Tribe as a sign of their good faith in the ongoing negotiations relating to the restructuring of our Consulting
Agreement.



Our consulting fees resulting from our consulting
services to the Barona Tribe are VCATs principal source of revenues and liquidity. Based on indications from the Barona Tribe, we anticipate that they will continue to make good faith payments of $650,000 to us through the end of the term of
the Consulting Agreement in March 2004. We do not anticipate earning fees pursuant to the formula under the Consulting Agreement through the end of the current term of the Consulting Agreement because of the existing cumulative shortfall and the
formula established in the Consulting Agreement is unlikely to result in consulting fees. Accordingly, consistent with our ongoing efforts, we intend to continue to discuss with the Barona Tribe a restructuring of our consulting relationship to take
into account these factors. We anticipate that our discussions with the Barona Tribe relating to restructuring our economic relationship will coincide with our discussions relating to extending the term of the Consulting Agreement. At this time,
there can be no assurance as to whether we will be successful in negotiating a new consulting agreement with the Barona Tribe with terms which will provide predictable monthly revenues.



In January 2003, as a sign of our good faith intentions in our ongoing
discussions to restructure our business relationship with the Barona Tribe and in return for use of the Barona Tribes gaming operations as a testing and marketing platform for Mariposa, we:



| |  | granted to the Barona Tribe a perpetual, royalty-free, non-exclusive and non-transferable license to use Mariposa at the Barona Valley Ranch including all upgrades, maintenance and
support;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | entered into a profit sharing arrangement with the Barona Tribe, whereby, so long as we have a consulting agreement in place with the Barona Tribe, we will share a percentage of any
net profits generated by Mariposa on a quarterly basis, starting January 1, 2003, based on the following sliding scale:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 25% percent of the first $250,000 of the net profits per quarter;
| | - | -----------------------------------------------------------------



| |  | 30% percent of the second $250,000 of the net profits per quarter;
| | - | ------------------------------------------------------------------



| |  | 35% percent of the net profits in excess of $500,000 per quarter; and
| | - | ---------------------------------------------------------------------



| |  | agreed never to provide Mariposa or future related software products developed by us to any Native American tribe in San Diego County or within sixty-five miles of the Barona Valley
Ranch.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our Software Division



During fiscal 2002, we completed a project focused on creating a
fully-integrated customer relationship management (CRM) and marketing software product for the gaming and hospitality industry which is marketed under the name Mariposa. Mariposa consists of a suite of functionally distinct
modules, each designed to address a specific set of requirements within the gaming and hospitality industry. The modules may be licensed and deployed as an integrated solution or individually, depending upon the customers needs and financial
resources. We have made, and will continue to make, material organizational changes, including adding staff, to cultivate qualified sales leads and to maintain, support and continue development of Mariposa and/or related software products. This will
involve material additions to our expenses and additional capital. At this time, we are uncertain whether we will be able to generate enough revenue to absorb the additional expenses.



Critical Accounting Policies



Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period. Critical accounting policies are defined as policies that management believes are (a) the most
important to the portrayal of our financial condition and results of operations; and (b) that require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are
inherently uncertain.



We believe that revenue recognition and
our treatment of the anticipated contract loss and accrued consulting costs are the most critical accounting policies that impact our consolidated financial statements.



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Revenue Recognition-Consulting Services.In accordance with the governing revenue recognition
guidelines, revenue for consulting services is recognized when the services are rendered, provided all of the following criteria are met:



| |  | persuasive evidence of an arrangement exists;
| | - | ---------------------------------------------



| |  | the fee is fixed or determinable; and
| | - | -------------------------------------



| |  | collectibility is reasonably assured.
| | - | -------------------------------------



Revenue relating to the above-referenced good faith payments is recognized when the services with respect to which the payments were made were rendered,
provided that we have received indications from the Barona Tribe that they intend to make a good faith payment for that period.



Anticipated Contract Loss.If, at any time through the end of the term of the Consulting Agreement in March 2004, estimated future costs exceed
estimated future revenues under the Consulting Agreement we will record a loss related to the Consulting Agreement for the amount the estimated expenses exceed the estimated revenues. The loss will be recorded as an anticipated contract loss and
corresponding liabilities will be established for the current and non-current amounts, which are recorded as accrued consulting costs. Once recorded, the accrued consulting costs will fluctuate throughout the term of the Consulting Agreement as a
result of the timing of revenues earned and costs incurred. The accrued consulting costs will increase in any period when anticipated revenues are earned that are in excess of actual costs incurred, by the amount that the anticipated revenues earned
exceed the costs incurred, and a corresponding increase in cost of revenues will be recorded in order to reflect no income earned from the Consulting Agreement. Alternatively, when actual costs incurred exceed revenues earned in any period, the
accrued consulting costs and cost of revenues will be reduced by the amount the costs incurred exceed the revenues such that the Consulting Agreement will have no impact on our income or loss. The anticipated contract loss and related liabilities
were reduced to zero in the fourth quarter of fiscal 2003. As a result of the good faith payments received, no further losses related to the Consulting Agreement were recorded during the six months ended December 31, 2003.



