**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

**FORM 10-K**

(Mark One)
| **x**      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                               |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | **For the fiscal year ended  December 31, 2006**                                                                                                                                                                                                                                                             |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period  from              to              ** |
| ** ** | **Commission file number 0-23588**                                                                                                                                                                                                                                                                                |

 

****

**GAMING PARTNERS INTERNATIONAL CORPORATION**

(Exact name of registrantas specified in its charter)

| **NEVADA**                | **88-0310433**                        |
|---------------------------|---------------------------------------|
| (State of  incorporation) | (I.R.S. Employer  Identification No.) |

 

**1700 South IndustrialRoad, Las Vegas, Nevada 89102**

(Address of principalexecutive offices)

**Registrant’s telephone number, including area code:  (702)384-2425**

Registrant’swebsite:  **www.gpigaming.com**

Securities registeredpursuant to Section 12(b) of the Act:  **None**

Securities registeredpursuant to Section 12(g) of the Act:  **Common Stock**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. o Yes x No

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  x Yes  o No

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer in Rule 12b-2 of the Exchange Act (check one):Large accelerated Filer o Accelerated Filer o Non-accelerated filer x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Act).  o Yes  x No

The aggregate market valueof voting and non-voting stock held by non-affiliates of the registrant as of June 30,2006, based on the closing price as reported on the NASDAQ National Market of$24.40 per share:  **$71,015,736.**

The number of sharesoutstanding of each of the registrant’s classes of common stock, as of May 1,2007 was **8,103,401**shares of Common Stock.

**Documents Incorporated byReference:**

None

 

----

**TABLEOF CONTENTS**

| PART I                                                                               | 1                                                                                                                       |
|--------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
| Item 1.                                                                              | Business                                                                                                                | 1 |
| Item 1A.                                                                             | Risk Factors                                                                                                            | 15 |
| Item 1B.                                                                             | Unresolved  Staff Comments                                                                                              | 18 |
| Item 2.                                                                              | Properties                                                                                                              | 18 |
| Item 3.                                                                              | Legal  Proceedings                                                                                                      | 19 |
| Item 4.                                                                              | Submission  of Matters to a Vote of Security Holders                                                                    | 19 |
| PART II                                                                              | 20                                                                                                                      |
| Item 5.                                                                              | Market for Registrant’s  Common Equity and Related Stockholder Matters,  and Issuer Purchases of Equity Securities | 20 |
| Item 6.                                                                              | Selected Financial Data                                                                                                 | 22 |
| Item 7.                                                                              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             | 24 |
| Item 7A.                                                                             | Quantitative  and Qualitative Disclosures about Market Risk                                                             | 38 |
| Item 8.                                                                              | Financial  Statements and Supplementary Data                                                                            | 39 |
| Reports  of Independent Registered Public Accounting Firm                            | 41                                                                                                                      |
| Consolidated  Balance Sheets                                                         | 43                                                                                                                      |
| Consolidated  Statements of Income                                                   | 44                                                                                                                      |
| Consolidated  Statements of Stockholders’ Equity and Other Comprehensive Income | 45                                                                                                                      |
| Consolidated  Statements of Cash Flows                                               | 46                                                                                                                      |
| Notes  to Consolidated Financial Statements                                          | 47                                                                                                                      |
| Item 9.                                                                              | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                                   | 72 |
| Item 9A.                                                                             | Controls and Procedures                                                                                                 | 72 |
| Item  9B.                                                                            | Other  Information                                                                                                      | 73 |
| PART III                                                                             | 73                                                                                                                      |
| Item 10.                                                                             | Directors and Executive Officers of the Registrant                                                                      | 73 |
| Item 11.                                                                             | Executive  Compensation                                                                                                 | 78 |
| Item 12.                                                                             | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters         | 82 |
| Item 13.                                                                             | Certain  Relationships and Related Transactions                                                                         | 84 |
| Item 14.                                                                             | Principal  Accountant Fees and Services                                                                                 | 85 |
| PART IV                                                                              | 86                                                                                                                      |
| Item 15.                                                                             | Exhibits,  Financial Statement Schedules                                                                                | 86 |

 

----

**PART I**

**Item 1.**                        Business.

*The following Business section containsforward-looking statements, which involve risks and uncertainties. Our actualresults could differ materially from those anticipated in these forward-lookingstatements as a result of certain factors. See Item 1A, “Risk Factors.”*

**Company Overview**

Effective September 1, 2004, Paul-Son GamingCorporation, a Nevada corporation, completed its name change to Gaming PartnersInternational Corporation (“GPIC”). GPIC and each of its subsidiaries are sometimescollectively referred to herein as the “Company,” “us,” “we” or “our.” The namechange was approved by a vote of stockholders at the Company’s annual meetingheld on May 26, 2004. The Company’s established brand names such asPaulson®, Bourgogne et GrassetÒ,or B&G, Bud JonesÒ, and T-K®,remain unchanged. GPIC’s subsidiary, Paul-Son Gaming Supplies, Inc.,changed its name to Gaming Partners International USA, Inc. (“GPI USA”). GPIC’ssubsidiary, Etablissements Bourgogne et Grasset S.A., changed its name toGaming Partners International SAS (“GPI SAS”). GPI USA’s subsidiary, Paul-SonMexicana, S.A. de C.V., changed its name, effective as of January 22,2005, to GPI Mexicana S.A. de C.V. (“GPI Mexicana”).

On September 12, 2002, the businesses of GPIC,GPI SAS and GPI SAS’ then wholly-owned subsidiary, The Bud Jones Company, Inc.(“Bud Jones”) were combined, with GPI SAS and Bud Jones becoming wholly-ownedsubsidiaries of GPIC, or the Combination. The Combination was accounted for asa purchase transaction for financial accounting purposes. Because the formerGPI SAS stockholders owned a majority of the outstanding GPIC common stock as aresult of the Combination, the Combination was accounted for as a reverseacquisition in which GPI SAS was the purchaser of GPIC. On December 31,2002, Bud Jones merged into GPI USA, which was a wholly-owned subsidiary ofGPIC, and GPI USA was the surviving entity. Bud Jones was a gaming supplymanufacturing company, which was also headquartered in Las Vegas. Both former operations(GPI USA and Bud Jones) were consolidated into one facility at the Company’sheadquarters in Las Vegas, Nevada with the new name of GPI USA. (See Part II—Item 8.Financial Statements and Supplementary Data—Notes to Consolidated FinancialStatements—Note 1.)

GPI USA, formerly Paul-Son Gaming Supplies, Inc.,was founded in 1963 by our former Chairman, Paul S. Endy, Jr., andinitially manufactured and sold dice to casinos in Las Vegas. The former BudJones Company was founded in 1965 by Bud Jones and this entity eventuallymerged into GPI USA. GPI SAS, formerly Bourgogne et Grasset, was formed by Mr. Bourgogneand Mr. Grasset in 1923 and became operational in 1925 in Beaune, France.

We believe we are one of the leading manufacturers andsuppliers of casino table game equipment in the world. Our business activitiesinclude the manufacture and/or supply of gaming chips, table layouts, playingcards, dice, gaming furniture, roulette wheels and miscellaneous tableaccessories such as chip trays, drop boxes and dealing shoes, which are used inconjunction with casino table games such as blackjack, poker, baccarat, crapsand roulette.

We are headquartered in Las Vegas, Nevada withmanufacturing facilities located in Las Vegas, Nevada; San Luis Rio Colorado, Mexico;and Beaune, France. Our sales offices are in Las Vegas, Nevada; Atlantic City,New Jersey; and Gulfport, Mississippi for the United States, and Beaune, Francefor the remainder of the world. Through our GPI USA subsidiary, we sell ourcasino products manufactured in North America to licensed casinos primarilythroughout the United States and Canada. Through our GPI SAS subsidiary, wesell our European-manufactured casino products and some North American productsto licensed casinos internationally primarily in countries other than theUnited States. Our revenues are derived primarily from the sale of casino tablegame products to casinos throughout the world. Most of our 

----

products are sold directlyto end-users. In some regions of the world, however, we sell throughdistributors. We also sell our non-casino poker chips to a wholesaler in theUnited States.

We manufacture products tomeet particular customer and industry specifications, which may include a widerange of shapes and sizes, varied color schemes and other graphics, andnumerous security and anti-counterfeit features. The useful lives of ourproducts typically range from several hours in the case of playing cards anddice, to several months in the case of layouts, and several years in the caseof casino chips and gaming furniture. As such, our primary business is theongoing replacement sale of these products and providing initial products tonew casinos. When a new casino opens, we strive to supply most of the productsrequired to operate the casino’s table games. When successful, revenues aregenerated both from the initial sale to the new casino and on a continuingbasis as the new casino becomes part of our primary customer base.

**Product Segments**

We operate in oneoperating segment—casino game equipment products in multi-geographic areas. (SeePart II—Item 8. Financial Statements and Supplementary Data—Notes toConsolidated Financial Statements—Note 14.)

**Products**

***Gaming Chips***

We design and manufacture gaming chips, includingcasino chips, plaques and jetons (the European equivalent of casino chips) tomeet a variety of customer preferences and specifications, including size,weight, ability to stack, ease of handling, texture, color, graphics,durability, security and anti-counterfeit features. Because casino chips,jetons and plaques, like real currency, are subject to counterfeiting, weincorporate a variety of custom security and anti-counterfeit features intoeach chip. Our most sophisticated anti-counterfeiting feature is a radiofrequency identification device, or “RFID,” which is a microchip that can beembedded in our gaming chips making them extremely counterfeit resistant.

A casino will generally order all of its gaming chips,including replacement chips after wear and usage, from a single supplier. Accordingly,we strive to become the original chip supplier to a casino upon its opening. Anew casino order will typically include at least five to seven distinct chipdenominations, colors and styles, ranging in denominations from $0.50 to inexcess of $1 million. Our selling price is variable, based on thecustomization, quantities, design and security features, with a price rangegenerally between $0.75 and $2.50 per chip in the United States. A typicalPaulson® brand clay chip with a microchip will sell for approximately $1.90 or$2.50 per chip depending on the RFID frequency. Given this relatively low priceand a gaming chip’s expected lifespan of several years, we believe thatcompetition is generally based upon factors other than price. In 2006, we soldand manufactured approximately 25 million gaming chips, including casinogaming chips, plaques and jetons.

Gaming chips can bedivided into three basic families: (a) European-style jetons and plaques; (b) American-stylecasino chips; and (c) commemorative chips. Jetons, plaques and all casinochips can also be manufactured with an embedded RFID microchip. Casino chipsaccounted for approximately 72% of total sales in 2006.

*European-styleJetons and Plaques*

Jetons and plaques areEuropean-style casino chips. Our jetons and plaques are manufactured by GPI SASat our facility in France. Jetons are circular with standard diameters in 13different sizes, ranging from 32 mm to 60 mm. Plaques are rectangular, squareor oval with standard sizes ranging from 30 mm x 30 mm to 151 mmx 105 mm. Jetons and plaques are used mainly for traditional Europeangames and also 

2

----

extensivelyin Asian countries. Jetons and plaques are made of laminated cellulose acetatewith a very large range of colors, shapes and security and anti-counterfeitcomponents, such as, UV pigment, number serialization, laser pigment or “LaserLockTM”, gold lace material and RFID technology. GPI SAS created its originalproduct line in 1925 and has held a leading position in this market since thattime. Our production capacity in France for European-style jetons and plaquesis approximately 5 to 8 million units on a three shift basis.

*American-styleCasino Chips*

Casino chips areused worldwide for games originating in the United States. Originally, casinochips in the United States were made of clay and called “clay chips.” Clay wasreplaced many years ago by plastic materials. There are currently three maintechnologies used to produce these types of chips: injection molding,sublimation and compression molding. We produce casino chips using all three ofthese methods. GPI USA manufactures our American-style casino chips under ourbrand names, Paulson® and Bud JonesÒ,at our facilities in San Luis Rio Colorado, Mexico and in Las Vegas, Nevada. GPISAS also manufactures American-style casino chips in Beaune, France.

·       *Injection Molded Chips*.   Plastic injectionmolded chips were created in the late 1960’s under the Bud Jones brand,manufactured in the United States. Such chips are made with severalinjection-molded colors, typically with a central metal piece for the weightand printed decals. There are several standard diameters and a wide range ofdesign and color combinations. Various security features are used to make thechips counterfeit resistant, including UV pigments, laser pigments, hologramsand RFID technology. The Bud Jones brand offers a wide range of such chips,made of acrylic with very vivid colors and with ground and smooth surface. Since1990, the B&G brand, which is manufactured in France, has developed a fullline of injection molded chips with designs different from the Bud Jones brand andusing a different type of plastic material with less vivid colors but requiringno grinding and allowing a rougher surface. A particular line of injectionmolded gaming chips specifically designed and sold for optical readingidentification are also manufactured by GPI SAS. GPI USA’s and GPI SAS’ linesof injection-molded chips allow a very good coverage of most casinos’requirements, which vary greatly around the world. Annual production capacityfor injection molded chips in the United States and France is approximately 15 million,considering the use of 2-3 shifts.

·       *Sublimation Chips*.   Sublimation chipsare made of one disc of white plastic material (usually injection molded). Thedecor of these chips is traditionally transferred from printed paper to theplastic material by pressing and heating the printed paper onto the plasticdisc. The printed colors sublimate and go from the paper into the plasticmaterial. In 1996, GPI SAS created a new way of manufacturing this type ofcasino chip by using a printing technology called “pad printing.” Thistechnology permits simultaneous printing on the face and the edge of the chip. GPISAS holds several patents and patent applications for this technology, andrefers to this casino chip as “Full Face.” Security features for sublimationchips include UV pigments and laser pigments. Annual production capacity at GPISAS is approximately two million chips, considering utilizing threeshifts.

·       *Compression Molded Chips*.   Compression molded casinochips are manufactured from a proprietary formulation of more than 10 rawmaterials using a compression molding process. Printed decals or “inlays” areincorporated in the chips during the compression steps. Customized designs,security and identifying features are incorporated into the chips. GPI USAholds a leading market share in compression molded chips, which are similar tothe original clay chips of the past. They have a unique feel and easy handlingand are often referred to as “clay chips.” Compression molded chips aremanufactured under the Paulson® brand at its GPI Mexicana facilities in San LuisRio Colorado, Mexico. Various security features are used to make the chips more

3

----

counterfeitresistant, including UV pigments, Laser LockTM, alpha-dot, customized rim andRFID technology. Our annual production capacity at our Mexico facilities isapproximately 20 million compression molded chips (based on a single shiftand increased labor availability). We believe that given our currentanticipated production level of compression molded chips per year, there willbe sufficient manufacturing capacity to meet potential increases in futuredemand. In 2006, GPI Mexicana produced approximately 11 millioncompression molded chips.

*CommemorativeGaming Chips*

Since 1994, GPIC hasmarketed gaming chips that commemorate certain types of special events such astitle boxing matches, significant anniversaries and premier entertainmentevents. Casino patrons often retain commemorative chips as souvenirs. Casinosbenefit to the extent that gaming chips purchased are not redeemed, therebyresulting in added cash flow to the casino.

*Gaming Chips withRFID Microchips and Reading Equipment*

*Need for RFID*

Gaming chips are the principal currency of eachcasino, and each casino has its own unique gaming chips or currency. A gamingchip that appears or feels or even sounds slightly different than the otherscan warrant review by the casino personnel. There are several possible securityand anti-counterfeit features that can be incorporated into the chip materialitself and/or in the chip appearance.

The most sophisticated anti-counterfeiting devices arethe microchips or RFID, which can be embedded in gaming chips without modifyingthe appearance or handling characteristics of the chips. These are not onlyhigh quality gaming chips, but they are also reliable carriers of the dataneeded by the casinos to efficiently and securely manage their table gameoperations.

A sophisticated RFID microchip transponder is embeddedin each gaming chip. Read/write devices communicate quickly and accurately witha large number of these RFID embedded gaming chips without human contact. Theauthenticity and denomination of each gaming chip is established, and then thedata is transferred to the casino information systems.

The RFID embedded gaming chips can be read with 100%accuracy, either one at a time or in large quantities, with the same efficiencywhether in stacks, boxes, trays, cabinets or on the tables. This increases thesecurity of the chip production, transportation and utilization.

Traditional jetons,plaques and casino chips could not easily and precisely be accounted for by thecasinos and the games that call for them, thus the tables could not be managedby casinos as efficiently as slot machines. Casinos have a need for morestreamlined and automated accounting transactions between the pit and cage operations,thus the RFID solution.

*RFID Technology*

Bourgogne & Grasset (now GPI SAS) startedmaking RFID chips before 1994. Some 10 years ago GPIC and Mikohn GamingCorporation, now Progressive Gaming International Corporation, started workingtogether and selected Philips 125 KHz or low frequency RFID technology as itwas particularly well adapted to the gaming chip security and chip trackingapplications. PGIC developed players tracking applications with thistechnology. GPIC acquired the rights to the reader technology from Philips in2001 and very significantly developed the reading capabilities of this reader.Ten years ago GPIC readers could read only stacks of 10 chips, now severalhundred chips in stacks of 20 can be read in a matter of a few seconds and newimprovements keep coming. The 125 KHz Philips RFID microchip used by GPIC isnow in its third generation and a fourth generation is planned.

4

----

Over the years RFID chips’ capabilities went up andcosts came down. The first B&G gaming chips with RFID technology that GPICsold in 1996, were priced above $6.00, more than $4.50 above the regular priceof standard gaming chips. Today GPIC charges substantially less for an embedded125 KHz RFID microchip transponder in a Paulson® gaming chip, programming androyalty included. In parallel, the prices of the readers went down while theircapabilities increased.

GPIC offers a full line of standard or customized RFIDreaders such as cashier’s desk, table to authenticator, chip tray reader, chipbank reader and vault reader.

Over the last few years, GPIC has sold several millionRFID chips and hundreds of readers mainly for chip tracking and chip securityto casinos all over the world, including the United States. GPIC holds severalinternational patents related to the embedding process of an RFID microchipinto a gaming chip, a jeton or a plaque and an exclusive license on two patentsowned by IGT to make and sell in the United States RFID chips and readersfor chip tracking. Our patents and exclusive license apply to all RFIDfrequencies.

In 2003, PGIC started developing new player systemsand other readers based on the higher frequency 13.56 MHz RFID microchips andreaders developed by an Australian company called Magellan Technology Pty. Ltd(“Magellan”). PGIC has an exclusive agreement with Magellan for all gamingapplications of these 13.56 MHz RFID microchips and readers. As casinos haveexpressed an interest in PGIC’s project, we developed efficient ways to embedthis 13.56 MHz RFID tag in all of our well known and widely accepted B&Gand Paulson® gaming chips including B&G jetons and plaques. In January 2006,PGIC and GPIC signed an agreement by which we have the right to buy the 13.56MHz RFID tags to make casino chips, exclusive for the United States market andnon-exclusive for the rest of the world. Casinos now have the choice betweenthe two RFID technologies: 125 KHz from Phillips and 13.56 MHz from Magellan.Other RFID technologies are being researched.

The RFID gaming chips andreaders significantly increase the casino protection against counterfeit gamingchips. In addition, the RFID gaming chips and readers, with appropriatesoftware programs, open the door to significant increases in efficiency andcost savings. Chips can be tracked and accounted for automatically and reliablyeverywhere in the casino. With appropriate systems developed and sold by othercompanies, players can also be tracked for more objective comping. As a resultof RFID embedded gaming chips, readers and computer systems, the necessarytools are now available for the casinos to track their gaming chips and playersand to manage their tables as efficiently as their slots.