Revenue Recognition-Software Products and Services.We expect to
derive a portion of our revenues from licensing Mariposa software applications and the sale of related professional services, including integration, installation, training, (collectively, professional services), and maintenance and
support services (support services). Inherent in the software revenue recognition process are significant estimates and judgments which influence the timing and amount of revenues recognized.



In accordance with the governing revenue recognition guidelines, if the
arrangement between vendor and purchaser does not require significant production, modification, or customization of software, revenue should be recognized when all of the following criteria are met:



| |  | persuasive evidence of an arrangement exists;
| | - | ---------------------------------------------



| |  | delivery has occurred;
| | - | ----------------------



| |  | the vendors fee is fixed or determinable; and
| | - | ----------------------------------------------



| |  | collectibility is probable.
| | - | ---------------------------



Our standard license arrangements are multiple element arrangements that include both software products and professional services. The professional
services are essential to the functionality of the software products, which require significant modification to meet the customers purpose; therefore, in accordance with paragraph 69 of SOP 97-2, ARB No. 45 and SOP 81-1, contract accounting is
applied to both the software and professional service elements of the arrangement. The final determination for revenue recognition policies, and related accounting issues, will be made based on the specific details of each arrangement, which could
result in the application of alternative revenue recognition policies in the future.



We have only been in the software business since November 2002, and as of December 31, 2003 we have successfully completed only two full installations of Mariposa. Mariposa is a complex enterprise level software
system that, in order to meet the customers functionality, must work in conjunction with the customers player tracking system and a number of other customer data systems. Initially, as a result of the difficulty in making dependable
estimates, the inherent risks associated with new technologies and our ability to fulfill our obligations under the license arrangements, we are using the completed contract method and will recognize revenue and cost of revenues for each license
arrangement at the time of completion of all elements of a multiple element arrangement. Provisions for contract adjustments and losses are recorded in the period such items are identified. During the three months ended December 31, 2003, we
recorded a loss on uncompleted software contracts of $41,000 which is included in the cost of revenues, software products and services.



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Billings and costs related to our software contracts are accumulated on the balance sheet. When
accumulated costs exceed related billings to date, they are recorded as an asset called costs in excess of billings, software contracts. If billings to date exceed related costs incurred, a liability is recorded called billings in
excess of costs, software contracts. Contracts are segregated for purposes of recording related assets and liabilities.



Services not included in our software contracts are billed on a time and materials or fixed fee basis and revenues related to the additional services are
recorded as services are provided.



Support services are
provided pursuant to a separate contractual arrangement. Fees for support services are recognized ratably over the term of the support period. Deferred revenues are recorded when billings for support services exceed revenues recognized to date.



Results of Operations



Three Months Ended December 31, 2003 Compared with the Three Months Ended
December 31, 2002.



Revenues



Revenues for the three months ended December 31, 2003 were $1,952,000,
compared to $357,000 during the same period last year. During the three months ended December 31, 2003, we earned $1,951,000 in consulting fees, resulting from three good faith payments from the Barona Tribe, for services provided during the period.
During the three months ended December 31, 2002, we earned $357,000 pursuant to the formula in the Consulting Agreement for services provided in October 2002.



Cost of Revenues



Cost of revenues for the three months ended December 31, 2003 were $1,021,000 as compared to ($217,000), during the three months ended December 31, 2002.
During the prior year period, the aggregate cost of revenues was negative due to the reduction in the anticipated contract loss in our consulting services division, as described below.



Cost of revenues in our consulting services division consists primarily of compensation and other personnel-related
expenses, costs of services provided by third-party consultants and service providers, client relations expenses and other direct costs related primarily to providing consulting services to the Barona Tribe. The cost of revenues during the three
months ended December 31, 2003 in the consulting services division was $728,000, compared to $16,000 recorded during the same period in fiscal 2003. During the prior year period, the actual cost of revenues incurred related to the Consulting
Agreement were $542,000, however, the cost of revenues were decreased by $542,000, attributable to the anticipated contract loss and related accrued liabilities. The increase in the actual expenses incurred related to the Consulting Agreement was
primarily the result of an increase in (a) other direct expenses related to providing services to the Barona Tribe, including, among others, charitable and political contributions, as a result of the wildfires in San Diego in 2003 and the
recall election, and (b) compensation and other personnel-related expenses. In addition, in the prior year period, we reduced the anticipated contract loss by $409,000 as a result of a change in estimates. In the fourth quarter of fiscal
2003, the remaining anticipated contract loss was reduced to zero and no adjustments to the cost of revenues were recorded during the three and six months ended December 31, 2003 as a result of the anticipated contract loss. For a more detailed
discussion of the anticipated contract loss, see Critical Accounting Policies, above.



The cost of revenues in our software division consist primarily of costs for services provided by a third-party software development firm engaged by us in
connection with maintenance and support services for Mariposa, compensation and other personnel-related expenses, losses on uncompleted software contracts, amortization of capitalized software costs and other direct costs related to Mariposa. The
cost of revenues in the software division during the three months ended December 31, 2003 increased 66% to $293,000 from $176,000 during the three months ended December 31, 2002. Expenses during the current year period increased as a result of (a)
an increase in maintenance and support services, primarily related to the ongoing enhancements and bug fixes of the initial version of Mariposa, and (b) an estimated loss of $41,000 for uncompleted software contracts. The increase was
partially offset by a decrease in consulting fees and professional service fees paid to third-parties in connection with our software business.



General Operating and Administrative Expenses



General and administrative expenses include costs associated with our finance, human resources, legal and other administrative functions. These costs
consist primarily of compensation and other personnel-related expenses, professional fees, facilities, depreciation, insurance costs and other general overhead and administrative costs. General operating and administrative



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expenses decreased 12% to $639,000 for the three months ended December 31, 2003, from $729,000 during the same period last year. The decrease was primarily
attributable to (a) a decrease in legal fees and professional services, which in the prior year period were significant as a result of the proposed merger transaction and related litigation at that time, and (b) insurance expense. The decrease was
partially offset by an increase in compensation and other personnel-related expenses.



Sales and Marketing



Sales and marketing
expenses consist primarily of compensation and other personnel-related expenses, costs of marketing programs, including trade shows and advertising, and travel and lodging expenses in connection with sales efforts. Sales and marketing expenses
during the three months ended December 31, 2003, increased 85% to $91,000 from $49,000 during the same period last year. The increase was a result of an increase in Mariposa business development efforts, including advertising, attendance at trade
shows and costs associated with product demonstrations and travel to potential clients.



Research and Development



Research and
development expenses consist primarily of costs of services provided by a third-party software development firm engaged by us in connection with the development of our software products, compensation and other personnel-related expenses for internal
engineering personnel and equipment and software used in the development of our software products. To date, other than $247,000 in capitalized costs during fiscal 2002, all costs related to the development of Mariposa have been expensed as incurred.



During the three months ended December 31, 2003, research and
development expenses decreased 92% to $12,000, from $154,000 during the same period last year. The decrease was a result of the reduction in the research and development services required by our third-party software development firm as a result of
the completion of the initial version of Mariposa. Expenses related to ongoing product development of Mariposa since the completion of the initial applications are primarily being recorded as maintenance and support and are included in
cost of revenues.



Other Income and Expense



For the three months ended December 31, 2003, interest income decreased to
$14,000 compared to $30,000 for the same period last year, as a result of lower average cash balances and lower interest rates on investments. Interest expense increased to $278,000 from $255,000, as a result of the increase in the principal amount
of notes payable related to the 1996 repurchase of shares of our common stock which is discussed in greater detail under the caption Liquidity and Capital Resources, below.



There was no other income recorded during the three months ended December 31, 2003. During the prior year period, other
income was $13,000, resulting from gains related to asset sales.



Income Tax
Benefit



During the three months ended December 31, 2003
and 2002, the income tax benefit was zero, as a result of our net operating loss carry-forward.



Six Months Ended December 31, 2003 Compared with the Six Months Ended December 31, 2002.



Revenues



Revenues for the six months ended December 31, 2003 were $3,904,000, compared to $2,552,000 during the same period last
year. During the six months ended December 31, 2003, we earned $3,902,000 in consulting fees resulting from six good faith payments from the Barona Tribe for services provided during the period. During the six months ended December 31, 2002, we
earned (a) $2,047,000 for services provided pursuant to the formula in the Consulting Agreement, (b) a $475,000 good faith payment from the Barona Tribe, and (c) $30,000 from other clients as a result of a one-time payment for financial advisory
services.



Cost of Revenues



Cost of revenues decreased 39% to $1,861,000 for the six months ended
December 31, 2003 from $3,032,000 during the six months ended December 31, 2002.



Cost of revenues in our consulting services division consists primarily of compensation and other personnel-related expenses, costs of services provided by third-party consultants and service providers, client
relations expenses and other direct costs related



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primarily to providing consulting services to the Barona Tribe. The cost of revenues during the six months ended December 31, 2003 in the consulting services
division was $1,331,000, a decrease of 52% compared to $2,747,000 recorded during the same period last year. During the prior year period, the actual cost of revenues incurred related to the Consulting Agreement were $1,160,000, however, the cost of
revenues were increased by an aggregate amount of $1,587,000, attributable to the anticipated contract loss, of which $530,000 was recorded as an increase to the anticipated contract loss. The increase in the actual expenses incurred related to the
Consulting Agreement was primarily the result of an increase in (a) other direct expenses related to providing services to the Barona Tribe, including, among others, charitable and political contributions, as a result of the wildfires in San Diego
in 2003 and the recall election, and (b) compensation and other personnel-related expenses. In the fourth quarter of fiscal 2003, the remaining anticipated contract loss was reduced to zero and no adjustments to the cost of revenues were
recorded during the six months ended December 31, 2003 as a result of the anticipated contract loss. For a more detailed discussion of the anticipated contract loss, see Critical Accounting Policies, above.