***Dice***

We manufacture our dice at our GPI Mexicanafacilities, from cellulose acetate specifically formulated to provide therequired clarity, hardness and dimensional stability. All dice are solddirectly by GPI USA in North America and the Caribbean Islands. GPI SASdistributes dice to the other parts of the world. We offer a variety of spotdesigns, which are inserted in the body of the dice and machined flat to thesurface. We offer two different finishes and up to two monograms on the dice. Acasino may request the imprinting of its name and logo (in a variety andcombination of colors), the insertion of a hidden security “key,” a specialreverse spot, the addition of a security “glow” spot, the use of Laser LockTM,the serialization of the dice, or all, or a combination of, the above.

All of our brands of dice are manufactured with a highdegree of accuracy in conformity with the strictest standards of gamingregulations. Generally, a stick of dice (two and one-half pair) does not remainin play for more than eight hours on a given table, in a busy casino.

The typical sales price ofcasino dice currently ranges between approximately $2.50 and $3.50 per pair. Wecurrently have the capacity to produce approximately one million pairs ofdice per year (based upon 

5

----

oneproduction shift) in Mexico. In 2006, we produced approximately 780,000 pairsof dice. We believe our capacity for dice production is sufficient toaccommodate an increase in production requirements.

***Table Layouts***

Every gaming table is covered with a layout printedwith patterns particular to each specific game, as well as multi-colored logosand other markings according to individual casino preferences. GPI USA hasdeveloped a comprehensive range of different quality layouts and variousprinting processes. GPI USA manufactures PaulsonÒfelt and synthetic layouts made of Paul-Son FXÒmaterial for which GPI USA holds an exclusivity of supply in the United States,as well as full graphic layouts. We have a creative art department that candesign any specific layout to meet the casino needs.

We believe we are a leading manufacturer of layouts inthe United States, utilizing high quality cloths, enhanced graphics, andproprietary dye formulations which we believe result in the widest variety ofcustomized colors. Since 2000, when we acquired certain patent rights coveringmethodology and processes relating to the screening of inks on synthetic clothfor casino tabletop layouts, we have also offered synthetic layouts in a widevariety of colors and customer preferences. The patent rights which expire in20 years enable us to provide a full line of table game supplies andequipment.

We typically install layouts on new gaming tablesprior to delivery to a casino. The table layouts are replaced by casinos on aregular basis, in order to maintain their appearance, which is generally within60 to 150 days. Layouts typically sell in a price range of approximately$100 to $300 in the United States, depending on the type of table, thecomplexity of the patterns and the variety and difficulty of colorcombinations.

We primarily manufactureour layouts at our Mexico facilities and occasionally, in Las Vegas; we alsomay sell a small quantity of full graphic sublimation layouts using an outsidevendor. Our layout production capacity is approximately 20,000 felt layouts andapproximately 25,000 synthetic layouts per year. In fiscal 2006, we producedapproximately 38,000 layouts, of which approximately 12,000 were felt and26,000 were synthetic. We believe the capacity of our layout productionfacilities in Mexico will allow us to increase layout production as needed.

***Playing Cards***

We manufacture and sell our own line of paper casinoplaying cards under the PaulsonÒbrand. A deck of cards typically sells to casinos within a price range ofapproximately $0.80 and $1.50 and, based on casino industry practices, isgenerally replaced every eight hours or less. A casino typically enters into aone or two year purchase commitment with a supplier to supply its cards atregular intervals, generally monthly. Casinos occasionally purchase cards frommore than one supplier, as casino floor managers often have preferences for aparticular type of card. Our cards are compatible with all card shufflers.

Given our relatively low market share of the playingcards market, our established distribution system for table game supplies andour low cost manufacturing facilities, we believe that playing cards representa reasonable growth opportunity for us.

We produce all of our playing cards at our GPIMexicana facilities. We purchased additional equipment in fiscal 2004 toincrease our production capacity to satisfy the marketplace. The appropriatemarketing approach will permit management to offer better service to selectedcustomers. In 2006, the Company produced approximately 4.7 million decksof playing cards.

Traditionally, theCalifornia card room market prefers plastic playing cards while the traditionalhotel-casino markets generally prefer paper cards. Our capacity, assuming asingle shift, is approximately 8 million decks per year.

6

----

***Wheels***

GPI SAS manufactures American and French roulettewheels in Beaune, France and sells them primarily in Europe and in certainUnited States and Canadian-based jurisdictions where GPI SAS is licensed (suchas New Jersey, Louisiana, Iowa, Washington State and Mississippi). Productionin France consists of designing and assembling the different parts produced byvery specialized sub-contractors. In 2006, GPI SAS produced and soldapproximately 70 roulette wheels and in 2005 approximately 100 roulettewheels mostly in Europe and in the United States. Our annual capacity isapproximately 300 wheels.

Until the Combination, thetwo former United States companies, Paul-Son and Bud Jones, manufacturedroulette wheels and “Big Six” wheels in their plants in Las Vegas. In October 2000and September 2002, respectively, the former Paul-Son and the former BudJones administratively and voluntarily surrendered their Nevada gamingmanufacturer and distributor licenses due to excessive license costs, and wereno longer permitted to assemble or manufacture wheels in Nevada or sell wheelsfrom Nevada. On November 18, 2004, the Nevada Gaming Commission granted GPISAS and GPI USA approval, by way of transactional waivers, to manufacture anddistribute roulette wheels to Nevada casinos. Effective August 30, 2006,the transactional waivers were expanded to permit GPI USA to sell GPI SASroulette wheels outside the State of Nevada. GPI USA sold 6 roulette wheels in2006.

***Gaming Furniture***

We sell a variety ofcasino gaming furniture. Tables range in price approximately between $1,500 and$3,000 for a blackjack table to approximately $3,000 to $5,000 for a roulettetable (excluding the roulette wheel) and up to approximately $5,000 to $8,000for a craps table. We vigorously pursue gaming table sales because the sale ofa gaming table will generally bolster our ability to sell gaming chips andconsumable products such as layouts, dice, cards, and other accessories to thetable purchasers. Prior to 2000, we purchased our gaming tables from a thirdparty. Subsequently we began manufacturing our own table game furniturecomponents in our Mexico facility. Tables are assembled by us in Mexico andcompleted by adding the layout, drop boxes, trays and other table accessoriesin Las Vegas. Table game seating is produced by nonaffiliated manufacturers anddistributed by us. We have seen a growth in our sales of gaming furniture due tothe reopening of casinos in the south (Mississippi and Louisiana) and theremodeling of several high limit rooms. In 2006, GPI Mexicana producedapproximately 2,500 tables; our current capacity is up to 3,500 tables. GPI SASalso manufactures a variety of casino gaming furniture, including tables(blackjack, roulette, etc.) in Beaune, France.

***Table Accessories and Other Products***

In order to offer our customers a full product line,we sell a number of ancillary casino table game products, which we typically donot manufacture. We have expanded our manufacturing of certain plasticproducts, including dealing shoes in our GPI Mexicana facility. Ancillaryproducts include plastic money paddles, discard holders, drop boxes, dealingshoes, trays and covers, dice sticks and on/off pucks. These products aregenerally sold in conjunction with the sale of gaming tables and tend to havelong useful lives. In 2006, GPI Mexicana produced a large number of ancillaryproducts that were sold in conjunction with our gaming furniture.

We also sell an airventilation device specifically for gaming tables called the Air-RailÒSystem. This ventilation system creates a positive flow of air at the gamingtable, which pushes smoke away from the dealer and assists nonsmokers in contendingwith secondhand smoke. Small air vent devices secured underneath the table drawsmoke from the surface and recycle it, dispensing the air outward where thecasino’s primary ventilation systems can distribute it. By filtering anddispersing the smoke-filled air, the 

7

----

Air-RailÒSystem makes the casino’s primary air circulation systems perform moreefficiently and improves the comfort of the nonsmoking casino dealers andpatrons.

**Sales, Advertisingand Promotion**

We generally distribute our products in North Americaand the Caribbean Islands through our four-person****salesforce, which operates out of regional offices in Las Vegas, Nevada; AtlanticCity, New Jersey; and Gulfport, Mississippi. We generally distribute ourproducts in the international market through our four-person sales force, whichoperates out of our Beaune, France office.

We believe that the long-standing customerrelationships, which have been developed over the years by our individual salesrepresentatives, as well as our reputation for quality, reliability andsecurity features, are key factors upon which we successfully compete in themarket place. Experience, production, flexibility, service and a wide range ofproducts are the keys to selling customized products and position us as thecasinos partner for table operations. When direct selling is not feasiblebecause of local conditions, we may enter into agreements with carefullyselected local distributors. But, even in this case, we always maintain directcontact with the end customers.

We place advertising in trade publications andparticipate in major casino industry trade shows. We keep abreast of new casinoopenings through personal contact with casino management, legislative and tradepublications and wire service press releases. When new casino projects areidentified, our representatives make personal contact with appropriate officersand/or purchasing agents in order to solicit the sale of our products to suchpotential new customers.

Our experience has beenthat once a casino buys from a table game supplier, it tends to purchasereplacement products from the same supplier, provided that the quality, serviceand competitive pricing on the products are maintained. As a result, our salesefforts are primarily focused on selling and promoting a wide range of tablegaming products to casinos while they are in the development and licensingstage. By thereafter maintaining a frequent contact program, we seek to realizea steadily increasing base of recurring sales for our consumable products suchas layouts, dice and cards, while capturing incremental sales to new casinos.

**Materials, Suppliesand Backlog**

We maintain good relationships with our suppliers andhave, where possible, diversified our supplier base so as to avoid a disruptionof supply. However, some key raw materials for our principal products haveunique suppliers. In most other cases, our raw materials are staple goods, suchas paper, plastic, wood, felt and synthetic fabric, which are readily availablefrom several suppliers. We believe that our practice of purchasing fromdiversified sources minimizes the risk of interrupting the supply of rawmaterials.

Our backlog of production orders amounted toapproximately $3.9 million for our United States operations and $1.6 millionfor our France operations as of December 31, 2006. At December 31,2005, our backlog was approximately $4.5 million for our United Statesoperations and $21.2 million for our France operations, a result of largepending orders for new casino openings in 2006; such orders have now beenfilled. We believe that all of our backlog will be filled in 2007.

8

----

**Competition**

There are a number of companies that compete with usin the sale of each of our product lines:

*GamingChips**  **The gaming chip product line has in recent yearsbecome an increasingly competitive area of the gaming supply business.Currently, our major competitors and their respective locations are ChipcoInternational and The United States Playing Card Company in the United States,Abbiati Casino Equipment in Italy, Dolphin Products Pty Ltd. in Australia, andMatsui Gaming Machine Co., Ltd. in Japan. We believe key competitive factorsfor gaming chip sales are: well established product and process security,respect of players’ and dealers’ habits, attractiveness, durability, quality ofservice and price.*

*TableLayouts*   Our primarycompetitors for casino table layouts are Midwest Game Supply Co. and GemacoPlaying Card Co. in the United States, and TCS/John Huxley in the UnitedKingdom. We believe the key competitive factors for table layout sales arecloth quality, durability, printing processes and price.

*PlayingCard*   Our majorcompetitors in the domestic playing card market are The United States PlayingCard Company and Gemaco Playing Card Co. Our major competitors internationallyare Angel Co., Ltd. in Japan, primarily servicing the Asian market, andCartamundi in Belgium, primarily servicing the European market. We believe theprimary competitive factors for playing cards are price, intrinsiccharacteristics (snap memory, ease of handling, etc.), security, quality control,brand name identification, process security and reputation.

*GamingFurniture*   Our principalcompetitors for casino gaming furniture are TCS/John Huxley in the UnitedKingdom and Abbiati Casino Equipment in Italy and smaller regional wood shopsin certain geographic areas. Competition is based on product ranges, qualityservice, industry know-how, and price.

*Dice**  *Our principalcompetitor for domestic casino dice sales is Midwest Game Supply Co. and TheUnited States Playing Card Company. There is no significant marketinternationally for casino dice. We believe the primary competitive factors fordice sales are quality of the product and services and pricing. In addition,casino shift managers typically prefer that casinos purchase dice from morethan one supplier due to industry superstition that dice from one of itssuppliers may run “cold” for the house from time to time.

*Table Accessories andOther Products*   Our principal competitors for distributingtable accessories and other products, which include drop boxes, dealing shoes,chip trays and chip bank covers, foot rails are several local vendors. Webelieve that key competitive factors for these products are the ability to be asingle source supplier, service, convenient locations, and product quality.

**IntellectualProperty**

We owna portfolio of trademarks, copyrights, trade secrets and patents that provideus with a competitive advantage, fostering future profitability and growth. Weown United States federal trademark registrations (®) for the following marks:

| Air Rail             | BG                                |
|----------------------|-----------------------------------|
| Bourgogne et Grasset | Bud Jones                         |
| Chipsoft             | Gaming Partners  International    |
| GPI                  | GPI Logo                          |
| Paulson              | SafeChip by Bourgogne et  Grasset |
| SmartChip            | T-K                               |

 

We own common law rights in these trademarks (TM):

WheelCheckPlus

WeMake the Money the World Plays With

Casino Currency Control

9

----

In addition we have international protection for manyof our trademarks.

We own numerous UnitedStates and international patents. We also retain an exclusive license tomanufacture and sell gaming chips with embedded RFID microchips and RFIDreaders for chip tracking and accounting in the United States until 2015. Webelieve that our trademarks, logos and patent rights are valuable to theoperation of our Company and are important to our marketing strategy. Ourpolicy is to actively pursue and maintain registration of our trademarks andlogos where our business strategy requires us to do so and to oppose vigorouslyany infringement or dilution of our trademarks, logos or patent rights.However, we cannot predict whether steps taken by us to protect our proprietaryrights will be adequate to prevent misappropriation of these rights or the useby others. It may be difficult for us to prevent others from copying elementsof our concepts, or our trade secrets, and any litigation to enforce our rightswill likely involve significant costs.

**EnvironmentalMatters**

We believe we are in compliance with international,federal, state and local laws and regulations that have been enacted or adoptedrelating to the protection of the environment. The liability for environmentalremediation or costs will be accrued by us when or if it is considered probableand the costs can be reasonably estimated.

On or aboutAugust 25, 2006, the Company received a 60-day notice from theCenter for Environmental Health (“CEH”), a private environmental advocacy firm,stating that CEH intended to bring suit against the Company in California foralleged failure to provide a warning required under the California SafeDrinking Water and Toxic Enforcement Act of 1986 (“Proposition 65” or the“Act”). Previously a number of card room operators throughout Californiareceived similar 60-day notice letters from CEH alleging they failed tomeet warning requirements contained in the Act. We have sold gaming chips tosome of these card room operators. The Act requires, among other things, thatcertain businesses in California must provide a “clear and reasonable warning”if they expose persons to chemical listed by the State of California as acarcinogen and/or reproductive toxicant, unless the business can demonstratethe exposure is below a “No Significant Risk Level” for that chemical. Failureto provide the warning can be enforced by the government or private citizens inan action for civil penalties and injunctive relief. In this case, theenvironmental group alleges that gaming chips contain lead and/or leadcompounds and that no warning was given by the card room operators to itsemployees or customers. We have engaged outside counsel who is pursuingdiscussions with counsel for CEH. We have entered into a joint defenseagreement with several of the card room operators and a tolling agreement withCEH in order to continue discussions. No litigation has been commenced in thematter to date. In the meantime, we are now providing a Proposition 65 warningon all gaming chips sold in the State of California. We are pursuing rigorousefforts to reformulate our gaming chips to eliminate the need to provide suchwarnings in connection with future chip sales. While the maximum amount ofstatutory penalties for failing to provide a required Proposition 65 warningare substantial, based on our preliminary analysis, we do not believe that ourliability, if any, in this matter will have a material adverse effect on us orour business, operations or financial position.

**Employees**

At March 31, 2007, weemployed approximately 760 people. Approximately 459 of the employees werelocated at our Mexico facilities, 203 employees were located in our Beaune,France facility with the remainder located primarily in Las Vegas, Nevada andAtlantic City, New Jersey. None of our employees are covered by collectivebargaining agreements and we believe that our relations with our employees aregood.

10

----

**Regulation andLicensing**

*General GamingRegulation*

Thegaming operations of each of our subsidiaries are subject to extensiveregulation, and each of our subsidiaries hold registrations, approvals, gaminglicenses or permits in each jurisdiction in which it operates gamingactivities. A list of the geographical locations of the jurisdictions in whichwe, through our subsidiaries, are subject to licensing and/or regulatorycontrol of the gaming authorities is set forth below. 

| Gaming Jurisdictions |
|----------------------|
| Arizona              |   | New York |
| California           |   | North Carolina |
| Colorado             |   | North Dakota |
| Connecticut          |   | Oklahoma |
| Florida              |   | Oregon |
| Illinois             |   | South Dakota |
| Indiana              |   | Washington |
| Iowa                 |   | Wisconsin |
| Kansas               |   | Australia |
| Louisiana            |   | Puerto Rico |
| Michigan             |   | Alberta, Canada |
| Minnesota            |   | British Columbia, Canada |
| Mississippi          |   | Manitoba, Canada |
| Missouri             |   | Nova Scotia, Canada |
| Montana              |   | Ontario, Canada |
| Nevada               |   | Quebec, Canada |
| New Jersey           |   | Saskatchewan, Canada |
| New Mexico           |   | Republic of Panama |

 

While the regulatory requirements vary fromjurisdiction to jurisdiction, most require licenses, permits, findings ofsuitability, documentation of qualification including evidence of financialstability and/or other required approvals for companies who manufacture anddistribute gaming equipment, as well as the individual suitability of officers,directors, major stockholders and key employees. Under the various gamingregulations, key personnel generally include the current and/or proposedcorporate officers and directors of a corporation and its subsidiaries. Laws ofthe various gaming regulatory agencies are generally intended to protect thepublic and ensure that gaming related activity is conducted honestly, competitively,and free of corruption.

Various gaming regulatoryagencies have issued licenses allowing our wholly owned subsidiaries tomanufacture and/or distribute our products. Our subsidiaries and their keypersonnel, as applicable, have obtained or applied for all government licenses,permits, registrations, findings of suitability and approvals necessaryallowing for the manufacture and distribution of gaming supplies and equipmentin the jurisdictions where it is required. These companies have never been denieda gaming related license, nor have any licenses been suspended or revoked.

*Nevada GamingRegulation*

The manufacture and distribution of gaming equipmentin Nevada are subject to extensive state and local regulation. Our operationswere subject to the licensing and regulatory control of the Nevada GamingCommission, the Nevada State Gaming Control Board and various local regulatoryagencies, or the Nevada gaming authorities, due to our prior manufacture ofroulette wheels and Big Six wheels, which are considered gaming devices.

11

----

The complex regulatory scheme governing the licensingof gaming device manufacturers and distributors in Nevada imposedadministrative burdens which far exceed those of most other gamingjurisdictions when applied to our new combined corporate structure and ourforeign stockholders. From the time of the Combination and up to mid-2004,in the opinion of our management, the anticipated time and expense of a foreigninvestigation that would be conducted by the Nevada gaming authorities wouldfar outweigh any benefit to be gained by maintaining licensure in Nevada.Specifically, based upon an analysis of three factors: the potential market forour roulette and Big Six wheels in Nevada; the benefits gained through ourchoice of corporate structure; and the administrative costs associated withcompliance with certain requirements of the Nevada gaming authorities, weconcluded that the costs of maintaining licensure in Nevada upon the completionof the Combination significantly exceeded our potential profits. We thusadministratively and voluntarily surrendered the Nevada gaming licenses of theformer Paul-Son Gaming Supplies, Inc. upon the completion of theCombination, a procedure that allowed us to forego licensure in Nevada withoutimpacting our licensure in other gaming jurisdictions or our ability tocontinue to manufacture roulette wheels and Big Six wheels in and for otherjurisdictions. The above license surrender did not impact the manufacture orsale of our other products in Nevada.