The cost of revenues in our software division consist primarily of costs for
services provided by a third-party software development firm engaged by us in connection with maintenance and support services for Mariposa, compensation and other personnel-related expenses, losses on uncompleted software contracts, amortization of
capitalized software costs and other direct costs related to Mariposa. The cost of revenues in the software division during the six months ended December 31, 2003 increased 86% to $530,000 from $285,000 during the six months ended December 31, 2002.
Expenses during the current year period increased primarily as a result of increases in (a) maintenance and support services, primarily related to the ongoing enhancements and bug fixes of the initial version of Mariposa, and (b) an
estimated loss of $41,000 for uncompleted software contracts. The increase was partially offset by a decrease in consulting fees and professional service fees paid to third-parties in connection with our software business.



General Operating and Administrative Expenses



General and administrative expenses include costs associated with our
finance, human resources, legal and other administrative functions. These costs consist primarily of compensation and other personnel-related expenses, professional fees, facilities, depreciation, insurance costs and other general overhead and
administrative costs. General operating and administrative expenses decreased 17% to $1,269,000 for the six months ended December 31, 2003, from $1,523,000 during the same period last year. The decrease was primarily attributable to a decrease in
(a) legal fees and professional services, which in the prior year period were significant as a result of the proposed merger transaction and related litigation at that time, (b) insurance expense, and (c) outside consultant costs. The decrease was
partially offset by an increase in compensation and other personnel-related expenses.



Sales and Marketing



Sales and marketing
expenses consist primarily of compensation and other personnel-related expenses, costs of marketing programs, including trade shows and advertising, and travel and lodging expenses in connection with sales efforts. Sales and marketing expenses
increased 61% to $330,000 during the six months ended December 31, 2003, from $204,000 during the same period last year. The increase was a result of an increase in Mariposa business development efforts, including, advertising, attendance at trade
shows and costs associated with product demonstrations and travel to potential clients.



Research and Development



Research and
development expenses consist primarily of costs of services provided by a third-party software development firm engaged by us in connection with the development of our software products, compensation and other personnel-related expenses for internal
engineering personnel, and equipment and software used in the development of our software products. To date, other than $247,000 in capitalized costs during fiscal 2002, all costs related to the development of Mariposa have been expensed as
incurred.



During the six months ended December 31, 2003,
research and development expenses decreased 92% to $26,000, from $315,000 during the same period last year. The decrease was a result of the reduction in the research and development services required by our third-party software development firm as
a result of the completion of the initial version of Mariposa. Expenses related to ongoing product development of Mariposa since the completion of the initial applications are primarily being recorded as maintenance and support and are
included in cost of revenues.



Other Income and Expense



For the six months ended December 31, 2003, interest income decreased to
$28,000 compared to $61,000 for the same period last year, as a result of lower average cash balances and lower interest rates on investments. Interest expense increased to



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$533,000 from $485,000, as a result of the increase in the principal amount of notes payable related to the 1996 repurchase of shares of our common stock
which is discussed in greater detail under the caption Liquidity and Capital Resources, below.



There was no other income recorded during the six months ended December 31, 2003. During the prior year period, other income was $15,000, resulting from
gains related to asset sales.



Income Tax Benefit



During the six months ended December 31, 2003 and 2002, the income tax
benefit was zero, as a result of our net operating loss carry-forward.



Liquidity and Capital Resources



Our principal
sources of liquidity at December 31, 2003 to fund ongoing operations are cash provided from operations and unrestricted cash and cash equivalents of $7,005,000. During the six months ended December 31, 2003, our cash position increased by $170,000
from the June 30, 2003 balance of $6,835,000. This increase was a result of net cash provided by operating activities of $187,000 partially offset by cash used in investing activities of $17,000.



The cash provided by operating activities of $187,000 resulted primarily from
revenue received from the Barona Tribe less cash expenditures during the period. Cash used in investing activities of $17,000 resulted from the purchase of fixed assets.



In September 1996, we entered into a Stock Purchase and Settlement and Release Agreement with two of our shareholders (the
Stock Purchase Agreement). In connection with the Stock Purchase Agreement, we incurred debt in the form of unsecured promissory notes bearing interest at a rate of 10% per annum. As of December 31, 2003, the outstanding principal amount
of debt and accrued interest was $11,414,000. In addition, the principal amount of the notes could increase by an additional $4,856,000 if certain contingencies are met. All payments pursuant to the Stock Purchase Agreement and the notes are subject
to our ability to meet certain financial tests, including tests provided under applicable law. Because of our financial condition, we were not required to make payments under the notes in September 2003, 2002 and 2001 and, based upon our current
stockholders deficit balance, estimates of fees under the Consulting Agreement and our current sources of revenues, we do not expect that we will be obligated to make a payment of principal or interest for the foreseeable future; accordingly,
all amounts have been classified as non-current liabilities. Although our failure to make payments under the notes in such circumstances does not constitute an event of default, the unpaid interest on the notes is added to the
outstanding principal which continues to accrue interest. However, if we are successful in restructuring and extending the Consulting Agreement or if we generate significant revenue under the Consulting Agreement beyond our expectations or from
Mariposa or other sources, a portion of the long-term debt due to the noteholders could be paid in the future. In such case, we would classify the respective amount as a current liability at that time.



At December 31, 2003, we have an obligation called advances of future
consulting fees due to the Barona Tribe of $3,070,000. These advances are unsecured and non-interest bearing. At the beginning of the management relationship in 1992 with the Barona Tribe, the Barona Tribe was not in a financial position to
make required investments in the Barona Casino. We invested approximately $2,500,000 into the Barona Casino for additional working capital needs that was accounted for as revenue to the Barona Casino and expensed by us due to the uncertainty of
recovery. As the Barona Casino became profitable between 1992 and 1994, $2,500,000 of the initial profits of the Barona Casino were distributed to us after all draws, distributions and payments were made to the Barona Tribe and were recorded on our
books as an obligation called advances of future consulting fees. The Barona Casino established a corresponding receivable. The remaining balance in advances of future consulting fees at December 31, 2003 of $570,000 is due primarily to timing
differences between payments to us and consulting revenues earned and recognized since that time. Forgiveness of this liability is one of the issues under consideration by us and the Barona Tribe in connection with the ongoing negotiations to
restructure our business relationship with the Barona Tribe. We are not certain on how this issue will ultimately be resolved.



In connection with a $200,000,000 loan obtained by the Barona Tribe in July 2001, we entered into a Reaffirmation, Consent and Amendment of Intercreditor
and Subordination Agreement (Subordination Agreement). The Subordination Agreement permits consulting fees or other amounts owed to us to be paid up to the amounts permitted under the debt coverage ratios set forth in the permanent
financing loan agreement. No payments may be made if there is a default under the terms of the permanent financing loan agreement that has not been cured or waived. As of December 31, 2003, we are not aware of any default by the Barona Tribe of any
of the terms of the loan agreement. Our consulting fees will still be subject to the Subordination Agreement if we enter into a new business relationship with the Barona Tribe pursuant to terms substantially similar to those currently being
discussed.



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Based upon the current level of operations, we believe that the cash generated from operations and
available cash and cash equivalents will be adequate to meet our operating expenses and to service our debt requirements as they come due for at least the next twelve months. Our consulting agreement with the Barona Tribe expires in March 2004 and
our consulting fees resulting from our consulting services to the Barona Tribe are VCATs principal source of revenues and liquidity. Although, based upon indications from the Barona Tribe, we expect to receive good faith payments of $650,000
through the end of the current term of the Consulting Agreement in March 2004, we do not anticipate earning fees pursuant to the formula under the Consulting Agreement through the end of the current term of the Consulting Agreement in March 2004.
Consistent with our ongoing efforts, we intend to continue to discuss with the Barona Tribe a restructuring and extending of our consulting relationship. Unless or until we enter into a new consulting agreement with the Barona Tribe and our
consulting fees and other current sources of revenue become more certain and predictable, there can be no assurance that our business will generate sufficient cash flow from operations to sustain our long-term working capital, capital expenditure
and debt service needs.



Factors That May Affect Future Results



Risks Related to our Financial Condition



We have incurred losses recently and our future
sources of revenues are uncertain.



We incurred net losses
of $85,000 during the six months ended December 31, 2003 and $1,430,000 during fiscal 2003. At December 31, 2003, our total liabilities exceeded our assets by $7,340,000. Although we anticipate receiving monthly fee payments from the Barona Tribe of
$650,000 through the end of the current term of the Consulting Agreement in March 2004, the Barona Tribe is not obligated to make these payments to us under the terms of the Consulting Agreement; therefore, our revenues remain uncertain as we
continue to explore restructuring and extending our business relationship with the Barona Tribe. Additionally, we are uncertain as to the amount and timing of revenues from other sources, including Mariposa as we evaluate the extent of the
acceptance of Mariposa in the marketplace and we evaluate the demand in the marketplace for other gaming related consulting services which we are currently offering.



We have limited resources to grow our business.



Our cash and cash equivalents were $7,005,000 as of December 31, 2003. The uncertainty and unpredictability of our future
revenue may reduce our ability to pursue or exploit additional business opportunities. If we are unable to pursue or exploit future business opportunities, it could have an adverse effect on the growth of our business.



Risks Related to our Consulting Agreement and Business Concentration
with the Barona Tribe



Our revenues are currently
dependent upon one client, the Barona Tribe.



We have
historically derived substantially all of our revenue from providing consulting services to the Barona Tribe. The Consulting Agreement expires in March 2004 and, although our intention is to extend our business relationship beyond the term of the
Consulting Agreement, we are not certain that the Barona Tribe will agree to an extension. If we are successful in extending our relationship, we are uncertain as to the term of such extension or the fees we will be entitled to under such extension.
Loss of the Barona Tribe as a client, or a material reduction in the fees we earn from the Barona Tribe, would have a material adverse effect on our business and may result in our inability to continue to operate the business.



Our revenues from the Barona Tribe are subject to significant fluctuation
and uncertainty.



During the past two fiscal years, we
have derived consulting revenues earned under the Consulting Agreement and from voluntary payments made by the Barona Tribe to us relating to consulting services rendered to them in connection with their gaming operations. Revenues and profits
related to the operation of the Barona Valley Ranch are factors in determining the consulting revenues earned by us under the Consulting Agreement. Accordingly, an understanding of the uncertainties associated with operating a gaming property are
important to an understanding of why our revenues may fluctuate or be uncertain from time to time.