In mid-2004, however, with the construction ofnew casino properties in Nevada on the horizon, the Company applied to theNevada gaming authorities for certain exemptions from provisions of the Nevadagaming laws and for the limited licensure of GPI USA and GPI SAS to manufactureand distribute roulette wheels in Nevada. Company research showed that nocurrent licensed manufacturers or distributors in Nevada were actively in thebusiness of manufacturing or selling roulette wheels and it was anticipated thatNevada casino operators were in need of a source for such products.

By Nevada State GamingCommission Order entered November 18, 2004, GPIC was exempted fromregistration as a publicly traded corporation and GPI USA and GPI SAS were eachlicensed as manufacturers and distributors strictly limited to the manufacture,distribution and service of roulette wheels in Nevada, and subject toadministrative approval prior to the distribution of any roulette wheel andfurther subject to specified conditions set forth in the Order, including butnot limited to the filing of periodic reports with and notifications to Nevadagaming authorities. The result of this Order is to grant GPI USA and GPI SAStransactional waivers so that they may manufacture roulette wheels for sale toNevada casino licensees. Effective August 30, 2006, the approvals wereexpanded by the Nevada gaming authorities to permit GPI USA to sell GPI SASroulette wheels outside of Nevada. The waivers granted were specifically foundby the Nevada State Gaming Commission to be consistent with the policies setforth for in the Nevada gaming laws. These waivers may, however, be withdrawnby the Nevada State Gaming Control Board for any cause deemed reasonable. Uponsuch withdrawal, the Company would be subject to full registration andlicensing.

*New Jersey GamingRegulation*

Our subsidiaries are currently required to be licensedunder the New Jersey Casino Control Act, or the New Jersey Act, as casinoservice industries qualified to manufacture and sell gaming-related products tocasinos in New Jersey. As part of such licensure, parent companies, holdingcompanies and certain officers and directors of the companies are required tobe found suitable by the New Jersey Casino Control Commission, or the New JerseyCommission. The sale and distribution of gaming equipment to casinos in NewJersey is also subject to the New Jersey Act and the regulations promulgatedthereunder by the New Jersey Commission. The New Jersey Commission hasbroad discretion in promulgating and interpreting regulations under the NewJersey Act. Amendments and supplements to the New Jersey Act, if any, may be ofa material nature, and accordingly may adversely affect the ability of acompany or its employees to obtain any required licenses, permits and approvalsfrom the New Jersey Commission, or any renewals thereof. The currentregulations govern licensing requirements, standards for qualification, personsrequired to be qualified, disqualification criteria, competition, investigationof supplementary 

12

----

information, duration oflicenses, record keeping, causes for suspension, standards for renewals orrevocation of licenses, equal employment opportunity requirements, fees andexemptions. In deciding to grant a license, the New Jersey Commission mayconsider, among other things, the financial stability, integrity,responsibility, good character, and reputation for honesty, business abilityand experience of the applicant and its directors, officers, management andsupervisory personnel, principal employees and stockholders as well as theadequacy of the financial resources of the applicant. New Jersey licenses aregranted for a period of three or four years, depending on the length of time acompany has been licensed, and if they are renewable. The New Jersey Commissionmay impose such conditions upon licensing, as it deems appropriate. Theseinclude the ability of the New Jersey Commission to require the applicant orlicensee to report the names of all of its stockholders as well as the ability torequire any stockholders whom the New Jersey Commission finds not qualified todispose of the stock, not receive dividends, not exercise any rights conferredby the shares, nor receive any remuneration from the licensee for servicesrendered or otherwise. Failure of such stockholder to dispose of suchstockholder’s stock could result in the loss of the license. Licenses are alsosubject to suspension, revocation or refusal for sufficient cause, includingthe violation of any law. In addition, licensees are also subject to monetarypenalties for violations of the New Jersey Act or the regulations of the NewJersey Commission.

Our new combined structurerequired that each subsidiary company submit a new application for licensure.Following a complete investigation of each subsidiary’s respective licenseapplication, in October 2006, the New Jersey Commission granted plenarygaming-related casino service industry licenses to GPI USA, GPI SAS and GPIMexicana.

*Other GamingJurisdictions*

In addition to New Jersey, our subsidiaries arecurrently licensed in a number of other jurisdictions. Although the regulationsin these jurisdictions are not identical to the states of Nevada or New Jersey,their material attributes are substantially similar, and are summarized below.

The manufacture, sale anddistribution of gaming supplies in each jurisdiction are subject to variousstate, county and/or municipal laws, regulations and ordinances, which areadministered by the relevant regulatory agency or agencies in that jurisdiction.These laws, regulations and ordinances primarily concern the responsibility,financial stability and character of gaming supply and equipment owners,distributors, sellers and operators, as well as persons financially interestedor involved in gaming or liquor operations. In many jurisdictions, selling ordistributing gaming supplies may not be conducted unless proper licenses areobtained. An application for a license may be denied for any cause which thegaming regulators deem reasonable. In order to ensure the integrity ofmanufacturers and distributors of gaming supplies, most jurisdictions have theauthority to conduct background investigations of a company, its key personneland significant stockholders. The gaming regulators may at any time revoke,suspend condition, limit or restrict a license for any cause deemed reasonableby the gaming regulators. Fines for violation of gaming laws or regulations maybe levied against the holder of a license and persons involved. Oursubsidiaries and their respective key personnel have obtained all licensesnecessary for the conduct of their respective business in the jurisdictions inwhich they sell and distribute gaming equipment and supplies. Suspension orrevocation of such licenses could have a material adverse effect on ouroperations.

*Federal GamingRegistration*

The Federal GamblingDevices Act of 1962 (“Federal Act”) makes it unlawful for a person tomanufacture, transport, or receive gaming machines, gaming devices (includingroulette wheels) or components across interstate lines unless that person hasfirst registered with the Attorney General of the United States Department ofJustice. In addition, the Federal Act imposes gambling device identificationand record keeping requirements. Violation of the Federal Act may result inseizure and forfeiture of the 

13

----

equipment,as well as other penalties. Our subsidiaries, which are involved in themanufacture and transportation of gaming devices, are required to registerannually.

*Native AmericanGaming Regulation*

Gaming on Native Americanlands is governed by federal law, tribal-state compacts, and tribal gamingregulations. The Indian Gaming Regulatory Act of 1988 (“IGRA”) provides theframework for federal and state control over all gaming on Native Americanlands and is administered by the National Indian Gaming Commission and theSecretary of the United States Department of the Interior. The IGRA requiresthat a tribe and the state in which the tribe is located enter into a writtenagreement, a tribal-state compact, which governs the terms of the gamingactivities. Tribal-state compacts vary from state-to-state and in many casesrequire equipment manufacturers and/or distributors to meet ongoingregistration and licensing requirements. In addition, tribal gaming commissionshave been established by many Native American tribes to regulate gaming-relatedactivity on Indian lands. Our subsidiaries manufacture and distribute gamingsupplies to Native American tribes who have negotiated compacts with their respectivestates and have received federal approval. Currently, GPI USA is authorized tosell products to Native American casinos in seventeen states and GPI SAS isauthorized to sell products to Native American casinos in five states.

*InternationalGaming Regulation*

Certain foreign countries permit the importation, saleand operation of gaming supplies in casino and non-casino environments. Certainjurisdictions require the licensing of manufacturers and distributors of gamingsupplies. We and our subsidiaries manufacture and/or distribute gaming suppliesto various international markets including Australia, the Caribbean, Canada,and other foreign countries. We have obtained the required licenses tomanufacture and distribute our products in the various foreign jurisdictionswhere we do business.

While the regulatoryrequirements vary from jurisdiction to jurisdiction, most require licenses,permits, findings of suitability, documentation of qualification includingevidence of financial stability and/or other required approvals for companieswho manufacture and distribute gaming equipment, as well as the individualsuitability of officers, directors, major stockholders and key employees. Underthe various gaming regulations, key personnel generally include the currentand/or proposed corporate officers and directors of a corporation and itssubsidiaries. Laws of the various gaming regulatory agencies are generallyintended to protect the public and ensure that gaming related activity isconducted honestly, competitively, and free of corruption.

**FinancialInformation about Geographic Areas**

See Part II—Item 8.Financial Statements and Supplementary Data—Notes to Consolidated FinancialStatements—Note 14 for certain financial information by geographic area.

**AvailableInformation**

Our current website is *www.gpigaming.com*. There we make available, free of charge,our annual Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K, and, if applicable, any amendments tothose reports filed or furnished pursuant to the Exchange Act as soon asreasonably practicable after we electronically file such material with, orfurnish it to, the SEC. The information found on our website is not part ofthis or any other report we file or furnish to the SEC. You may also submitwritten information requests by mail to: Attn: Investor Relations, GamingPartners International Corporation, 1700 Industrial Road, Las Vegas, Nevada89102.

14

----

**Item 1A.**                RiskFactors.

Throughout this annual Form 10-K, we makesome forward-looking statements, which do not relate to historical or currentfacts, but are forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements relate to analysesand other information based on forecasts of future results and estimates ofamounts not yet determinable that, while considered reasonable by us, areinherently subject to significant business, economic and competitive risks anduncertainties, many of which are beyond our control and are subject to change.The statements also relate to our future prospects and anticipated performance,development and business strategies. These statements are identified by theiruse of terms and phrases such as anticipate, believe, could, would, estimate,expect, intend, may, plan, predict, project, pursue, will, continue, feel, orthe negative or other variations thereof, and other similar terms and phrases,including references to assumptions.

Although we believe that the expectations reflected inany of our forward-looking statements are reasonable, actual results coulddiffer materially from those expressed or implied. Our future financialcondition and results of operations, as well as any forward-looking statements,are subject to change and to inherent known and unknown risks anduncertainties. We do not intend, and undertake no obligation, to update ourforward-looking statements to reflect future events or circumstances.

We urge you to carefullyreview the following discussion of the specific risks and uncertainties thataffect our business. These include, but are not limited to, the following:

**Demand for ourproducts would be adversely affected by:**

·        alack of acceptance of our RFID technology;

·        areduction in the growth rate of new and existing casinos and markets, particularlyin Asia;

·        delaysof scheduled openings of newly constructed or planned casinos; and

·        a decline in the publicacceptance of gaming.

**Our intellectualproperty rights are subject to risks, including:**

·        developmentof new proprietary technologies that could be applied by our competitors tomake our products obsolete or less desirable;

·        potentialinability to obtain, maintain and defend patents, trademarks, copyrights, andtrade secrets to protect our newly developed products and technology;

·        competitors’infringement upon our existing trademarks, patents, trade secrets copyrights;

·        costsin defending our intellectual property rights against unexpected claims;

·        approvalof competitors’ patent applications that may restrict our ability to compete effectively;

·        successfulchallenge of the patents underlying our exclusive license in the United Statesregarding our RFID embedded gaming chips; and

·        ineffective or lack ofenforcement of patents by our licensors.

**Ourbusiness is vulnerable to changing economic conditions, including:**

·        uncertaintiesrelated to changing economic conditions including those that affect therelative health of the gaming industry;

·        higherthan anticipated manufacturing, selling, administrative, legal and/ordistribution costs;

15

----

·        unfavorablechanges in United States or foreign state or federal taxation laws orapplication of such laws that could reduce our profitability;

·        politicalor economic instability in international markets, particularly those where wehave higher sales concentrations and growth;

·        changesin interest rates causing a reduction of investment income or in the value ofmarket rate sensitive instruments;

·        fluctuationsin foreign exchange rates, tariffs and other trade barriers;

·        aninability to effectively hedge our foreign currency exposures; and

·        consolidationswithin the casino industry.

**Weoperate in a highly regulated industry and our ability to sell our products incertain jurisdictions could be adversely affected by:**

·        unfavorablepublic referendums or anti-gaming legislation, especially in other countries;

·        unfavorablelegislation affecting or directed at manufacturers or gaming operators, such asreferendums to increase taxes on gaming revenues;

·        adversechanges in or findings of non-compliance with applicable governmental gamingregulations;

·        delaysin approvals from regulatory agencies;

·        alimitation, conditioning, suspension or revocation of any of our gaminglicenses; and

·        unfavorabledeterminations or challenges of suitability by gaming regulatory authoritieswith respect to our officers, directors or key employees.

**Oursuccess in the gaming industry depends in part on our ability to developinnovative products and would be adversely affected by:**

·        failureof the casino industry to accept RFID technology with respect to gaming chipsand readers; and/or the 125 KHz or the 13.56 MHz RFID technologies inparticular;

·        thedevelopment of competing new technologies, making ours obsolete or undesirable;

·        adecline in the popularity of our gaming products with players and casinos;

·        alack of success in developing or adequately servicing new products, inparticular our products with security features; and

·        an increase in thepopularity of competitors’ products.

**Investorscannot exercise control over the Company as a result of principal stockholders’ownership due to:**

·        thecurrent executive officers and directors of the Company beneficially ownapproximately 60.4% of the outstanding common stock as of March 24, 2007. Asa result, the executive officers and directors of the Company can control themanagement and affairs of the Company and all matters requiring stockholderapproval, including the election of directors and approval of significantcorporate transactions;

16

----

·        thisconcentration of ownership could have the effect of delaying or preventing achange in control of the Company, even when such change of control is in thebest interests of stockholders; and

·        thisconcentration of ownership also might adversely affect the market price of thecommon stock and the voting and other rights of our Company’s otherstockholders.

**Our outstandingdebt obligations subject us to certain additional risks, including:**

·        increasingour vulnerability to general adverse economic and industry conditions;

·        limitingour ability to obtain additional financing to fund future working capital,capital expenditures, acquisitions and other general corporate requirements;

·        requiringa substantial portion of our cash flows from operations for the payment ofinterest on our indebtedness and reducing our ability to use our cash flows tofund working capital, capital expenditures, acquisitions and general corporaterequirements;

·        limitingour flexibility in planning for, or reacting to, changes in or business and theindustry; and

·        creatinga disadvantage to us compared to competitors with less indebtedness.

**We are subject torisk related to our combination with GPI SAS, including:**

·        difficultyin moving cash between GPI SAS and GPI USA, primarily due to negative taxconsequences; and

·        volatilityin our intercompany international operations.

**Asignificant percentage of our revenues result from the sale of our gaming chipsto new casinos in Macau, including approximately 75% of GPI SAS’ revenues andapproximately 45% of the Company’s revenues on a consolidated basis. As such:**

·        uponthe eventual reduction in the rate of new casino openings, and the expansion ofexisting casinos, in Macau our business could be adversely affected if we areunable to find new growth markets to replace those sales;

·        theexceptional growth of the Macau market over the last three years has resultedin an increase in the number of competitors in the gaming chip market and inthe intensity of such competition.

**Oursuccess is dependent on key management and sales personnel, including Gerard P.Charlier, our President and Chief Executive Officer. As such:**

·        theloss of Mr. Charlier or our other key personnel, or the limitation oftheir availability, could adversely affect our business. To a substantialextent, we rely on the ability and experience of Mr. Charlier for ourstrategic plan, financial plans, growth, marketing and other objectives;

·        Mr. Charlier’semployment agreement expires in September 2007; however, we are currentlyin the process of negotiating an extension of his employment agreement. Wecannot assure you that we will be able to successfully negotiate such anextension.

·        sinceour 1994 Long-Term Incentive Plan expired in 2004, we have not had anequity-based incentive program for our executive officers and key personnel.

17

----

**Newlegislation or regulations requiring more stringent corporate governance andfinancial reporting standards have led and will continue to lead to an increasein our costs of compliance:**

·        Section 404of the Sarbanes-Oxley Act of 2002 will require us to include an internalcontrol report of management in our 2007 and post-2007 annual Form 10-K.While we intend to fully comply with these new laws and regulations, a failureto comply may impact market perception of our financial condition and couldmaterially harm our business and operating results;

·        thelack of adequate internal controls, as exhibited by the material weaknessesdisclosed in Item 9A—Controls and Procedures, could result in misstatedfinancial statements which could require us to restate our financialstatements.

**Our businessoperations are subject to other risks, including:**

·        limitedor unique suppliers for certain key raw materials for significant products;

·        theloss or retirement of our key executives or other key employees;

·        adversechanges in the creditworthiness or parties with whom we have receivables;

·        issuanceof a substantial number of shares of our common stock, or the perception thatthis will occur;

·        thediscovery of facts with respect to legal actions pending against us notpresently known to us or determinations by judges, juries or other finders offact which do not accord with our evaluation of the possible liability oroutcome of existing litigation;

·        increasedcosts due to reliance on third party suppliers and contract manufacturers;

·        casualty,theft or loss of our gaming chips, prior to delivery to casinos;

·        agreementswith casinos in Native American jurisdictions which may subject us to sovereignimmunity risk;

·        naturaldisasters, pandemic illnesses, travel or tourism decline risks, increased fuelprices, other travel limitations, or acts of God that are concentrated in majorgambling locations;

·        actsof war, potential domestic or international terrorist incidents; and

·        anyfailures, difficulties or significant delays in implementing or maintaining ourcomputer information systems could result in material adverse consequences toour business, including disruption of operations, loss of information andunanticipated increases in costs.

**Item 1B.**               UnresolvedStaff Comments.

None.

**Item 2.**                        Properties.

We are based in, and operate domestically from,company-owned facilities in Las Vegas, Nevada, and internationally from Beaune,France. We currently assemble and manufacture our primary products atfacilities in Las Vegas, Nevada, San Luis Rio Colorado, Mexico and Beaune,France. We also lease sales offices in Atlantic City, New Jersey and Gulfport,Mississippi.

*LasVegas, Nevada.**  **Our Las Vegas headquarters are locatedin an approximately 60,000 square foot building. Our Las Vegas headquarters waspurchased in September 1995 for approximately $2.0 million. This facilityhouses the Las Vegas sales and corporate offices, including a centralizedwarehouse for certain of our finished goods inventory, several manufacturingdepartments, and a graphics art department. In our*

18

----

*Las Vegas headquarters, we also maintain a certain inventoryof templates, graphic designs, logos, and tools and dies for casino customers’gaming equipment. Maintaining such an inventory results in time and costsavings for product manufacturing and delivery to our customers. Our Las Vegasheadquarters secures a deed of trust issued under our outstanding term loan. Inthe second quarter of 2005, we acquired an approximately one acre parcel ofland adjacent to our Las Vegas headquarters for approximately $800,000. Wecurrently use the property primarily for additional employee and visitorparking. (See Part II*—*Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations*—*Liquidity and Capital Resources.)*

*SanLuis Rio Colorado, Mexico.**  **We manufacture casino chips, allplaying cards, dice, all plastic products, layouts and tables at threefacilities in San Luis Rio Colorado, Mexico. These facilities include a 34,000square foot leased facility in which casino chips, dice and plastic productsare manufactured, approximately 32,500 square feet where layouts are producedand an approximately 66,000 square foot facility used for producing playingcards and tables. We own the 66,000 square foot facility. In April 2004, weextended the lease of our main 34,000 square foot facility for an additionalfive years at the same monthly rent amount of approximately $0.35 per squarefoot, or $12,000, except that the amount may be prorated, commensurate with thespace we elect to use, since then we have added to our lease an additional32,500 square feet at the same monthly rent amount of approximately $0.35 persquare foot, or $11,300. (See Part II*—*Item 8. Financial Statements andSupplementary Data*—*Notes to Consolidated Financial Statements Note 13.)*

*Beaune,France.**  **We own an approximately 34,000 square footmanufacturing and administrative facility, in Beaune, France.*OnMay 7, 2004, GPI SAS entered into a 350,000 Euro (or approximately$423,000 as of May 7, 2004) loan transaction, with Banque Nationale deParis (B.N.P), a French bank, for a building expansion, which includedapproximately 3,600 square feet of additional office and production space and1,350 square feet of storage space. This expansion was completed in the thirdquarter of 2004.