In general, gaming revenues are difficult to estimate because of a variety of factors including general economic conditions, competition with other gaming
venues for patrons and sporadic high-end play results. For example, the recent expansion of gaming activities in California has resulted in experienced gaming companies negotiating or entering into contracts with Native American tribes in California
and there has been an increase in the number of Native American casinos operating in the San Diego marketplace. The number of casinos has grown from four to ten since 2000 and there are additional casinos that will be opening, or that are attempting
to open, in this area, all of which may be competing for the same customers. This increased competition could reduce the profit levels achieved at the Barona Valley Ranch which could adversely impact our ability to



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restructure and/or extend our business relationship with the Barona Tribe, or if we are successful in restructuring and/or extending the relationship, the
amount of fees earned by us from the Barona Tribe under such extension.



The gaming and hospitality industry is also particularly susceptible to global geopolitical events, such as terrorist attacks, acts of war or other hostilities and natural disasters such as the wildfires in the San Diego area and elsewhere
in Southern California in 2003. These extraordinary events also may adversely affect the Barona Valley Ranch and could have an adverse effect on our consulting revenues.



Accordingly, we anticipate that our revenues may continue to be subject to significant fluctuations and uncertainties.
Although we anticipate receiving payments from the Barona Tribe of $650,000 a month through the end of the current term of the Consulting Agreement in March 2004, the Barona Tribe is not obligated to make fee payments to us under the terms of the
Consulting Agreement. Our revenues remain uncertain for the foreseeable future as we continue to explore restructuring and extending our business relationship with the Barona Tribe.



We have entered into subordination agreements that, under certain
circumstances, may preclude the Barona Tribe from making payments to us for consulting services.



Our right to receive fees from the Barona Tribe is subordinated to certain senior debt of the Barona Tribe. In connection with two of the Barona
Tribes financings, we entered into agreements pursuant to which the Barona Tribe under the applicable financing documents shall pay no fees to us if there is a default. In addition, one of those agreements also limits the Barona Tribes
ability to make payments to us if the debt coverage ratios set forth in the loan agreement are not met. Moderate or severe economic downturns or adverse conditions, nationally and especially in Southern California, may negatively affect the Barona
Valley Ranchs operations which may result in the Barona Tribe being precluded from making payments to us. If, as a result of negative economic or other adverse conditions, the Barona Tribe is precluded from making payments to us during a time
when the Consulting Agreement is in effect, we will still be obligated to provide services to the Barona Tribe under the Consulting Agreement. In connection with providing such services, it is possible that we will deplete our cash and cash
equivalents. If that should occur, and we are not able to generate alternative sources of revenues to finance our operations, we will not be able to continue to operate our business.



Approval of the Consulting Agreement by appropriate regulatory authorities is still pending.



Appropriate regulatory authorities have not yet approved the Consulting
Agreement. If the Consulting Agreement is not approved or is significantly modified by regulatory authorities to our detriment, such action could have a material adverse effect on our business and financial condition. In addition, the regulatory
review could result in our being required to pay fines or incur additional expenses, all of which could have a material adverse effect on our business and financial condition.



Our application for a determination of suitability by appropriate regulatory authorities is still pending.



In August 2003, we submitted an application for a
suitability determination to the California Gambling Control Commission (the CGCC). If the CGCC determines that we would not qualify for a gambling license under state law, the Barona Tribe would be required to terminate the Consulting
Agreement. There can be no assurance that the CGCC will approve our application for a suitability determination, and failure to receive such approval may have a material adverse effect on our business and financial condition.



Risks Related to Mariposa and our Software Business



We may not be able to compete in the CRM software market.



We compete in the highly competitive CRM software market.
A principal source of competition is the internal information technology departments at potential customers, which may develop systems that provide for some or all of the functionality of our applications. Our products compete with products or
solutions offered by numerous competitors. Compared to us, many of these competitors have a longer operating history, greater name recognition, larger customer bases and significantly greater financial resources. This may place us at a disadvantage
in responding to our competitors pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. Competitive pressures and our perceived viability in this market may make it difficult for us to
acquire and retain customers.



If we fail to keep pace with
technological innovation, improve our existing products, or develop new products, our application suite could become obsolete.



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The market for CRM software products is marked by rapid technological change, frequent new product
introductions, uncertain product life cycles, changes in client demands and evolving industry standards. If we are unable to market Mariposa on a timely and cost-effective basis, we may not generate revenues from the sale or license of the software.
In marketing Mariposa, we may:



| |  | fail to respond to technological changes in a timely or cost-effective manner;
| | - | ------------------------------------------------------------------------------



| |  | encounter software products, capabilities or technologies developed by others that render Mariposa obsolete or noncompetitive or that shorten the life cycle of Mariposa;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | experience difficulties that could delay or prevent the successful development, introduction and marketing of Mariposa; or
| | - | --------------------------------------------------------------------------------------------------------------------------



| |  | fail to achieve market acceptance of Mariposa.
| | - | ----------------------------------------------



If our product does not operate with the wide variety of hardware, software and operating systems used by our current and potential customers, our
revenues would be harmed.