On December 22, 2004, we entered into aconstruction contract for a 1,600 square foot additional expansion to extendthe jeton and plaque production area. This extension was completed in thesecond quarter of 2005. The total cost of approximately $320,000, was paid forout of our operating funds.

On July 7, 2006, we bought an approximately10,700 square foot manufacturing and administrative facility in Beaune, Francefor 650,000 Euros (approximately $828,000 at July 7, 2006).

*Facility Capacity**  *With the current approximate 244,000 square feetof manufacturing facilities as of December 31, 2006, we believe that we willhave sufficient production capacity to meet anticipated future demand for allof our products in the United States and abroad.

**Item 3.**                        LegalProceedings.

See Part II—Item 8.Financial Statements and Supplementary Data—Notes to Consolidated FinancialStatements Note 9. for information regarding legal proceedings andcontingencies.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders.

No matters were submitted to a vote of our securityholders during the fourth quarter of the fiscal year ended December 31,2006.

19

----

**PART II**

**Item 5.        Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities**

**PERFORMANCE GRAPH**

The following graphreflects the cumulative stockholder return (change in stock price plusreinvested dividends) of a $100 investment in our common stock for thefive-year period from December 31, 2001 through December 31, 2006, incomparison with the Standard & Poor’s 500 Composite Stock Index andour self-determined industry peer group index(1). The comparisons are notintended to forecast or be indicative of possible future performance of ourcommon stock.

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

Among GamingPartners International Corp. The S & P 500 IndexAnd A Peer Group

----

*       $100invested on 12/31/01 in stock or index-including reinvestment of dividends.Fiscal year ending December 31.

Copyright© 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.All rights reserved. www.researchdatagroup.com/S&P.htm

| ** **               | ** ** | **Investment Value as of December 31,** | ** ** |
|--------------------------|------------|------------------------------------------------------------------|------------|
| ** **               | ** ** | **2001**                                                         | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| GPIC                     |       | $                                                                | 100.00     |   | $ | 311.76 |   | $ | 422.79 |   | $ | 1,516.91 |   | $ | 828.61 |   | $ | 1,343.03 |   |
| S & P  500 |       | 100.00                                                           |       | 77.90 |   | 100.24 |   | 111.15 |   | 116.61 |   | 135.03 |   |
| Peer Group(1)            |       | 100.00                                                           |       | 109.27 |   | 205.05 |   | 208.29 |   | 194.58 |   | 273.33 |   |
|                          |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)   The companies in the peer group include: Bally Technologies Inc.(formerly Alliance Gaming Corp.), Fortune Diversified Industries Inc. (formerlyAmerican Gaming & Entertainment), Innovative 

20

----

Gaming Corp.America, International Game Technology, Progressive Gaming International Corp.(formerly Mikohn Gaming Corp.), Scientific Games Corp. (formerly AutototeCorp.) and ShuffleMaster Inc. GTech Holdings Corp., which was included inthe peer group for fiscal year 2005, is no longer trading and has thereforebeen removed from the peer group.

**Market Information**

As of March 10,2005, the Company moved its stock trading from the NASDAQ Small Cap Market tothe NASDAQ National Market, and continued trading under the symbol “GPIC.”Prior to the name change on September 1, 2004, the Company’s stock tradedunder the symbol “PSON.” The following table sets forth the quarterly high andlow closing prices of our common stock as reported by NASDAQ during the periodsindicated. All stock prices reflect a fiscal year ending December 31. On April 25,2007, the closing price was $18.50 per share.

| **Fiscal Year** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|------------|------------|----------|------------|---------|------------|
| 2005 First  Quarter  |       | 19.56      |       | 12.40    |       |
| 2005 Second  Quarter |       | 19.64      |       | 13.36    |       |
| 2005 Third  Quarter  |       | 23.42      |       | 14.99    |       |
| 2005 Fourth  Quarter |       | 15.65      |       | 11.18    |       |
| 2006 First  Quarter  |       | 16.25      |       | 9.31     |       |
| 2006 Second  Quarter |       | 24.40      |       | 16.70    |       |
| 2006 Third  Quarter  |       | 25.77      |       | 17.75    |       |
| 2006 Fourth  Quarter |       | 20.95      |       | 16.62    |       |
| 2007 First Quarter   |       | 20.61      |       | 16.95    |       |

 

On April 18, 2007, asa result of the delay in filing of the Company’s annual Form 10-Kfor the year ended 2006, the Company received a NASDAQ staff determinationletter indicating that the Company was not in compliance with timely filing ofperiodic reports and that the Company’s common stock is subject to delisting. TheCompany requested a hearing to appeal the staff’s determination thus stayingthe possible delisting of the Company’s common stock. If the Company is unableto demonstrate an ability to comply with these requirements to NASDAQ’ssatisfaction, its common stock could be delisted from the NASDAQ Global Market.

**Holders**

There were 93 holders ofrecord of our common stock as of March 31, 2007. We estimate that thereare approximately 1,200 beneficialholders of our common stock based on the proxies distributed in connection withthe May 2006 meeting of stockholders.

**Dividend Policy**

On November 8, 2006,the Company’s Board of Directors declared a non-recurring cash dividend of$0.125 per share paid on December 15, 2006 to stockholders of record atthe close of business on November 27, 2006. The cash was paid from theCompany’s normal operations. This was the second time a cash dividend has beenpaid. The other cash dividend was paid in December 2005. The Board ofDirectors presently does not intend to declare or pay any dividends for theforeseeable future.

**Transfer Agent**

Our stock transfer agentand registrar is American Stock Transfer & Trust Co., located at 6201 15th Avenue, Brooklyn, NewYork 11219; the telephone number is (718) 921-8247.

**Purchases of EquitySecurities by the Issuer**

The Company made no purchases of GPIC equitysecurities during the fourth quarter of 2006.

21

----

**Item 6.        SelectedFinancial Data.**

The selected consolidated financial data included inthe following tables should be read in conjunction with our ConsolidatedFinancial Statements and related notes, and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” appearing elsewhereherein. The selected consolidated financial data for the years ended December 31,2006, 2005, and 2004, have been derived from our audited consolidated financialstatements included elsewhere herein. The selected consolidated financial datafor the years ended December 31, 2003 and 2002 have been derived from ouraudited consolidated financial statements not included herein.

A Combination Agreement was executed on September 12,2002, combining GPIC (formerly known as Paul-Son Gaming Corporation) withGPI SAS (formerly known as Etablissements Bourgogne et Grasset S.A.). At theclosing, the businesses of GPIC, GPI SAS and GPI SAS’ then wholly-ownedsubsidiary, the Bud Jones Company, Inc., or Bud Jones, were combined, withGPI SAS and Bud Jones becoming wholly-owned subsidiaries of GPIC, or theCombination. The Combination was accounted for as a purchase transaction forfinancial accounting purposes. Because the former GPI SAS stockholders owned amajority of the outstanding GPIC common stock as a result of the Combination,the Combination was accounted for as a reverse acquisition in which GPI SAS wasthe purchaser of GPIC. On December 31, 2002, Bud Jones merged into GPIUSA, which was a wholly-owned subsidiary of GPIC and GPI USA was the survivingentity. Bud Jones was a gaming supply manufacturing company, which was alsoheadquartered in Las Vegas. Both former operations (GPI USA and Bud Jones) wereconsolidated into one facility at the Company’s headquarters in Las Vegas,Nevada with the new name of GPI USA. (See Part II—Item 8. FinancialStatements and Supplementary Data—Notes to Consolidated Financial Statements—Note 1.)

The table below reflects information for the yearended December 31, 2002 which includes information for GPI SAS, the formerBud Jones Company, Trend Plastics, T-K Specialty Company, Inc. forthe entire year and the former Paul-Son Gaming Corporation and itssubsidiaries from September 12, 2002. The years ended December 31,2003 to 2006 include full years for all entities described above.

| ** **                                            | ** ** | **Years Ended December 31,**                           | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                            | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Operations statement data:**                        |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                              |       | $                                                                     | 73,954     |   | $ | 57,121 |   | $ | 44,585 |   | $ | 36,171 |   | $ | 21,861 |   |
| Cost of revenues(1)                                   |       | 49,580                                                                |       | 36,154 |   | 28,682 |   | 23,773 |   | 15,171 |   |
| Gross profit                                          |       | 24,374                                                                |       | 20,967 |   | 15,903 |   | 12,398 |   | 6,690 |   |
| Selling, general and administrative expenses(1)       |       | 15,893                                                                |       | 15,128 |   | 11,827 |   | 10,656 |   | 7,206 |   |
| Restructuring and costs associated with Combination   |       | —                                                                |       | — |   | — |   | — |   | 622 |   |
| Operating income (loss)                               |       | 8,481                                                                 |       | 5,839 |   | 4,076 |   | 1,742 |   | (1,138 | ) |
| Gain (loss) on foreign currency transactions          |       | (349                                                                  | )          | 133 |   | (155 | ) | (292 | ) | (529 | ) |
| Interest income                                       |       | 410                                                                   |       | 162 |   | 39 |   | 3 |   | 16 |   |
| Interest expense                                      |       | (175                                                                  | )          | (199 | ) | (253 | ) | (264 | ) | (232 | ) |
| Other income, net                                     |       | 145                                                                   |       | 149 |   | 59 |   | 145 |   | 112 |   |
| Total other income (expense)                          |       | 31                                                                    |       | 245 |   | (310 | ) | (408 | ) | (633 | ) |
| Income (loss) before income taxes                     |       | 8,512                                                                 |       | 6,084 |   | 3,766 |   | 1,334 |   | (1,771 | ) |
| Income tax expense                                    |       | 3,383                                                                 |       | 1,756 |   | 1,152 |   | 101 |   | 383 |   |
| Net income (loss)                                     |       | $                                                                     | 5,129      |   | $ | 4,328 |   | $ | 2,614 |   | $ | 1,233 |   | $ | (2,154 | ) |
| Earnings (loss)  per share:                           |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                 |       | $                                                                     | 0.64       |   | $ | 0.55 |   | $ | 0.34 |   | $ | 0.16 |   | $ | (0.42 | ) |
| Diluted                                               |       | $                                                                     | 0.62       |   | $ | 0.53 |   | $ | 0.34 |   | $ | 0.16 |   | $ | (0.42 | ) |
| Weighted-average  shares of common stock outstanding: |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                 |       | 7,974                                                                 |       | 7,829 |   | 7,608 |   | 7,595 |   | 5,131 |   |
| Diluted                                               |       | 8,226                                                                 |       | 8,179 |   | 7,754 |   | 7,672 |   | 5,131 |   |

 

22

----

 

| ** **                               | ** ** | **December 31,**   | ** ** |
|------------------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| **Balance  sheet data:**                 | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents               |       | $                       | 5,888      |   | $ | 4,573 |   | $ | 8,012 |   | $ | 4,186 |   | $ | 2,333 |   |
| Marketable  securities                   |       | 4,710                   |       | 9,075 |   | 4,971 |   | 2,580 |   | 1,329 |   |
| Working capital                          |       | 14,787                  |       | 9,563 |   | 12,230 |   | 7,327 |   | 6,240 |   |
| Property and  equipment, net             |       | 14,567                  |       | 11,212 |   | 9,469 |   | 8,658 |   | 9,500 |   |
| Total assets                             |       | 46,969                  |       | 48,716 |   | 39,225 |   | 28,596 |   | 28,157 |   |
| Current  liabilities                     |       | 11,454                  |       | 20,825 |   | 13,960 |   | 9,219 |   | 8,672 |   |
| Long-term debt, less  current maturities |       | 2,749                   |       | 1,892 |   | 2,856 |   | 1,563 |   | 3,576 |   |
| Stockholders’  equity(2)            |       | 32,584                  |       | 25,999 |   | 21,620 |   | 17,814 |   | 15,478 |   |
|                                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)   Certainamounts have been reclassified from Selling, general and administrativeexpenses to Cost of revenues; as such they would not have had an impact on netincome or earnings per share. The reclassification related to administrativeexpenses associated with our manufacturing facility in Mexico. The amountsreclassified were $2,065,000 for 2006, $2,014,000 for 2005; $1,433,000 for2004; $1,386,000 for 2003 and $401,000 for 2002.

(2)   Cashdividends paid were approximately $1,011,000 and $787,000 for the periods endedDecember 31, 2006 and 2005, respectively. Dividends were not paid in anyother years presented.

23

----

**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

**Recent Developments**

In July 2006, GPI SAS closed on the purchase ofan existing, two-story building in Beaune, France located near GPI SAS’existing facility for a purchase price of 650,000 Euros (approximately$828,000) in order to accommodate the high demand for its gaming chips fromMacau casinos, including particularly RFID chips in both low and highfrequencies. The building serves as the administrative and sales headquartersand non-gaming chip production facility for GPIC’s operations outside of theUnited States, resulting in additional space for gaming chip production at GPIC’sexisting facility in Beaune, France. GPI SAS has also added severaladditional and sophisticated pieces of equipment in order to properly serve theneeds of the Macau casinos that are purchasing RFID and non-RFID gaming chipsfrom GPI SAS. The new space has allowed GPIC to increase its gaming chipproduction capacity without any significant interference with ongoingproduction and business operations.

In November 2006, GPIC and Progressive GamingInternational Corporation (“PGIC”) formed a strategic alliance furtherexpanding the two companies’ prior relationship of January 2006 to developand market casino currency control equipment incorporating 13.56 MHz RFIDmicrochip technology. Under the terms of this agreement, PGIC is promoting GPICas its exclusive chip manufacturer in the United States and preferred chipmanufacturer abroad. GPIC is the sole chip manufacturer dedicated by PGIC tosell 13.56 MHz RFID based peripheral readers in the United States and abroad. Additionally,the two companies agreed to further integrate equipment, software and otherproducts and technologies that make use of PGIC’s 13.56 MHz RFID platform. GPICand PGIC are working closely to develop and accelerate the availability of morecomprehensive management and tracking systems to enable casinos to make greateruse of the data provided by RFID embedded casino currency.

In anticipation of severallarge potential orders in the fourth quarter of 2006 from an existingcustomer in Macau, GPI SAS maintained its labor force for fullproduction; however, the orders were unexpectedly delayed. Results for thefourth quarter of 2006 were negatively impacted due to higher expensesresulting from increased labor costs as GPI SAS could not immediately reduceits labor force under French laws. The Company had expectedto begin to recognize revenue from these orders in the firstquarter of 2007. The potential orders remain unsigned and firstquarter results will show a significant loss.

**Overview**

Gaming Partners International Corporation, a Nevadacorporation (“GPIC”) and each of its subsidiaries are sometimes collectivelyreferred to herein as the “Company,” “us,” “we,” or “our.” The followingdiscussion is intended to assist in the understanding of our results ofoperations and our present financial condition. The consolidated financialstatements and the accompanying notes contain additional detailed informationthat should be referred to when reviewing this material. Statements in thisdiscussion may be forward-looking. Such forward-looking statements involverisks and uncertainties that could cause actual results to differ significantlyfrom those expressed. See Item 1A, “Risk Factors.”

A Combination Agreement was executed on September 12,2002, combining GPIC (formerly known as Paul-Son Gaming Corporation) withGPI SAS (formerly known as Etablissements Bourgogne et Grasset S.A.). At theclosing, the businesses of GPIC, GPI SAS and GPI SAS’ then wholly-ownedsubsidiary, the Bud Jones Company, Inc. (“Bud Jones”) were combined, withGPI SAS and Bud Jones becoming wholly-owned subsidiaries of GPIC, or theCombination. The Combination was accounted for as a purchase transaction forfinancial accounting purposes. Because the former GPI SAS stockholders owned amajority of the outstanding GPIC common stock as a result of the Combination,the Combination was accounted for as a reverse acquisition in which GPI SAS isthe purchaser of GPIC. On December 31, 2002, Bud Jones merged into GPIUSA, which was a wholly-owned subsidiary of GPIC and GPI USA was 

24

----

the surviving entity. BudJones was a gaming supply manufacturing company, which was also headquarteredin Las Vegas. Both former operations (GPI USA and Bud Jones) have beenconsolidated into one facility at the Company’s headquarters in Las Vegas,Nevada with the new name of GPI USA. (See Part II—Item 8. FinancialStatements and Supplementary Data—Notes to Consolidated Financial Statements—Note 1.)

Our business activities include the manufacture and/orsupply of gaming equipment and supplies such as gaming chips, table layouts,playing cards, dice, gaming furniture, roulette wheels, table accessories andother products that are used with casino table games such as blackjack, poker,baccarat, craps and roulette. We generally sell our casino products to licensedcasinos for new openings and to existing casino operations, worldwide. We areheadquartered in Las Vegas, Nevada, with offices in Beaune, France; San LuisRio Colorado, Mexico; Atlantic City, New Jersey and Gulfport, Mississippi.

Our products on display at the 2006 Global Gaming Expoin Las Vegas, Nevada and the 2007 ICE show in London, England included ourgaming chips with embedded RFID technology in high and low frequency andcorresponding chip readers. We have been working for several years to apply theRFID technologies to gaming chips. RFID microchips are available for eachbrand and type of our gaming chips. We hold several patents concerning theembedding process of RFID microchips and an exclusive license for themanufacturing and selling of these RFID gaming chips and readers for chiptracking in the United States. We also sell several types of related RFIDgaming chip readers that can be used by the casinos at the cages, vaults,tables, or by the pit bosses. Our gaming chips with embedded RFID microchipsand readers help to protect the casinos from redeeming counterfeit or stolenchips and to improve the efficiency of table game management.

The following arethe most important factors and trends that contribute to our operatingperformance:

·       Anumber of foreign countries are currently considering legislation to legalizeor expand gaming. Such legislation presents potential opportunities to sell ourgaming supplies to new properties and thus increase revenue. The timing andoccurrence of these events remain uncertain. Therefore, we may experiencequarters that are more profitable than others due to the timing and nature ofnew casino openings and expansions throughout the world. There has also beenaccelerated expansion of United States based gaming companies overseas. Ofparticular importance has been the opening of new casinos and expansions ofexisting casinos in Macau in 2006 and the anticipated openings in 2007.

·       Thereceipt of higher volume orders enhances our profit margins through productionefficiencies. The timing and occurrence of these orders remain uncertain anddifficult to predict. Therefore, we may experience quarters that are moreprofitable than others due to the timing and volume of product demand.

·       Theintroduction of new technologies such as high frequency RFID is always achallenge, as a ramp up period is necessary to increase the manufacturingefficiency and bring such efficiencies to the level reached in othertechnologies for which accumulated experience has already allowed significantcost reduction.

·       The level of desire oracceptance, or lack thereof, for our product innovations regarding our securityfeatures and various degrees of desire for increased efficiency of tablemanagement information systems by the casino industry are important factors toour Company. In particular, the increased acceptance of RFID gaming chips foraccounting, security, tracking, and wager recognition in table games may be asignificant trend, impacting our business.