We currently market Mariposa to
a customer base that uses a wide variety of constantly changing hardware, software applications, operating and other systems. Mariposa will gain broad market acceptance only if it can support a wide variety of hardware, software applications,
systems and standards, including those developed in the future.



Mariposa could contain undetected errors or failures.



If we license Mariposa, it may contain undetected errors or failures. This may result in the loss of, or delay in, the market acceptance of Mariposa and could cause us to incur significant costs to correct errors or failures or to pay
damages suffered by customers as a result of such errors or failures.



Errors in Mariposa also may be caused by defects in third-party software incorporated into our software. If so, we may not be able to fix the defects without the cooperation of the software providers. Since these defects may not be as
significant to the software provider as they are to us, we may not receive the rapid cooperation that it requires. We may not have the contractual right to access the source code of third-party software and, even if we have the right to access the
source code, we may not be able to fix the defect. Our customers could seek significant compensation from us for their losses resulting from defects in our products. Even if unsuccessful, a product liability claim brought against us could be time
consuming and costly.



We rely on a third-party services
firm for development, installation, integration and support in connection with our software business.



We rely on a third-party software development firm to handle the majority of our software development efforts. In addition, we use a third-party service
firm to support our products and to assist our customers with the installation and integration of our products. If we are unable to maintain and develop relationships with third-party firms to provide these services, we would be required to hire and
train additional personnel, which would result in higher expenses and delays in our ability to generate revenue.



If we are unable to protect our intellectual property or become subject to intellectual property infringement claims, we may lose a valuable asset or
incur costly and time-consuming litigation.



Our success
depends in part on the development and protection of the proprietary aspects of our technology as well as our ability to operate without infringing the proprietary rights of others. To protect our proprietary technology, we rely primarily upon the
protections afforded under the trade secret, copyright, trademark, and patent laws, as well as upon confidentiality procedures and contractual restrictions. Despite our efforts to protect our proprietary rights and technology, unauthorized parties
may attempt to copy aspects of our products, obtain the source code to our software, or use other information that we regard as proprietary. Such parties may also attempt to develop software competitive to ours. Our means of protecting our
proprietary rights may not be adequate, and our competitors may independently develop similar technology or duplicate our products or software. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources that could have a
material adverse effect on our business, operating results, and financial condition.



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We have filed four U.S. patent applications, three of which remain pending in the Patent Office. We have
also filed two corresponding international patent applications. In addition, we may file additional patent applications in the future. It is possible that these patent applications will not issue as patents and that, even if issued, the validity or
enforceability of such patents may be successfully challenged. It is also possible that we may not develop additional proprietary products or technologies that are patentable; that any patents issued to us may fail to provide us with competitive
advantage and that the patents of others may materially harm our ability to do business. In the future, a third party may bring suit claiming that our products or software infringe its patents, trade secrets or copyrights. Any claims, with or
without merit, could be costly and time-consuming to defend, divert our managements attention, or cause product delays. If our products or software were found to infringe a third partys proprietary rights, we could be required to enter
into royalty or licensing agreements to be able to license or sell our products or software. Royalty and licensing agreements, if required, may not be available on terms that are acceptable to us (or at all), which could materially harm our
business.



Other Risks



Our business is subject to strict regulation by gaming authorities.



We operate in a highly regulated industry and our ability
to operate in certain jurisdictions could be subject to extensive federal, state, local and foreign regulation by various gaming authorities. Although the laws and regulations of the various jurisdictions in which we may operate vary in their
technical requirements, and are subject to amendment from time to time, virtually all these jurisdictions could require licenses, permits, documentation of the qualification, including evidence of integrity and financial stability, and other forms
of approval for us, as well as for our officers, directors, major shareholders and key personnel. We will attempt to obtain all government licenses, registrations, findings of suitability, permits and approvals necessary, however, there can be no
assurance those licenses, registrations, findings of suitability, permits, or approvals will be granted. Additionally, there can be no assurance that any regulatory agency will not enact new rules or change regulations that would negatively impact
our ability to operate within such jurisdictions.



We are
dependent upon our Chairman and Chief Executive Officer.



Our success largely depends upon the continued contributions of L. Donald Speer, II, our Chairman of the Board and Chief Executive Officer. The loss of Mr. Speers services, for any reason, would have a material adverse effect on our
success and prospects. We have not entered into an employment agreement with Mr. Speer. If Mr. Speer were to leave VCAT or become unavailable, there can be no assurance that we will be able to find a suitable replacement, particularly in connection
with our ability to perform consulting services to the Barona Tribe.



We depend upon our key personnel.



Our future
performance also depends in significant part upon the continued service of our key technical and senior management personnel. We have a small number of employees and our dependence on maintaining our relationships with key employees is particularly
significant.



Our common stock is subject to wide
fluctuations.