25

----

**Results ofOperations**

Thefollowing table summarizes selected items from the Company’s ConsolidatedStatements of Income as a percentage of revenues for the periods indicated:

| ** **                                       | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                         |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Cost of revenues(1)                              |       | 67.0                                        | %          | 63.3 | % | 64.3 | % |
| Gross profit                                     |       | 33.0                                        | %          | 36.7 | % | 35.7 | % |
| Selling, general  and administrative expenses(1) |       | 21.5                                        | %          | 26.5 | % | 26.6 | % |
| Operating income                                 |       | 11.5                                        | %          | 10.2 | % | 9.1 | % |
| Gain (loss) on  foreign currency transactions    |       | (0.5                                        | )%         | 0.2 | % | (0.3 | )% |
| Interest income                                  |       | 0.6                                         | %          | 0.3 | % | 0.1 | % |
| Interest expense                                 |       | (0.2                                        | )%         | (0.3 | )% | (0.5 | )% |
| Other income, net                                |       | 0.1                                         | %          | 0.3 | % | 0.1 | % |
| Income tax  expense                              |       | (4.6                                        | )%         | (3.1 | )% | (2.6 | )% |
| Net income                                       |       | 6.9                                         | %          | 7.6 | % | 5.9 | % |

----

(1)          Certain amounts havebeen reclassified from Selling, general and administrative expenses to Cost ofrevenues; as such they would not have had an impact on net income or earningsper share. The reclassification related to administrative expenses associatedwith our manufacturing facility in Mexico. These amounts as a percentage ofrevenue were 3.5% for 2005 and 3.2% for 2004.

Thefollowing table details the Company’s historical revenues by product line:

| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(in thousands)**                     | ** ** |
| Revenues:                            |       |                                        |       |   |   |   |   |
| Casino chips                         |       | $                                           | 53,605     |   | $ | 37,959 |   | $ | 26,566 |   |
| Table layouts                        |       | 5,124                                       |       | 4,949 |   | 4,516 |   |
| Playing cards                        |       | 4,183                                       |       | 3,906 |   | 4,440 |   |
| Gaming furniture                     |       | 2,918                                       |       | 2,576 |   | 1,843 |   |
| Dice                                 |       | 2,555                                       |       | 2,711 |   | 2,669 |   |
| Table accessories and other products |       | 5,569                                       |       | 5,020 |   | 4,551 |   |
| Total                                |       | $                                           | 73,954     |   | $ | 57,121 |   | $ | 44,585 |   |

 

**Comparison ofOperations for the Years Ended December 31, 2006 and 2005**

*Revenues**  *For the year ended December 31, 2006, revenueswere $74.0 million, an increase of approximately $16.8 million, compared torevenues of $57.1 million for the year ended December 31, 2005. Of thisincrease, $16.3 million was attributable to GPI SAS and principally the resultof higher sales in Asia. Sales by GPI USA amounted to $31.5 million for theyear 2006, an increase of $.5 million.

*Costof Revenues**  *Cost ofrevenues, as a percentage of sales, increased to 67.0% for 2006, compared to63.3% for 2005. The increase in cost of revenues as a percentage of salesoccurred principally as a result of the cost associated with startingproduction on new product lines to fulfill large orders from Asia.

*GrossProfit**  *Grossprofit for the year ended December 31, 2006 increased by approximately$3.4 million from 2005. This occurred as a result of the aforementionedincrease in revenues of approximately $16.8 million offset by the increase incost of revenues as a percentage of sales.

26

----

*Selling, general and administrative expenses*

| ** **                                          | ** ** | **Years Ended December 31,**(in thousands) | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                                       | ** ** | **Revenue %** | ** ** | **2005** | ** ** | **Revenue %** | ** ** |
| Product  development                                |       | $                                                              | 422        |   |   | 0.6 | % |   | $ | 330 |   |   | 0.6 | % |   |
| Marketing and  sales                                |       | 4,316                                                          |       |   | 5.8 | % |   | 4,284 |   |   | 7.5 | % |   |
| Depreciation and  amortization                      |       | 1,427                                                          |       |   | 1.9 | % |   | 1,292 |   |   | 2.3 | % |   |
| General and  administrative(1)                      |       | 9,728                                                          |       |   | 13.2 | % |   | 9,222 |   |   | 16.1 | % |   |
| Total selling,  general and administrative expenses |       | $                                                              | 15,893     |   |   | 21.5 | % |   | $ | 15,128 |   |   | 26.5 | % |   |

----

(1)          Certain amounts havebeen reclassified from General and administrative expenses to Cost of revenues;as such they would not have had an impact on net income or earnings per share.The reclassification related to administrative expenses associated with ourmanufacturing facility in Mexico. For the year ended 2005, $2,014,000 or 3.5%of revenue has been reclassified.

Selling, general andadministrative expenses, which include product development; marketing andsales; depreciation and amortization; and general and administrative costs,increased to $15.9 million for the year ended December 31, 2006 from$15.1 million for the year ended December 31, 2005. This increase ofapproximately $800,000 was primarily attributable to an increase in general andadministrative expenses. The increase in general and administrative expenseswas primarily the result of an increase in salary expense in both GPI USA andGPI SAS of approximately $442,000 as a result of additional personnel,promotions and an overall salary increase of 6% for 2006; a one-time expense tothe Louisiana sales tax authorities of $421,000 as a result of audits fromseveral parishes which resulted in payments exceeding sales tax collected; anincrease in the reorganization and relocation expense at GPI SAS ofapproximately $165,000 due to the purchase of the new building; and, anincrease in legal fees at GPI USA of approximately $158,000 due to theresolution of several legal matters. These increases were offset by a decreasein stock compensation expense. Expense recorded in 2005 was approximately$778,000 relating to the 100,000 performance-based options granted to the ChiefExecutive Officer that vested due to performance conditions being met. Stockcompensation expense recorded in 2006 of approximately $234,000 was due to theadoption of SFAS 123(R) “Share-Based Payment”.

*Other Income (Expense)*

| ** **                                    | ** ** | **Years Ended December 31,**(in thousands) | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                       | ** ** | **Revenue %** | ** ** | **2005** | ** ** | **Revenue %** | ** ** |
| Gain (loss) on  foreign currency transactions |       | $                                                              | (349       | ) |   | (0.5 | )% |   | $ | 133 |   |   | 0.2 | % |   |
| Interest income                               |       | 410                                                            |       |   | 0.6 | % |   | 162 |   |   | 0.3 | % |   |
| Interest expense                              |       | (175                                                           | )          |   | (0.2 | )% |   | (199 | ) |   | (0.3 | )% |   |
| Gain on sale of  marketable securities        |       | 138                                                            |       |   | 0.1 | % |   | 102 |   |   | 0.2 | % |   |
| Other income, net                             |       | 7                                                              |       |   | 0.0 | % |   | 47 |   |   | 0.1 | % |   |
| Total other income  (expense)                 |       | $                                                              | 31         |   |   | 0.0 | % |   | $ | 245 |   |   | 0.5 | % |   |

 

During the year ended December 31, 2006, otherincome (expense), including gain (loss) on foreign currency transactions,interest income, gains on sales of marketable securities, and other income(expense) decreased to $31,000 from $245,000 for the year ended December 31,2005. This net decrease of $214,000 was principally the result of the change inforeign currency exchange rates, resulting in a loss of $349,000 in 2006compared to a gain of $133,000 in 2005. Foreign currency transaction lossesoccurred as a result of the decrease in the U.S. dollar to Euro exchange ratesduring 2006. Gain on the sale of marketable securities increased by $36,000between the periods. Interest income showed an increase of $248,000 primarilydue to the interest earned on marketable securities held in 2006. Interestexpense decreased to 

27

----

$175,000 for the yearended December 31, 2006, from $199,000 for the year ended December 31,2005. This decrease of $24,000 was primarily caused by a decrease in theaverage outstanding debt amounts in 2006 as compared to 2005 due to normalpayments.

*Income Taxes**  *During the year ended December 31, 2006, oureffective tax rate was 39.7% as compared to 28.9% for the year ended December 31,2005. The increase in our effective rate for the year ended December 31,2006 was primarily a result of the foreign dividend inclusions and relatedvaluation of foreign tax credits. The Company’s effective tax rate for the yearended December 31, 2006 differed from the statutory rate as a result ofthe Company’s repatriation of non-cash dividend from GPI SAS and the relatedincrease in the valuation allowance related to foreign tax credits which areexpected to expire before usage. The Company’s effective tax rate for the yearended December 31, 2005 differed from the statutory rate as a result of achange in the valuation allowance to reflect the expected utilization offederal net operating loss carry forwards, the Company’s repatriation ofnon-cash dividend from GPI SAS, and book-to-return adjustments primarilyresulting from a refinement of the Company’s previous estimate of deemeddividends under IRC Sec 956. It is likely that in the future the Company willdistribute additional non-cash dividends from GPI SAS to GPI USA. If suchdividends occur the Company will generate excess foreign tax credits, whichwill carry forward for 10 years. The utilization of the foreign tax creditswill depend upon the Company’s ability to generate foreign source incomeprospectively.

**Comparison ofOperations for the Years Ended December 31, 2005 and 2004**

*Revenues**  *For the year ended December 31, 2005, revenueswere approximately $57.1 million, an increase of approximately $12.5 million,versus revenues of approximately $44.6 million for the year ended December 31,2004. The increase in revenues for 2005 was principally the result of GPI SAS’sales to new casinos in Asia of approximately $8.0 million. Sales by GPIUSA amounted to $31.0 million for the year 2005, an increase ofapproximately $5.0 million, primarily as a result of sales to a new casinothat opened in Las Vegas of approximately $1.8 million, sales to awholesaler totaling $1.0 million and large reorders of approximately $2.2 million.

*Costof Revenues**  *Cost ofrevenues, as a percentage of sales decreased to 63.3% for 2005, compared to64.3% for 2004. The decrease in cost of revenues as a percentage of salesoccurred principally due to the better absorption of fixed costs due to thehigher sales volume, and the increased efficiency achieved by the realignmentand restructuring of our production facilities.

*Gross Profit**  *Gross profit for the year ended December 31,2005 increased by approximately $5.0 million from 2004. This occurred as aresult of the aforementioned increase in revenues of approximately $12.5 millionand the decrease in cost of revenues as a percentage of sales.

*Selling, general and administrative*

| ** **                                          | ** ** | **Years Ended December 31,**(in thousands) | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                                       | ** ** | **Revenue %** | ** ** | **2004** | ** ** | **Revenue %** | ** ** |
| Product  development                                |       | $                                                              | 330        |   |   | 0.6 | % |   | $ | 259 |   |   | 0.6 | % |   |
| Marketing and  sales                                |       | 4,284                                                          |       |   | 7.5 | % |   | 3,768 |   |   | 8.5 | % |   |
| Depreciation and  amortization                      |       | 1,292                                                          |       |   | 2.3 | % |   | 1,158 |   |   | 2.6 | % |   |
| General and  administrative(1)                      |       | 9,222                                                          |       |   | 16.1 | % |   | 6,642 |   |   | 14.9 | % |   |
| Total selling,  general and administrative expenses |       | $                                                              | 15,128     |   |   | 26.5 | % |   | $ | 11,827 |   |   | 26.6 | % |   |

----

(1)          Certain amounts havebeen reclassified from General and administrative expenses to Cost of revenues;as such they would not have had an impact on net income or earnings per share. Thereclassification related to administrative expenses associated with ourmanufacturing facility in 

28

----

Mexico. For years ended2005 and 2004, $2,014,000 and $ 1,433,000, respectively, have been reclassifiedwhich represents 3.5% and 3.2%, respectively, of revenue.

Selling, general andadministrative expenses, which include product development; marketing andsales; depreciation and amortization; and general and administrative costs,increased to approximately $15.1 million for the year ended December 31,2005 from approximately $11.8 million for the year ended December 31,2004. This increase of $3.3 million was primarily attributable to anincrease in general and administrative expenses of $2.7 million. Theincrease in general and administrative expenses was primarily the result ofone-time expenses of $2.7 million; consisting of stock compensationexpense of $778,000, due to 100,000 shares of performance-based options whichvested in fourth quarter of 2005; $122,000 in NASDAQ National Market listingexpenses; $344,000 in building repairs in our Las Vegas, Mexico and Francefacilities; $346,000 in salary adjustments and reorganization costs; and$352,000 in information technology. Additionally, we incurred expenses of$525,000, which were related to work performed towards future compliance withthe Sarbanes-Oxley Act of 2002 and $48,000 related to new patent acquisitioncosts. We also incurred costs of $241,000 related to the Hurricane Katrina andRita disasters, of which $191,000 was related to the increase in the bad debtreserve on receivables due from casinos and $50,000 was related to donations. Additionally,product development and marketing and sales expenses increased $587,000. Theincreases were mainly due to costs associated with sales commissions of$160,000 related to the increase in sales, the cost of reorganization ofpersonnel in France of $353,000, and the cost of remodeling the Global GamingExpo Convention booth of $74,000.

*Other Income (Expense)*

| ** **                                    | ** ** | **Years Ended December 31,**(in thousands) | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                                       | ** ** | **Revenue %** | ** ** | **2004** | ** ** | **Revenue %** | ** ** |
| Gain (loss) on  foreign currency transactions |       | $                                                              | 133        |   |   | 0.2 | % |   | $ | (155 | ) |   | (0.3 | )% |   |
| Interest income                               |       | 162                                                            |       |   | 0.3 | % |   | 39 |   |   | 0.1 | % |   |
| Interest expense                              |       | (199                                                           | )          |   | (0.3 | )% |   | (253 | ) |   | (0.5 | )% |   |
| Gain on sale of  marketable securities        |       | 102                                                            |       |   | 0.2 | % |   | 55 |   |   | 0.1 | % |   |
| Other income, net                             |       | 47                                                             |       |   | 0.1 | % |   | 4 |   |   | 0.0 | % |   |
| Total other  income (expense)                 |       | $                                                              | 245        |   |   | 0.5 | % |   | $ | (310 | ) |   | (0.6 | )% |   |

 

During the year ended December 31, 2005, otherincome (expense) increased to $245,000 in income from $310,000 in expenseduring the year ended December 31, 2004. This increase of $555,000 wasprincipally the result of the change in foreign currency exchange rates,resulting in a loss of $155,000 in 2004 and a gain of $133,000 in 2005. Foreigncurrency transaction gains occurred as a result of an increase in the U.S.dollar to Euro exchange rates during 2005. Interest income increased by$123,000 primarily due to the interest earned on a higher balance of marketablesecurities in 2005. Gain on sale of marketable securities increased by $47,000between the periods. For the year ended December 31, 2005, interestexpense decreased to approximately $199,000 from approximately $253,000 for theyear ended December 31, 2004. This decrease of approximately $54,000 wasprimarily caused by a decrease in the average outstanding debt amounts in 2005as compared to 2004, due to normal payments.

*Income Taxes**  *During the year ended December 31, 2005, werecorded an income tax expense of approximately $1.8 million as comparedto a tax expense of approximately $1.2 million for the year ended December 31,2004. The increase in income tax expense for the year ended December 31,2005 was primarily a result of the Company’s higher foreign income. The Company’seffective tax rate for the year ended December 31, 2005 differed from thestatutory rate as a result of a change in the valuation allowance to reflectthe expected utilization of federal net operating loss carry forwards, theCompany’s repatriation of non-cash dividend from GPI SAS, and book-to-returnadjustments primarily resulting from 

29

----

a refinement of theCompany’s previous estimate of deemed dividends under IRC Sec 956. It is likelythat in the future the Company will distribute additional non-cash dividendsfrom GPI SAS to GPI USA. If such dividends occur, it is likely that the Company’snet operating losses will be diminished, and that the Company will generateexcess foreign tax credits, which will carry forward for 10 years. Theutilization of the foreign tax credits will depend upon whether the Companygenerates foreign source income prospectively.

**Liquidity andCapital Resources**

*Overview**  *Webelieve that the combination of cash flow from operations and cash on handshould be sufficient to fund expenses from routine operations for a minimum ofthe next twelve months. As of December 31, 2006, we had $5.9 millionin cash and cash equivalents and $4.7 million in current marketablesecurities. For the longer term, in addition to these cash sources, managementwill evaluate other cash source alternatives, including other lendingfacilities in the United States or abroad. Due to negative tax consequences,there may be difficulty in moving cash between France and the United States. Therecan be no assurance that the other cash sources will be available to us onterms and conditions acceptable to us.

*WorkingCapital and Cash Flow (See Consolidated Balance Sheets)**  *Working capital totaled approximately $14.8 millionat December 31, 2006, compared to approximately $9.6 million at December 31,2005. Working capital increased by approximately $5.2 million in 2006primarily due to a decrease in current assets of $4.1 million, offset byan decrease in current liabilities of $9.3 million. Overall, cashincreased by approximately $1.3 million from December 31, 2005 to December 31,2006.

The decrease in total current assets in 2006 was dueprimarily to a decrease in marketable securities of $4.4 million. This wasrelated to the decrease in current liabilities in 2006 in customer deposits ofapproximately $9.3 million.

*NetCash Flow (See Consolidated Statements of Cash Flow)**  *Net cash flow used in operatingactivities was $1.3 million during 2006 compared to net cash provided byoperating activities of $9.0 million during 2005. The $10.3 milliondecrease is primarily due to a $17.7 million decrease in cash providedfrom customer deposits offset by a $7.0 million increase in cash providedfrom inventories and accounts receivable.

Our investing activities resulted in net cash providedof $1.1 million for 2006, compared to net cash used of $10.6 millionin 2005. During 2006, we show net proceeds of $6.4 million due to the saleof marketable securities as compared to net cash used to purchase marketablesecurities in 2005 of $6.4 million. In addition, we used cash of $5.3 millionto purchase property and equipment to facilitate increased production ascompared to cash utilized in 2005 of $3.8 million for the acquisition ofproperty and equipment.

Net cash flow provided by financing activities was$1.2 million during 2006 compared to net cash used in financing activitiesof $1.1 million during 2005. The $2.3 million increase is primarilydue to an increase of $593,000 in cash provided from stock option exercises andan increase of $1.9 million related to proceeds from long term debt.

*Long-TermDebt (See Consolidated Balance Sheets)**  *In February 2001, GPI SASborrowed approximately $2.2 million from an unaffiliated party. Principaland interest payments are due quarterly until February 2008. Interestaccrues at the fixed rate of 5.1% per annum. The loan is guaranteed by ourmajority stockholder, Holding Wilson, S.A. Under the terms of the GPI SAS loanagreement, GPI SAS must comply with certain financial covenants that arecalculated annually based on the financial statements of GPI SAS. Specifically,GPI SAS’ ratio of total loans and similar debt (inclusive of capital leaseobligations) to operating cash flow (defined under French GAAP as operatingincome before depreciation 

30

----

and provisions) must notexceed 1.7, and the ratio of total loans and similar debt (inclusive of capitallease obligations) to stockholders’ equity must not exceed 0.5. GPI SAS’ actualratio of total loans and similar debt (inclusive of capital lease obligations)to operating cash flow and ratio of total loans and similar debt (inclusive ofcapital lease obligations) to stockholders’ equity were 0.27 and 0.17,respectively, as of December 31, 2006.

In March 2002, GPI USA entered into a $995,000loan transaction secured by a Deed of Trust on its Las Vegas building, whichmatures on March 1, 2012, at an interest rate equal to the greater of (i) 8%per annum, or (ii) 362.5 basis points over the average of the LondonInterbank Offered Rates for six-month dollar deposits in the London marketbased on quotations of major banks, or LIBOR, but may not exceed 12% per annum.This loan is payable in arrears in equal monthly installments through andincluding March 1, 2012, at which time the entire remaining principalbalance of approximately $883,000 will be due and payable. There is noprepayment penalty.

On May 7, 2004, GPI SAS entered into a 350,000Euro (approximately $423,000) loan transaction, with Banque Nationale de Paris,a French bank, for the purposes of building expansion in France. Monthlyprincipal and interest payments are 4,720 Euro; with a fixed interest rate of 3.6% per annum. The loan is secured by a mortgage on thebuilding premises and is due May 2011.

In June 2006, GPI SAS entered into a 1.5 millionEuro (approximately $1.9 million) loan agreement with Lyonnaise de Banque,a French bank. The loan has a five-year term at a fixed rate of 3.40% perannum. The loan is repayable in fixed quarterly installments. The loan issecured by GPI SAS’ marketable securities at the bank in which GPI SAS mustmaintain a minimum balance of at least 500,000 Euros ($658,500 atDecember 31, 2006). There are no prepayment penalties or accelerationpayment provisions in the loan agreement. The proceeds of the loan are beingused primarily to purchase (or to replace available cash previously used topurchase) part of the production equipment that will total approximately 2.0 millionEuros (approximately $2.6 million). The production equipment is being usedto increase the production capacity at GPI SAS’ facility in France due toincreased demand. GPI SAS has acquired a portion, and is in the process ofacquiring the balance, of the production equipment from several differentmanufacturers.

*Seasonality**  *We do nottypically experience seasonality relative to our revenues, except, potentially,for the third quarter of each year, when the French location (office andmanufacturing facility) is closed for a substantial part of the month ofAugust, due to holiday. Due to the high sales volume and related deadlines inthe third quarter of 2006, part of the production employees postponed theirholiday.

*LasVegas, Nevada Facilities**  *In May 1997, we purchased our current corporateheadquarters, an approximately 60,000 square foot building located in LasVegas. The Las Vegas headquarters secures the $995,000 loan pursuant to theDeed of Trust. See “Long-Term Debt” above. In connection with the Combination,the former Bud Jones relocated its operations to the Las Vegas headquartersduring the fourth quarter of 2002. In April 2005 we purchased anapproximately one acre parcel of land adjacent to our Las Vegas headquartersfor $800,000 in a cash transaction. This property is being used for additionalemployee and visitor parking.

*SanLuís Rio Colorado, Mexico Facilities**  *We lease two manufacturingfacilities totaling 66,500 square feet. In April 2004 we extended thelease for an additional five years at the same monthly rent amount ofapproximately $0.35 per square foot, except that the rent amount may beprorated, commensurate with the space that we elected to use. We also own anapproximately 66,000 square foot facility adjacent to the leased building. (SeePart II—Item 8. Financial Statements and Supplementary Data—Notes toConsolidated Financial Statements—Note 13.)

31

----

*Beaune,France Facilities**  *Weown an approximately 34,000 square foot manufacturing and administrativefacility in Beaune, France. In May 2004, GPI SAS entered into a 350,000Euro (or approximately $423,000) loan agreement, with Banque Nationale deParis, a French bank, for building expansion. See “Long-Term Debt” above. In December 2004,we entered into a construction contract for a 1,600 square foot additionalexpansion which was completed in the second quarter of 2005, to extend thejeton and plaque production area.

In July 2006, we completed the purchase of a twostory building of approximately 10,700 square foot in Beaune, France, locatednear our existing facility. We purchased the building for 650,000 Euros(approximately $828,000) plus certain statutory costs. The building serves asthe administrative and sales headquarters and non-gaming chip productionfacility for our operations outside of the United States. The new space allowedus to increase our gaming chip production capacity in France without anysignificant interference with our ongoing business operations. The additionalspace created at our existing facility is finished and functional. We usedavailable cash to pay for the building.

*Capital Expenditures**  *We currentlyplan to purchase approximately $3.0 million in capital equipment andimprovements in 2007. In 2006, we incurred $5.2 million for property,plant and equipment. Most of this was to increase production capacity of GPISAS.

**Selected Quarterly Financial Information**

| ** **                           | ** ** | **Year Ended December 31, 2006**               | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                           | ** ** | **First**                                                          | ** ** | **Second** | ** ** | **Third**(1) | ** ** | **Fourth** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **(in thousands, except per share data)** | ** ** |
| Net revenues                         |       | $                                                                  | 18,297     |   | $ | 19,436 |   | $ | 20,135 |   | $ | 16,086 |   | $ | 73,954 |   |
| Gross profit(2)                      |       | 7,194                                                              |       | 7,181 |   | 5,590 |   | 4,409 |   | 24,374 |   |
| Operating income                     |       | 3,398                                                              |       | 2,961 |   | 1,623 |   | 499 |   | 8,481 |   |
| Net income                           |       | $                                                                  | 2,080      |   | $ | 2,015 |   | $ | 919 |   | $ | 115 |   | $ | 5,129 |   |
| Basic net income  per common share   |       | $                                                                  | 0.26       |   | $ | 0.25 |   | $ | 0.12 |   | $ | 0.01 |   | $ | 0.64 |   |
| Diluted net income per  common share |       | $                                                                  | 0.25       |   | $ | 0.25 |   | $ | 0.11 |   | $ | 0.01 |   | $ | 0.62 |   |

----

(1)          Theseamounts have been restated from the amounts previously reported in the Form 10-Qissued on November 13, 2006. The amounts reported in the 10-Qincluded a clerical error of $100,000; in addition, the amounts presented aboveinclude a reclassification between Selling, general and administrative expensesand Cost of revenues of $379,000. The nine-month information was correctas originally reported. The previously reported amounts in the previousquarter were as follows (in thousands, except per share amounts):

| Net revenues                         |   | $     | 20,135 |   |
|--------------------------------------|--------|-------|--------|--------|
| Gross profit                         |   | 6,069 |   |
| Operating income                     |   | 1,723 |   |
| Net income                           |   | $     | 1,019  |   |
| Basic net income  per common share   |   | $     | 0.13   |   |
| Diluted net income per  common share |   | $     | 0.12   |   |

32

----

 

| ** **                                  | ** ** | **Year Ended December 31, 2005**               | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **First**                                                          | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **(in thousands, except per share data)** | ** ** |
| Net revenues                                |       | $                                                                  | 12,291     |   | $ | 15,187 |   | $ | 13,415 |   | $ | 16,228 |   | $ | 57,121 |   |
| Gross profit(2)                             |       | 4,431                                                              |       | 6,459 |   | 4,322 |   | 5,755 |   | 20,967 |   |
| Operating income  (loss)                    |       | 1,082                                                              |       | 2,820 |   | 455 |   | 1,482 |   | 5,839 |   |
| Net income (loss)                           |       | $                                                                  | 502        |   | $ | 1,482 |   | $ | 246 |   | $ | 2,098 |   | $ | 4,328 |   |
| Basic net income  (loss) per common share   |       | $                                                                  | 0.06       |   | $ | 0.19 |   | $ | 0.03 |   | $ | 0.27 |   | $ | 0.55 |   |
| Diluted net income  (loss) per common share |       | $                                                                  | 0.06       |   | $ | 0.18 |   | $ | 0.03 |   | $ | 0.26 |   | $ | 0.53 |   |

----

(2)          Certain amounts havebeen reclassified from Selling, general and administrative expenses to Cost ofrevenues; as such they would not have had an impact on net income or earningsper share. The reclassification related to administrative expenses associatedwith our manufacturing facility in Mexico. The amounts reclassified were$2,065,000 for 2006 ($545,000, $546,000, $535,000 and $439,000 for first,second third and fourth quarter, respectively) and $2,014,000 for 2005($402,000, $458,000, $604,000, $550,000 for first, second third and fourthquarter, respectively).

In the first, second and third quarters of 2006, theincreases in net revenues were primarily due to large casino openings in Asia.

Resultswere lower for the fourth quarter 2006 due mainly to an unexpected delay oflarge orders from one of GPI SAS’ Macau customers. GPI SAS was organized forfull production and could not immediately reduce its labor under French laborlaws.

**ContractualObligations and Commercial Commitments**

Thefollowing table presents the impact that our contractual obligations andcommercial commitments at December 31, 2006 are anticipated to have on ourliquidity and cash flow in future periods. We have no other significantcontractual obligations or commercial commitments either on or off balancesheet as of December 31, 2006. Operating leases on a month-to-month basisare not included. (See Part II—Item 8. Financial Statements andSupplementary Data—Notes to Consolidated Financial Statements—Note 9.)

| ** **                                    | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **(in thousands)**                   | ** ** |
| **Contractual Obligations**              | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less Than  1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **Beyond** | ** ** |
| Long-term debt(1)                             |       | $                                         | 3,747      |   |   | $ | 1,008 |   |   |   | $ | 1,093 |   |   |   | $ | 759 |   |   | $ | 887 |   |
| Capital lease  obligations                    |       | 49                                        |       |   | 39 |   |   |   | 10 |   |   |   | — |   |   | — |   |
| Purchase and  other commitment obligations(2) |       | 6,291                                     |       |   | 3,158 |   |   |   | 1,672 |   |   |   | 961 |   |   | 500 |   |
| Interest                                      |       | 633                                       |       |   | 177 |   |   |   | 275 |   |   |   | 168 |   |   | 13 |   |
| Operating leases                              |       | 1,212                                     |       |   | 470 |   |   |   | 642 |   |   |   | 73 |   |   | 27 |   |
| Total Contractual Cash  Obligations           |       | $                                         | 11,932     |   |   | $ | 4,852 |   |   |   | $ | 3,692 |   |   |   | $ | 1,961 |   |   | $ | 1,427 |   |
|                                               |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          The total represents theexpected cash payments of our long-term debt, including the current portion ofthe long-term debt, but excluding any fair value adjustments.

(2)          Amountsrepresent purchase obligations, agreements to purchase goods or services,obligations that relate to an intellectual property agreement, and employmentagreements that are enforceable and legally binding on us and that specify allsignificant terms, including: fixed, minimum or variable price provisions; andthe approximate timing of the transaction, but excluding any agreements thatare cancelable without penalty. A portion of the amounts for years 1-4consists of estimated payments under contractual commitments to purchasematerials. Such estimated payments due are variable 

33

----

based on the actualmix of the materials to be purchased by us and are also subject to increasebased on the supplier’s costs.

**Related PartyTransactions**

We lease two manufacturing facilities totaling 66,500square feet located in San Luis Rio Colorado, Mexico from an entity controlledby the family of the General Manager of GPI Mexicana. The lease was extended inApril 2004, for an additional five years, at the same monthly rent amountof approximately $0.35 per square foot, or $23,300. If we elect, at ourdiscretion, to use more or less square footage, our rent will be increased ordecreased accordingly on a pro rata basis. Also, in the second quarter of 2006,we began renting, on a month-to-month basis, a residential property from theGeneral Manager’s brother at approximately $800 per month.

An employee of our manufacturing facility in Mexicoowns and operates a small independent machine shop. In 2006 we used his machineshop to build small metal parts. For the fiscal year ended December 31,2006 GPI USA paid this employee, through his business, approximately $30,000.

Neither of these employeesis a director nor an executive officer. The charter of the Audit Committee ofthe Board of Directors requires the Audit Committee to review and approverelated party transactions involving our directors and executive officers.

**Critical AccountingEstimates**

Our consolidated financialstatements are prepared in conformity with accounting principles generallyaccepted in the United States. Certain of our accounting estimates, includingrevenue recognition, accounting for stock-based compensation, the depreciablelives of our assets, the recoverability of deferred tax assets, the allowancefor doubtful accounts receivable, write-downs of obsolete, excess or slowmoving inventories, and the estimated cash flows in assessing therecoverability of long-lived assets, require that we apply significantsubjective judgment in defining the appropriate assumptions for calculatingfinancial estimates. By their nature, these judgments are subject to aninherent degree of uncertainty. Our judgments are based on our historicalexperience, terms of existing contracts, our observance of industry trends,information provided by or gathered from our customers and informationavailable from other outside sources, as appropriate. There can be no assurancethat actual results will not differ from our estimates. The estimates discussedbelow are considered by management to be those in which our estimates andjudgments have a significant impact on issues that are inherently uncertain. Toprovide a further understanding of the methodology we apply, our significantaccounting estimates are discussed below and in the notes to our consolidatedfinancial statements.

*Revenue Recognition*

Revenue may be recognized under different methods,depending on the circumstances. In general, we recognize revenue when thefollowing criteria are met: persuasive evidence of an arrangement between ourcustomer and us exists, shipment has occurred or services have been rendered,the sales price is fixed or determinable, and collectibility is reasonablyassured.

Generally, this means we recognize revenue when ourproducts are shipped to our customers and title to the products and risk ofloss are transferred according to the shipping terms, at which time, the productsare deemed delivered. Shipping costs billed to our customers have the relatedexpense included in cost of revenues. We typically sell our products withpayment terms of net 30 days or less and generally require a 50% down payment.

34

----

We offer a limitedstandard warranty on some of our products, primarily in France. Warrantyreserves are provided under the accrual basis and are based on estimates offuture costs associated with fulfilling the warranty obligation. The estimatesare derived from historical cost experience.

*Property andEquipment*

We have significantcapital invested in our property and equipment, which represented approximately31% and 23%, respectively, of our total assets at December 31, 2006 and2005. Judgments are made in determining the estimated useful lives of assets,salvage value to be assigned to the assets and if or when an asset has beenimpaired. These estimates and the accuracy thereof affect the amount ofdepreciation expense recognized in the financial results and whether we have again or a loss on the disposal of the asset. We assign lives to our assetsbased on our standard policy, which is established by management asrepresentative of the useful life of each category of asset. The carrying valueof property and equipment is reviewed whenever events and circumstancesindicate that the carrying value of an asset may not be recoverable from theestimated future cash flows expected to result from its use and eventualdisposition. The factors considered by management in performing this assessmentinclude: current operating results, trends and prospects, historical data,useful life changes, as well as the effect of obsolescence, market pricechanges, demand, competition and other economic factors. Our estimates havebeen within our expectations of the useful life and depreciation amountsestablished. However, a change in our estimates may result in an adjustment todepreciation expense or to the gain or loss realized on the disposal of assets,which could have a material adverse effect on our consolidated results ofoperations.

*Goodwill and OtherIntangible Assets*

Effective November 1, 2002, in connection withthe implementation of Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill and trademarkswith indefinite useful lives are not amortized. We review goodwill and allintangibles with indefinite lives for impairment, annually as of December 31,and whenever events or changes in circumstances indicate that the carryingvalue of an asset may not be recoverable in accordance with SFAS 142. Wecompleted the annual goodwill impairment test in 2006, and as a result of thistest, no impairment of goodwill was deemed necessary. Management made itsjudgment about the fair value of our goodwill with assistance from anindependent accountant.

Other intangible assets such as patents, non-competeagreements and others with definite lives are amortized using the straight-linemethod over their economic useful lives, ranging from three to fourteen years. Weevaluate these intangible assets with definite lives for potential impairmentwhenever events or changes in circumstances indicate the carrying value may notbe recoverable.

We would record animpairment loss if the carrying amount of the intangible asset is notrecoverable and the carrying amount exceeds the estimated fair value. Factorsthat could trigger an impairment review or adjustment to determine if thecarrying value is recoverable include the following:

·       asignificant adverse change in legal factors or in the business climate

·       anadverse action or assessment by a regulator

·       unanticipatedcompetition

·       negativehistorical experience

·       anegative change in the estimate of the useful lives of products

·       technologicalobsolescence potential

·       anegative estimate of the commercial viability of our patents and licenses

35

----

·       theloss of key personnel

·       asignificant change in the manner we use our acquired assets or in the strategywe use in our business operations

·       asignificant decrease in the market price of an asset

·       acurrent period operating or cash flow loss, combined with a history ofoperating or cash flow losses or a projection or forecast that demonstratesreduced profitability associated with the use of an asset

·       acurrent belief or expectation that, more likely than not, an asset will be soldor otherwise disposed of significantly before the end of its previouslyestimated useful life

All of these assessmentsrequire management judgment. Any changes in the key assumptions about thebusiness and its prospects, or changes in the market conditions or otherexternal conditions, could result in an impairment charge and such charge couldhave a material adverse effect on our consolidated results of operations.

*Deferred Taxes*

We record a valuation allowance to reduce our deferredtax assets to the amount that is more likely than not to be realized. We haveconsidered estimated future taxable income and ongoing tax planning strategiesin assessing the amount needed for the valuation allowance. In assessing theneed for a valuation allowance, we look to the future reversal of existingtaxable temporary differences, taxable income in prior carry back years, thefeasibility of tax planning strategies and estimated future taxable income. Thevaluation allowance can be affected by changes to tax laws, both foreign anddomestic, changes to statutory tax rates and changes to future taxable incomeestimates.

The amount of income taxes we pay is subject toongoing audits by federal, state and foreign tax authorities, which may resultin proposed assessments. Our estimate for the potential outcome for anyuncertain tax issue is highly subjective and judgmental. We believe we haveadequately provided for any reasonably foreseeable outcome related to thesematters. However, our future results may include favorable or unfavorableadjustments to our estimated tax liabilities due to closure of income taxexaminations, new regulatory or judicial pronouncements, or other relevantevents. As a result, our effective tax rate may fluctuate significantly on aquarterly basis.

If actual results differunfavorably from those estimates used, we may not be able to realize all orpart of our net deferred tax assets and additional valuation allowances may berequired. Deferred tax assets and liabilities are determined based on temporarydifferences between the financial reporting and tax bases of assets andliabilities, applying enacted tax rates expected to be in effect for the yearin which the differences are expected to reverse. We periodically assess thelikelihood that we will be able to recover our deferred tax assets and reflectany changes in our estimates in the valuation allowance, with a correspondingadjustment to earnings or equity, as appropriate.

*Bad Debt Reserves*

We recognize an allowancefor doubtful accounts (bad debt reserves) to ensure trade receivables are notoverstated due to uncollectibility. This allowance is maintained for allcustomers, and reviewed on an ongoing basis, based on a variety of factors,including the length of time the receivables are past due, economic conditionsand trends, significant one-time events and historical experience. Variouspercentages are applied to the aged receivables. Additional amounts arerecorded to the allowance based on our awareness of a particular customer’sability to meet its financial obligations. As with many estimates, managementmust make judgments about potential actions by third parties in establishingand evaluating 

36

----

ourreserves for bad debts. Our estimates have been within our expectations and theprovisions established. However, a change in the financial condition ofspecific customers or in overall trends experienced may result in futureadjustments to our bad debt reserves.

*Inventory*

We evaluate our inventoryfor slow-moving, excess, and obsolete inventory that may not be saleable orrecoverable. Analysis of inventory levels, market conditions and future salesforecasts are some of the methodologies for estimating the inventorywrite-downs. Historical inventory usage activity, industry trends, and scraprates are considered in determining the level of reserves. As with manyestimates, management must make judgments about potential actions by thirdparties, including customer demand, in establishing and evaluating ourinventory reserves.

**Recently IssuedAccounting Standards**

In December 2004, the FASB issued SFAS 123(R) “Share-BasedPayment”, which replaces SFAS 123, “Accounting for Stock-Based Compensation”and supersedes Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”). SFAS 123(R) requires companies tomeasure compensation costs for share-based payments including stock options, toemployees and non-employees, at fair value and to expense suchcompensation over the service period beginning with the first annual periodbeginning after June 15, 2005. The pro forma disclosures previouslypermitted under SFAS 123 is no longer an alternative to financial statementrecognition. The Company adopted SFAS 123(R) effective January 1,2006. See Part II—Item 8. Financial Statements and Supplementary Data—Notesto Consolidated Financial Statements—Notes 1 and 11.