The trading price of our common stock has
been, and will likely continue to be, subject to wide fluctuations because of regulatory developments, quarterly variations in our operating results, the market where our common stock trades, announcements of new services or business activities by
us or our competitors, general market fluctuations and other events and factors. These factors, coupled with the small public float, have in the past, and could in the future, result in wide fluctuations in the market-trading price. Our common stock
currently trades on the Over-The-Counter (OTC) Bulletin Board. This generally is considered to be a less efficient trading market and our stock price as well as liquidity in our common stock may be adversely affected. Low-priced stocks
are subject to additional risks, including additional state regulatory requirements and the potential loss of effective trading markets.



|Item 3. | Controls and Procedures
|------- | -----------------------



Based on an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934, as amended), our Chief Executive Officer and Chief Financial Officer have
concluded that such controls and procedures were effective as of the end of the period covered by this report. In connection with such evaluation, no change in our internal control over financial reporting occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II - OTHER INFORMATION



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



The Annual Meeting of Stockholders of Venture Catalyst Incorporated was held on December 5, 2003 for the purpose of (a) electing five directors to the Board of Directors, and (b) voting on a proposal to approve an
Option Exchange Program pursuant to which our officers, directors and employees who hold options issued under our 1995 Stock Option Plan, as amended, may elect to surrender such options for cancellation in exchange for new options to purchase a
lesser number of shares of common stock that will be granted at least six months and one day from the date of cancellation of the surrendered options with an exercise price per share equal to the average of the closing bid and ask prices of our
common stock on the OTC Bulletin Board on the date of grant.



John Farrington, Jana McKeag, Greg Shay, Cornelius E. (Neil) Smyth, and L. Donald Speer, II each was elected to serve as a director of VCAT for a one-year term expiring at the 2004 Annual Meeting of Stockholders. The tabulation
of the votes cast for the election of directors was as follows:



|                            |  |           |  |               
|--------------------------- |  | --------- |  | --------------
|Nominee                     |  | Votes For |  | Votes Withheld
|John Farrington             |  | 5,755,678 |  | 159,418       
|Jana McKeag                 |  | 5,773,563 |  | 141,533       
|Greg Shay                   |  | 5,775,083 |  | 140,013       
|Cornelius E. (Neil) Smyth |  | 5,756,153 |  | 158,943       
|L. Donald Speer, II         |  | 5,772,598 |  | 142,498       



The proposal to approve the Option
Exchange Program was approved. The tabulation of votes was as follows:



|          |  |               |  |             |  |                 
|--------- |  | ------------- |  | ----------- |  | ----------------
|Votes For |  | Votes Against |  | Abstentions |  | Broker Non-Votes
|3,004,978 |  | 210,566       |  | 123,213     |  | 2,576,339       



|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------



(a) Exhibits.



The
Exhibits listed below are hereby filed with the U.S. Securities and Exchange Commission (the Commission) as part of this Quarterly Report on Form 10-QSB.



|           |  |                                                                                                                                                            
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                
|           | 
|31.1       |  | Certification of Chief Executive Officer of Venture Catalyst Incorporated, Pursuant to Rule 13a-14 of the Securities Exchange Act.                         
|           | 
|31.2       |  | Certification of Chief Financial Officer of Venture Catalyst Incorporated, Pursuant to Rule 13a-14 of the Securities Exchange Act.                         
|           | 
|32.1       |  | Certification of Chief Executive Officer of VCAT, 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 of VCAT, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



(b) Reports on Form
8-K.



During the three months ended December 31, 2003, we
filed one Current Report on Form 8-K dated, and filed with the Commission, on November 12, 2003, reporting our operating results for the three months ended September 30, 2003.



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SIGNATURES



In accordance with the
requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  |  |  |                                                   |  |                            |  |                                                                                                                          
|----------------------- |  |  |  | ------------------------------------------------- |  | -------------------------- |  | -------------------------------------------------------------------------------------------------------------------------
|                        |  |  |  | VENTURE CATALYST INCORPORATED, a
Utah Corporation
|                        |  |  | 
|Date: February 13, 2004 |  |  |  | By:                                               |  | /s/    L. DONALD SPEER, II
|                        |  |  |  |                                                   |  |                            | 
|                        |  |  |  |                                                   |  |                            |  | L. Donald Speer, II Chairman of the Board and Chief Executive Officer (Authorized Signatory, Principal Executive
Officer)



|                        |  |  |  |     |  |                       |  |                                                                                                                                                          
|----------------------- |  |  |  | --- |  | --------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|                        |  |  | 
|Date: February 13, 2004 |  |  |  | By: |  | /s/    KEVIN MCINTOSH
|                        |  |  |  |     |  |                       | 
|                        |  |  |  |     |  |                       |  | Kevin McIntosh Senior Vice President, Chief Financial Officer, Secretary and Treasurer (Authorized Signatory, Principal Financial and Accounting Officer)



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Exhibit Index



|            |  |                                                                                                                                                            
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                
|            | 
|31.1        |  | Certification of Chief Executive Officer of Venture Catalyst Incorporated, Pursuant to Rule 13a-14 of the Securities Exchange Act.                         
|            | 
|31.2        |  | Certification of Chief Financial Officer of Venture Catalyst Incorporated, Pursuant to Rule 13a-14 of the Securities Exchange Act.                         
|            | 
|32.1        |  | Certification of Chief Executive Officer of VCAT, 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 of VCAT, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



26