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN48”). This Interpretation prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return, and provides guidanceon derecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. This Interpretation will be effective forthe Company on January 1, 2007, with the cumulative effect of the changein accounting principle recorded as an adjustment to opening retained earnings.We have completed an initial evaluation of the impact of the adoption ofFIN 48 and determined that adoption will not have a material impact on ourfinancial position or result of operations.

In September 2006, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”). SAB 108 provides interpretiveguidance on how the effects of the carryover or reversal of prior yearmisstatements should be considered by management in quantifying a current yearmisstatement by evaluating errors using both a balance sheet and an incomestatement approach and concluding whether either approach results in amisstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. SAB 108 is effective for the fiscal years ending afterNovember 15, 2006. We applied the guidance in SAB 108 in the fourth quarterof 2006.

During our 2006 year-end financial closing process, wediscovered that, as the result of an error related to our conversion of fixedasset software in late 2003, depreciation was improperly recorded on a group ofassets in 2005 and 2004. This error caused depreciation expense to beunderstated by $240,000 and $54,000 for the years ended December 31, 2005and 2004, respectively.

SAB 108 permits the Company to adjust for thecumulative effect of errors relating to prior years in the carrying amount ofassets and liabilities as of the beginning of the current fiscal year, with anoffsetting adjustment to the opening balance of retained earnings in the yearof adoption. We have analyzed these 

37

----

amounts bothquantitatively and qualitatively and have concluded that they are not materialto the periods affected. Accordingly, these errors are reflected as acumulative adjustment reduction to retained earnings of $194,000, net of tax,as of January 1, 2006.

In September 2006, the FASB issued Statement of FinancialAccounting Standards No. 158, “Employers Accounting for Defined Pensionand Other Postretirement Plans—an amendment of FASB Statement No. 87,88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires companies to (1) fullyrecognize, as an asset or liability, the overfunded or underfunded status ofdefined pensions and other postretirement benefit plans; (2) recognizechanges in the funded status through other comprehensive income in the year inwhich the changes occur; (3) measure the funded status of defined pensionand other postretirement benefit plans as of the date of the Company’s fiscalyear-end; and (4) provide enhanced disclosures. The provisions of SFAS 158are effective for our year-end December 31, 2006. The Company has assessedthe impact of the adoption of SFAS 158 on its financial statements. Foradditional information about our defined benefit pension and other postretirement benefit plans, refer to Note 15 of the Consolidated FinancialStatements in our Form 10-K.

In February 2007, theFASB issued Statement of Financial Accounting Standard No. 159, “The FairValue Option for Financial Assets and Financial Liabilities—Including anAmendment of FASB Statement No. 115” (“SFAS 159”). The new statementallows entities to choose, at specified election dates, to measure eligiblefinancial assets and liabilities at fair value that are not otherwise requiredto be measured at fair value. If a company lacks the fair value option for aneligible item, changes in that item’s fair value and subsequent reportingperiods must be recognized in current earnings. SFAS 159 is effective forfiscal years beginning after November 15, 2007. The Company is currentlyevaluating the potential impact of SFAS 159 on our financial position andresults of operations.

**Item 7A.**                Quantitativeand Qualitative Disclosures About Market Risk.

Market risk refers to the potential losses arisingfrom changes in interest rates, foreign currency fluctuations and exchangerates, equity prices and commodity prices including the correlation among thesefactors and their volatility. We are primarily exposed to foreign currencyfluctuations and exchange risk and interest rate risk.

*ForeignCurrency Risk*   There are two types of foreigncurrency exchange risks that we may be subject to—transaction and translationgains and losses. Foreign exchange transaction gains or losses aredistinguished from translation gains or losses as follows: (i) translationadjustments do not involve the movement of cash, they are accounting conversioncalculations of an existing functional currency to a reporting currency and (ii) transactiongains or losses which are based on an actual transaction that requires formalpayment at a future point in time.

We are subject to foreign currency exchange riskrelating to the translation of GPI SAS’ assets, liabilities, and income andexpense accounts. The translation adjustment for assets and liabilities isreflected in the accumulated other comprehensive income (loss) caption includedin the stockholders’ equity section on our consolidated balance sheets. GPI SASuses the Euro as its functional currency.

The assets and liabilities of GPI SAS were translatedinto U.S. dollars at the rate of exchange at December 31, 2006. The incomeand expense accounts were translated using the average rate of exchange duringthe period. GPI SAS typically incurs gains or losses of specified foreigncurrency transactions and these amounts are occasionally material. These gainsand losses are reflected in our statementsof income. The U.S. dollar weakened against the Euro to $0.75800 at December 31,2006 from $0.84440 at December 31, 2005. For the year ended December 31,2006, we did not have any forwards, options or other derivative contracts inforce.

38

----

For GPI Mexicana, the U.S. dollar is the functionalcurrency. Non-monetary assets and liabilities are translated at historicalexchange rates, and monetary assets and liabilities are translated at currentexchange rates. Exchange gains and losses arising from translation are includedin other income, (expense).

Because of our significant international operations,we are exposed to currency fluctuations and exchange risk on all loans andcontracts in foreign currencies. We may engage in hedging as it relates to salecontracts between GPI SAS and other foreign countries, which have currenciesthat are different than the Euro. Although we have not entered into any hedgingagreements during the periods reflected in this report, there is a possibilitythat we may enter into a hedging agreement, depending on world money marketconditions and other foreign currency fluctuation considerations.

*InterestRate Risk*   Changes in interest rates may resultin changes in the fair market value of our financial instruments, interestincome and interest expense. As of December 31, 2006, we had totalinterest bearing debt and capital lease obligations of approximately $3.8 million.Of this amount, approximately $2.9 million has a fixed rate of interest; webelieve that the fair value of these agreements approximate reported amounts.

The remainingapproximately $0.9 million of interest bearing obligations has a variableinterest rate which is tied to the London Interbank Offered Rate (“LIBOR”), forsix-month dollar deposits, plus 362.5 basis points. For each 1.0% increasein LIBOR, we would incur increased interest expense of approximately $10,000over the next twelve-month period.

**Item8.**                        FinancialStatements and Supplementary Data.

| Reports of Independent  Registered Public Accounting Firms                                                                                      |
|-------------------------------------------------------------------------------------------------------------------------------------------------|
| Consolidated Balance Sheets at  December 31, 2006 and 2005                                                                                 |
| Consolidated Statements of  Income for the Years Ended December 31, 2006, 2005 and 2004                                                    |
| Consolidated  Statements of Stockholders’ Equity and Other Comprehensive Income for the  Years Ended December 31, 2006, 2005 and 2004 |
| Consolidated Statements of  Cash Flows for the Years Ended December 31, 2006, 2005 and 2004                                                |
| Notes to Consolidated  Financial Statements                                                                                                     |

 

39

----

**GAMINGPARTNERS INTERNATIONAL CORPORATIONAND SUBSIDIARIES**

**CONSOLIDATEDFINANCIAL STATEMENTS**

40

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofGaming Partners International Corporation and SubsidiariesLas Vegas, Nevada

We have audited the accompanying consolidated balancesheet of Gaming Partners International Corporation (formerly known as Paul-SonGaming Corporation) and Subsidiaries (the “Company”) as of December 31,2006, and the related consolidated statements of income, stockholders’ equityand other comprehensive income, and of cash flows for the year ended December 31,2006. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of GamingPartners International Corporation and Subsidiaries as of December 31,2006, and the results of their operations and their cash flows for the yearended December 31, 2006, in conformity with accounting principlesgenerally accepted in the United States of America.

As discussed in Note 1 to the consolidatedfinancial statements, GPIC adopted SFAS No. 123 (Revised 2004), “ShareBased Payment,” using the modified prospective method. As discussed inNote 1 to the consolidated financial statements, the Company recorded acumulative effect adjustment as of January 1, 2006, in connection with theadoption of the Securities and Exchange Commission Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements.”

/s/ MOSS ADAMS LLP

San Diego, CaliforniaMay 14, 2007

41

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofGaming Partners International CorporationLas Vegas, Nevada

We have audited the accompanying consolidated balancesheet of Gaming Partners International Corporation (formerly known as Paul-SonGaming Corporation) and subsidiaries (the “Company”) as of December 31,2005, and the related consolidated statements of income, stockholders’ equityand other comprehensive income, and cash flows for each of the two years in theperiod ended December 31, 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on the financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of GamingPartners International Corporation**andsubsidiaries as of December 31, 2005, and the results of their operationsand their cash flows for each of the two years in the period ended December 31,2005, in conformity with accounting principles generally accepted in the UnitedStates of America.

/s/ DELOITTE & TOUCHE LLP

Las Vegas, NevadaMarch 28, 2006

42

----

**GAMING PARTNERSINTERNATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDecember 31,(in thousands, except share amounts)**

| ** **                                                                                                                  | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ***ASSETS***                                                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current Assets:                                                                                                             |       |       |       |       |       |
| Cash and cash  equivalents                                                                                                  |       | $          | 5,888      |       | $          | 4,573 |   |
| Marketable  securities                                                                                                      |       | 4,710      |       | 9,075      |       |
| Accounts  receivables, less allowance for doubtful accounts of $335 and $398,  respectively                                 |       | 4,136      |       | 4,734      |       |
| Inventories                                                                                                                 |       | 9,251      |       | 9,895      |       |
| Prepaid expenses                                                                                                            |       | 404        |       | 623        |       |
| Deferred income  tax asset                                                                                                  |       | 355        |       | 200        |       |
| Other current  assets                                                                                                       |       | 1,497      |       | 1,288      |       |
| **Total  current assets**                                                                                                   |       | 26,241     |       | 30,388     |       |
| Property and equipment,  net                                                                                                |       | 14,567     |       | 11,212     |       |
| Goodwill                                                                                                                    |       | 1,524      |       | 1,386      |       |
| Other intangibles, net                                                                                                      |       | 1,245      |       | 1,529      |       |
| Deferred income tax  asset                                                                                                  |       | 2,093      |       | 2,407      |       |
| Long-term investments                                                                                                       |       | 683        |       | 1,645      |       |
| Other assets, net                                                                                                           |       | 616        |       | 149        |       |
| **Total  assets**                                                                                                           |       | $          | 46,969     |       | $          | 48,716 |   |
| *LIABILITIES AND STOCKHOLDERS’ EQUITY*                                                                                 |       |       |       |       |       |
| Current Liabilities:                                                                                                        |       |       |       |       |       |
| Current  maturities of long-term debt                                                                                       |       | $          | 1,047      |       | $          | 716 |   |
| Accounts payable                                                                                                            |       | 2,993      |       | 3,483      |       |
| Accrued expenses                                                                                                            |       | 4,557      |       | 3,587      |       |
| Customer deposits                                                                                                           |       | 1,187      |       | 10,506     |       |
| Income taxes  payable                                                                                                       |       | 870        |       | 1,136      |       |
| Deferred income  tax liability                                                                                              |       | 623        |       | 1,061      |       |
| Other current  liabilities                                                                                                  |       | 177        |       | 336        |       |
| **Total  current liabilities**                                                                                              |       | 11,454     |       | 20,825     |       |
| Long-term debt, less  current maturities                                                                                    |       | 2,749      |       | 1,892      |       |
| Long-term deferred  income tax liability                                                                                    |       | 182        |       | —     |       |
| **Total  liabilities**                                                                                                      |       | 14,385     |       | 22,717     |       |
| Commitments and  Contingencies (Note 9)                                                                                     |       |       |       |       |       |
| Stockholders’ Equity:                                                                                                  |       |       |       |       |       |
| Preferred stock,  authorized 10,000,000 shares, $.01 par value, none issued and outstanding                                 |       | —     |       | —     |       |
| Common stock,  authorized 30,000,000 shares, $.01 par value, 8,090,901 and 7,898,766,  respectively, issued and outstanding |       | 81         |       | 79         |       |
| Additional  paid-in capital                                                                                                 |       | 18,429     |       | 16,904     |       |
| Treasury stock,  at cost, 8,061 shares                                                                                      |       | (196       | )          | (196       | )          |
| Retained earnings                                                                                                           |       | 12,690     |       | 8,766      |       |
| Accumulated other  comprehensive income                                                                                     |       | 1,580      |       | 446        |       |
| **Total  stockholders’ equity**                                                                                        |       | 32,584     |       | 25,999     |       |
| **Total  liabilities and stockholders’ equity**                                                                        |       | $          | 46,969     |       | $          | 48,716 |   |

 

See Notes to Consolidated Financial Statements

43

----

**GAMING PARTNERSINTERNATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEYears Ended December 31,**(in thousands, exceptearnings per share)

| ** **                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues                                              |       | $        | 73,954     |     | $          | 57,121   |       | $ | 44,585 |   |
| Cost of revenues                                      |       | 49,580   |       | 36,154   |       | 28,682   |       |
| **Gross profit**                                      |       | 24,374   |       | 20,967   |       | 15,903   |       |
| Product  development                                  |       | 422      |       | 330      |       | 259      |       |
| Marketing and  sales                                  |       | 4,316    |       | 4,284    |       | 3,768    |       |
| General and  administrative                           |       | 11,155   |       | 10,514   |       | 7,800    |       |
| **Operating income**                                  |       | 8,481    |       | 5,839    |       | 4,076    |       |
| Other income  (expense)                               |       |     |       |     |       |     |       |
| Gain (loss) on foreign currency transactions          |       | (349     | )          | 133      |       | (155     | )          |
| Interest income                                       |       | 410      |       | 162      |       | 39       |       |
| Interest expense                                      |       | (175     | )          | (199     | )          | (253     | )          |
| Other income, net                                     |       | 145      |       | 149      |       | 59       |       |
| **Income before income taxes**                        |       | 8,512    |       | 6,084    |       | 3,766    |       |
| Income tax expense                                    |       | 3,383    |       | 1,756    |       | 1,152    |       |
| **Net income**                                        |       | $        | 5,129      |     | $          | 4,328    |       | $ | 2,614 |   |
| Earnings per  share:                                  |       |     |       |     |       |     |       |
| Basic                                                 |       | $        | 0.64       |     | $          | 0.55     |       | $ | 0.34 |   |
| Diluted                                               |       | $        | 0.62       |     | $          | 0.53     |       | $ | 0.34 |   |
| Weighted-average shares  of common stock outstanding: |       |     |       |     |       |     |       |
| Basic                                                 |       | 7,974    |       | 7,829    |       | 7,608    |       |
| Diluted                                               |       | 8,226    |       | 8,179    |       | 7,754    |       |

 

See Notes to Consolidated Financial Statements

44

----

**GAMING PARTNERSINTERNATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME Years Ended December 31, 2006, 2005 and 2004(in thousands, except share amounts)**

|                                                                                               | ** ** | ** **        | ** **   | ** **            | ** ** | ** **    | ** ** | ** **     | ** **    | ** **   | ** ** | ** **        | ** **        | **Accumulated**        | ** ** | ** ** | ** **      |
|-----------------------------------------------------------------------------------------------|------------|-------------------|--------------|-----------------------|------------|---------------|------------|----------------|---------------|--------------|------------|-------------------|-------------------|------------------------|------------|------------|-----------------|
| ** **                                                                                    | ** ** | ** **        | ** **   | ** **            | ** ** | ** **    | ** ** | **Additional** | ** **    | ** **   | ** ** | ** **        | ** **        | **Other**              | ** ** | **Total**  | ** **      |
| ** **                                                                                    | ** ** | **Comprehensive** | ** **   | **Common Stock** | ** ** | **Paid-In**   | ** ** | **Treasury**   | ** **    | **Retained** | ** ** | **Comprehensive** | ** **        | **Stockholders’** | ** ** |
| ** **                                                                                    | ** ** | **Income**        | ** **   | **Shares**            | ** ** | **Amount**    | ** ** | **Capital**    | ** **    | **Stock**    | ** ** | **Earnings**      | ** **        | **Income (Loss)** | ** ** | **Equity** | ** **      |
| **Balance, January 1, 2004**                                                             |       |              |         | ** **            |       | **7,594,900** | ** ** |           | **$ 76** | ** **   |       |              | **$ 14,253** | ** **             |       |       | **$ (196** | **)** |   |   | **$ 2,611** | ** ** |   |   | **$ 1,070** | ** ** |   |   | **$ 17,814** | ** ** |   |
| Net income                                                                                    |       |              | $ 2,614 |                  |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | 2,614 |   |   |   | — |   |   |   | 2,614 |   |   |
| Unrealized loss on securities, net of $1 tax                                                  |       |              | (1           | )                     |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | (1 | ) |   |   | (1 | ) |   |
| Common stock options and warrants exercised                                                   |       |              | —       |                  |       | 134,500       |       |           | 1             | ** **   |       |              | 648               | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | — |   |   |   | 649 |   |   |
| Foreign currency translation adjustment                                                       |       |              | 544          |                  |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | 544 |   |   |   | 544 |   |   |
| Total comprehensive income                                                                    |       |              | $ 3,157 |                  |       |          |       |           |          | ** **   |       |              |              | ** **             |       |       |            | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                          |       |              |         |                  |       |          |       |           |          | ** **   |       |              |              | ** **             |       |       |            | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance, December 31, 2004**                                                           |       |              |         | ** **            |       | **7,729,400** | ** ** |           | **77**        | ** **   |       |              | **14,901**        | ** **             |       |       | **(196)**       | ** ** |   |   | **5,225** | ** ** |   |   | **1,613** | ** ** |   |   | **21,620** | ** ** |   |
| Net income                                                                                    |       |              | $ 4,328 |                  |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | 4,328 |   |   |   | — |   |   |   | 4,328 |   |   |
| Unrealized gain on securities                                                                 |       |              | 5            |                  |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | 5 |   |   |   | 5 |   |   |
| Common stock options and warrants exercised                                                   |       |              | —       |                  |       | 169,366       |       |           | 2             | ** **   |       |              | 698               | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | — |   |   |   | 700 |   |   |
| Vesting of performance-based stock options                                                    |       |              | —       |                  |       | —        |       |           | —        | ** **   |       |              | 778               | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | — |   |   |   | 778 |   |   |
| Dividends paid, $0.10 per share                                                               |       |              | —       |                  |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | (787 | ) |   |   | — |   |   |   | (787 | ) |   |
| Tax benefit from stock options exercised                                                      |       |              | —       |                  |       | —        |       |           | —        | ** **   |       |              | 527               | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | — |   |   |   | 527 |   |   |
| Foreign currency translation adjustment                                                       |       |              | (1,172       | )                     |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | (1,172 | ) |   |   | (1,172 | ) |   |
| Total comprehensive income                                                                    |       |              | $ 3,161 |                  |       |          |       |           |          | ** **   |       |              |              | ** **             |       |       |            | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                                    |       |              |         | ** **            |       | ** **    | ** ** |           | ** **    | ** **   |       |              | ** **        | ** **             |       |       | ** **      | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Balance, December 31, 2005**                                                           |       |              |         | ** **            |       | **7,898,766** | ** ** |           | **79**        | ** **   |       |              | **16,904**        | ** **             |       |       | **(196**        | **)** |   |   | **8,766** | ** ** |   |   | **446** | ** ** |   |   | **25,999** | ** ** |   |
| Net income                                                                                    |       |              | $ 5,129 |                  |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | 5,129 |   |   |   | — |   |   |   | 5,129 |   |   |
| Cumulative effect of adjustments resulting from the  adoption of SAB 108, net of tax (Note 1) |       |              | —       |                  |       |          |       |           |          | ** **   |       |              |              | ** **             |       |       |            | ** ** |   |   | (194 | ) |   |   |   |   |   |   | (194 | ) |   |
| Unrealized loss on securities                                                                 |       |              | (3           | )                     |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | (3 | ) |   |   | (3 | ) |   |
| Common stock options and warrants exercised                                                   |       |              | —       |                  |       | 192,135       |       |           | 2             | ** **   |       |              | 761               | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | — |   |   |   | 763 |   |   |
| Stock compensation expense                                                                    |       |              | —       |                  |       | —        |       |           | —        | ** **   |       |              | 234               | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | — |   |   |   | 234 |   |   |
| Dividends paid, $0.125 per share                                                              |       |              | —       |                  |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | (1,011 | ) |   |   | — |   |   |   | (1,011 | ) |   |
| Tax benefit from stock options exercised                                                      |       |              | —       |                  |       | —        |       |           | —        | ** **   |       |              | 530               | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | — |   |   |   | 530 |   |   |
| Pension and other post retirement plans                                                       |       |              | 71           |                  |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | 71 |   |   |   | 71 |   |   |
| Foreign currency translation adjustment                                                       |       |              | 1,066        |                  |       | —        |       |           | —        | ** **   |       |              | —            | ** **             |       |       | —          | ** ** |   |   | — |   |   |   | 1,066 |   |   |   | 1,066 |   |   |
| Total comprehensive income                                                                    |       |              | $ 6,263 |                  |       |          |       |           |          | ** **   |       |              |              | ** **             |       |       |            | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                                    |       |              |         | ** **            |       | ** **    | ** ** |           | ** **    | ** **   |       |              | ** **        | ** **             |       |       | ** **      | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Balance,  December 31, 2006**                                                          |       |              |         | ** **            |       | **8,090,901** | ** ** |           | **$ 81** | ** **   |       |              | **$ 18,429** | ** **             |       |       | **$ (196** | **)** |   |   | **$ 12,690** | ** ** |   |   | **$ 1,580** | ** ** |   |   | **$ 32,584** | ** ** |   |

 

Notes toConsolidated Financial Statements

45

----

**GAMING PARTNERSINTERNATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYears Ended December 31,**(in thousands)

| ** **                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash Flows from Operating  Activities                                              |       |     |       |     |       |     |       |
| Net income                                                                         |       | $        | 5,129      |     | $          | 4,328    |       | $ | 2,614 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |     |       |     |       |     |       |
| Depreciation                                                                       |       | 2,151    |       | 1,558    |       | 1,673    |       |
| Amortization                                                                       |       | 287      |       | 282      |       | 324      |       |
| Provision for bad debt                                                             |       | (80      | )          | 128      |       | (86      | )          |
| Provision for inventory obsolescence                                               |       | 71       |       | 253      |       | (46      | )          |
| Deferred income taxes                                                              |       | (164     | )          | (1,126   | )          | (219     | )          |
| Stock-based compensation expense                                                   |       | 234      |       | 778      |       | —   |       |
| Excess tax benefit on exercise of stock options and  warrants                      |       | (529     | )          | 527      |       | —   |       |
| (Gain) loss on sale/disposal of property and equipment                             |       | —   |       | (23      | )          | 3        |       |
| (Gain) on sale of marketable securities                                            |       | (139     | )          | (102     | )          | (55      | )          |
| Change  in operating assets and liabilities:                                       |       |     |       |     |       |     |       |
| Accounts receivable                                                                |       | 861      |       | (1,609   | )          | (88      | )          |
| Inventories                                                                        |       | 1,120    |       | (3,434   | )          | (1,930   | )          |
| Other current assets, including prepaid expenses                                   |       | 9        |       | (782     | )          | (269     | )          |
| Accounts payable                                                                   |       | (784     | )          | (74      | )          | 2,128    |       |
| Customer deposits                                                                  |       | (9,947   | )          | 7,727    |       | 1,931    |       |
| Accrued expenses                                                                   |       | 654      |       | 1,168    |       | 602      |       |
| Income taxes payable                                                               |       | 16       |       | (469     | )          | 1,534    |       |
| Other current liabilities                                                          |       | (171     | )          | (163     | )          | 34       |       |
| Net cash provided by (used in) operating activities                                |       | (1,282   | )          | 8,967    |       | 8,150    |       |
| Cash Flows from Investing  Activities                                              |       |     |       |     |       |     |       |
| Purchase of marketable securities                                                  |       | (23,866  | )          | (29,137  | )          | (12,202  | )          |
| Proceeds from sale of marketable securities                                        |       | 30,280   |       | 22,720   |       | 10,009   |       |
| Acquisition of property and equipment                                              |       | (5,262   | )          | (3,781   | )          | (2,879   | )          |
| Purchase of intangible assets                                                      |       | —   |       | (235     | )          | —   |       |
| Proceeds from sale of property and equipment                                       |       | 30       |       | 52       |       | —   |       |
| (Increase) decrease in other assets                                                |       | (66      | )          | (227     | )          | (47      | )          |
| Net cash provided by (used in) investing activities                                |       | 1,116    |       | (10,608  | )          | (5,119   | )          |
| Cash Flows from Financing  Activities                                              |       |     |       |     |       |     |       |
| Proceeds from long-term debt                                                       |       | 1,884    |       | —   |       | 599      |       |
| Repayment of long-term debt                                                        |       | (932     | )          | (1,048   | )          | (794     | )          |
| Cash dividend distribution                                                         |       | (1,011   | )          | (787     | )          | —   |       |
| Tax benefit from stock options                                                     |       | 529      |       | —   |       | —   |       |
| Proceeds from issuance of common stock, net                                        |       | 764      |       | 700      |       | 649      |       |
| Net cash provided by (used in) financing activities                                |       | 1,234    |       | (1,135   | )          | 454      |       |
| Effect of exchange rate changes on cash                                            |       | 247      |       | (663     | )          | 341      |       |
| Net increase (decrease) in cash and cash equivalents                               |       | 1,315    |       | (3,439   | )          | 3,826    |       |
| Cash and cash equivalents, beginning of year                                       |       | 4,573    |       | 8,012    |       | 4,186    |       |
| Cash and cash equivalents, end of year                                             |       | $        | 5,888      |     | $          | 4,573    |       | $ | 8,012 |   |
| Supplemental disclosures  of cash flow information:                                |       |     |       |     |       |     |       |
| Cash paid for interest                                                             |       | $        | 151        |     | $          | 185      |       | $ | 232 |   |
| Cash paid for  income taxes                                                        |       | $        | 2,712      |     | $          | 3,110    |       | $ | 171 |   |

 

See Notes to Consolidated Financial Statements

46

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1.   Nature ofBusiness and Significant Accounting Policies**

***Organization and Nature of Business***

Effective September 1, 2004, Paul-SonGaming Corporation completed its name change to Gaming Partners InternationalCorporation. Gaming Partners International Corporation, a Nevada corporation (“GPIC”)and each of its subsidiaries are sometimes collectively referred to herein asthe “Company,” “we,” “us,” or “our.” The name change was approved by a vote ofstockholders at the Company’s annual meeting held on May 26, 2004. TheCompany’s established brand names such as Paulson®, Bourgogne et GrassetÒ,or B&G, Bud JonesÒ, and T-K®brands remain unchanged. The Company’s subsidiary, Paul-Son GamingSupplies, Inc. changed its name to Gaming Partners International U.S.A., Inc.,or GPI USA. The Company’s subsidiary, Etablissements Bourgogne et GrassetS.A. also changed its name to Gaming Partners International SAS, or GPI SAS. TheCompany’s subsidiary, Paul-Son Mexicana, S.A. de C.V., changedits name to GPI Mexicana S.A. de C.V., or GPI Mexicana.

A Combination Agreement was executed on September 12,2002, combining GPIC (formerly known as Paul-Son Gaming Corporation) withGPI SAS (formerly known as Etablissements Bourgogne et Grasset S.A.). At theclosing, the businesses of GPIC, GPI SAS and GPI SAS’ then wholly-ownedsubsidiary, the former Bud Jones Company, Inc., or Bud Jones, werecombined, with GPI SAS and Bud Jones becoming wholly-owned subsidiaries ofGPIC, or the Combination. The Combination was accounted for as a purchasetransaction for financial accounting purposes. Because the former GPI SASstockholders owned a majority of the outstanding GPIC common stock as a resultof the Combination, the Combination was accounted for as a reverse acquisitionin which GPI SAS is the purchaser of GPIC. On December 31, 2002, Bud Jonesmerged into GPI USA, which was a wholly-owned subsidiary of GPIC and GPI USAwas the surviving entity. Bud Jones was a gaming supply manufacturing company,which was also headquartered in Las Vegas. Both former operations (GPI USA andBud Jones) have been consolidated into one facility at the Company’sheadquarters in Las Vegas, Nevada with the new name of GPI USA.

Our business activitiesinclude the manufacture and supply of casino table game equipment and supplies,including gaming chips, table layouts, playing cards, dice, wheels, gamingfurniture, and miscellaneous table accessories such as chip trays, drop boxesand dealing shoes, which are used in conjunction with casino table games suchas blackjack, poker, baccarat, craps and roulette.

***Basis of Consolidation and Presentation***

The consolidated financial statements include theaccounts of GPIC and its wholly-owned subsidiaries GPI SAS, GPI USA and GPIMexicana. The assets and liabilities of our inactive former wholly-ownedsubsidiary, Authentic Products, Inc. were transferred into GPIC during thesecond quarter of 2004. All material intercompany balances and transactionshave been eliminated in consolidation. The consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States.

A summary of oursignificant accounting policies follows:

*Cash and CashEquivalents*

We consider all highly liquid investments withmaturities of three months or less at the date of purchase to be cash and cashequivalents.

47

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 1.**   Nature of Business and Significant Accounting Policies(Continued)

The Company maintains cashand cash equivalents at a bank in excess of the federally insured limit of$100,000. The Company believes it is not exposed to any significant creditrisk.

*Fair Value ofFinancial Instruments*

The fair value of cash,accounts receivable, and accounts payable approximates the carrying amount ofthese financial instruments due to their short-term nature. The fair value oflong-term debt, which approximates its carrying value, is based on currentrates at which we could borrow funds with similar remaining maturities.

*AccountsReceivables and Customer Deposits*

We perform ongoing credit evaluations of our customersand generally require up to a fifty percent deposit for manufactured orpurchased products at the discretion of management. These customer deposits areclassified as a current liability on the consolidated balance sheets.

We also maintain anallowance for doubtful accounts (See Note 12.) We recognize an allowance fordoubtful accounts (bad debt reserves) to ensure trade receivables are notoverstated due to uncollectibility. This allowance is maintained for allcustomers, based on a variety of factors, including the length of time thereceivables are past due, economic conditions and trends, significant one-timeevents and historical experience. Various percentages are applied to the agedreceivables. Additional amounts are recorded to the allowance based on ourawareness of a particular customer’s inability to meet its financialobligations.

*MarketableSecurities*

We account for ourinvestments in marketable securities in accordance with Statement of FinancialAccounting Standards No. 115, “Accounting For Certain Investments in Debtand Equity Securities” (“SFAS 115”). Under SFAS 115, our securities areclassified as available-for-sale and, as such, are carried at fair value withunrealized holding gains and losses excluded from earnings and reported withinaccumulated other comprehensive income. The first-in, first-out method is usedto determine the cost of securities disposed of. Marketable securities consistof investments in securities offered by French banks, primarily bond portfolios.These investments are primarily held with one major financial institution inour name.

*Inventories*

Inventories are stated atthe lower of cost or market, net of write-downs for slow-moving, excess andobsolete items. Cost is determined using the weighted-average method in Franceand the first-in, first-out method in the United States. Finished goodsinventories consist of dice, cards, chips, other gaming equipment and supplies.

48

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 1.**   Nature of Business and Significant Accounting Policies(Continued)

*Property andEquipment*

Property and equipment arestated at cost, net of depreciation. We include capitalized lease equipment inour property and equipment for financial statement purposes. Depreciation iscomputed primarily on the straight-line method for financial reporting purposesover the following estimated useful lives:

| ** **                  | ** ** | **Years** | ** ** |
|-----------------------------|------------|-----------|------------|
| Buildings and  improvements |       | 10-40     |       |
| Furniture and  equipment    |       | 3-12      |       |
| Vehicles                    |       | 4- 7 |       |

 

*Goodwill and OtherIntangible Assets*

Effective November 1, 2002, in connection withthe implementation of SFAS 142, “Goodwill and Other Intangible Assets,”economic goodwill and trademarks with indefinite useful lives are not amortized.We review goodwill and all intangible assets with indefinite lives forimpairment, annually and whenever events or changes in circumstances indicatethat the carrying value of an asset may not be recoverable in accordance withSFAS 142. We completed the annual goodwill impairment test as of December 31,2006 and December 31, 2005, and as a result of this test, no impairment ofgoodwill was deemed necessary.

Other intangible assetssuch as patents, non-compete agreements and others with definite lives areamortized, using the straight-line method over their economic useful lives, upto fourteen years. We evaluate these intangible assets with definite lives forpotential impairment whenever events or changes in circumstances indicate thecarrying value may not be recoverable.

*Debt*

We include obligationsfrom capitalized leases in our long and short-term debt captions for financialstatement purposes.

*Revenue Recognition*

Revenue is recognized when products are shipped to ourcustomers, according to the shipping terms. We typically sell our products withpayment terms of net 30 days or less.

We offer alimited standard warranty on some of our products, primarily in France. Salesreturns and warranty reserves are provided under the accrual basis and arebased on estimates of future costs associated with fulfilling the warrantyobligation. The estimates are derived from historical cost experience. Salesreturns were not material for us for the periods presented.

*Income Taxes*

We use SFAS 109, “Accounting for Income Taxes,” forfinancial accounting and reporting for income taxes. A current tax liability orasset is recognized for the estimated taxes payable or refundable on taxreturns for the current year. A deferred tax liability or asset is recognizedfor the estimated future tax effects, based on provisions of the enacted law,attributable to temporary differences and carry forwards.

49

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 1.**   Nature of Business and Significant Accounting Policies (Continued)

GPIC and our subsidiariesfile separate income tax returns in our respective jurisdictions. Income taxesare provided for the tax effects of transactions reported in the consolidatedfinancial statements and consist of taxes currently due plus deferred taxesrelated primarily to differences between the basis of assets and liabilitiesacquired for financial and income tax reporting. The deferred tax assets andliabilities represent the future tax consequences of those differences, whichwill either be taxable or deductible when the assets and liabilities arerecovered or settled. Deferred taxes also are recognized for operating lossesthat are available to offset future income taxes.

*Foreign CurrencyTransactions*

The financial statements of GPI SAS are measured usingthe Euro as the functional currency. Assets and liabilities of GPI SAS aretranslated into the U.S. dollar at exchange rates as of the balance sheet date.Revenues and expenses are translated into the U.S. dollar at average rates ofexchange in effect during the year. The resulting cumulative translationadjustments have been recorded in accordance with the provisions of SFAS 52, “ForeignCurrency Translation” and are shown within accumulated other comprehensiveincome.

For GPI Mexicana, the U.S. dollar is the functionalcurrency. Non-monetary assets and liabilities are translated at historicalexchange rates, and monetary assets and liabilities are translated at currentexchange rates. Exchange gains and losses arising from translation are includedin other income, (expense).

Transaction gains andlosses that arise from exchange rate fluctuations on transactions with thirdparties denominated in a currency other than the functional currency areincluded in the results of operations as incurred.

*ComprehensiveIncome*

Comprehensive incomeincludes net income, unrealized gains and losses on available-for-salesecurities recorded net of tax, pension related costs, and cumulative foreigncurrency translation adjustments.

*Estimates*

The preparation ofconsolidated financial statements in conformity with generally acceptedaccounting principles generally requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Estimates and assumptions have been made in determiningthe depreciable lives of assets, the recoverability of deferred tax assets, theallowance for doubtful accounts receivable, write-downs of slow moving, excessand obsolete inventories, estimates for the recoverability of long-livedassets, litigation, claims and assessments; and/or the recoverability ofgoodwill. Actual results could differ from those estimates and assumptions.

50

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 1.**   Nature of Business and Significant Accounting Policies(Continued)

*Long-Lived Assets*

In accordance with SFAS 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” we review long-lived assets andcertain identifiable intangibles for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. In general, we will recognize an impairment loss when the sum ofundiscounted expected future cash flows is less than the carrying amount ofsuch assets. The measurement for such an impairment loss is then based on thefair value of the assets. We had no impairment losses for each of the threeyears in the period ended December 31, 2006.

Assets are grouped andevaluated for impairment at the lowest level for which there is identifiablecash flows, which are largely independent of the cash flows of other groups ofassets. We operate in only one primary marketplace (legalized casinos), it hasonly one identifiable business segment with a centralized business operation,and all cash flows are generated by this one segment and are not disaggregated.(See Note 14 for the presentation of the one business segment bygeographic area.) Long-lived assets are principally real estate andproduction assets.

*Stock-BasedCompensation*

In December 2004, the FASB issued SFAS 123(R) “Share-BasedPayment”, which replaces SFAS 123, “Accounting for Stock-Based Compensation”and supersedes Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”). SFAS 123(R) requires companies tomeasure compensation costs for share-based payments including stock options, toemployees and non-employees, at fair value and to expense such compensationover the service period beginning with the first annual period beginning after June 15,2005. The pro forma disclosures previously permitted under SFAS 123 is nolonger an alternative to financial statement recognition.

Prior to the adoption of SFAS 123(R), we accounted forshare-based awards under the APB 25 intrinsic value method, which resulted incompensation expense being recorded only for performance based options grantedto the Chief Executive Officer. Prior period financial statements have not beenadjusted to reflect fair value expense of share-based compensation for awardsissued prior to the adoption of SFAS 123(R).

On January 1, 2006, the Company adopted SFAS123(R), using a modified prospective application. Accordingly, prior periodamounts have not been restated. For the year ended December 31, 2006, werecognized share-based compensation for all current award grants and for theunvested portion of previous award grants based on the previously determinedgrant date fair values. The Company attributes expense for fair valueshare-based payments on a straight-line basis over the vesting period of theawards, for pro forma disclosure prior to and post adoption of SFAS123(R).

We use historical data and projections to estimateexpected employee behaviors related to option exercises and forfeitures. SFAS123(R) requires that forfeitures be estimated at the grant date andreflected in current expense measurements. Prior to adopting SFAS 123(R), wereduced pro forma share-based compensation expense when forfeitures occurred.The cumulative effect of forfeitures related to previous SFAS 123 pro formaexpense was not material.

51

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 1.**   Natureof Business and Significant Accounting Policies (Continued)

We estimate the fair valueof each stock option award on the grant date using the Black-Scholes valuationmodel incorporating the assumptions. Option valuation models require the inputof highly subjective assumptions, and changes in assumptions used canmaterially affect the fair value estimate. Expected volatility and dividendsare based on historical factors related to our common stock. The expected termconsiders the contractual term of the options as well as the historicalexercise and termination behavior. Risk free rate is based on United StatesTreasury rates appropriate for the expected term.

*Earnings per Shareor “EPS”*

In accordance with SFAS 128, “Earnings per Share,”basic EPS is calculated by dividing net income by the weighted-average numberof common shares outstanding for the period. Diluted EPS reflects the effect ofpotential common stock, which consists primarily of assumed stock option andwarrant exercises. Potentially dilutive securities are not taken into accountwhen their effect would be antidilutive.

We have outstandingcertain stock options to purchase common stock, which have an exercise pricegreater than the average market price. These antidilutive options have beenexcluded from the computation of diluted net income per share for therespective fiscal years.

*Reclassifications*

Certain 2004 and 2005 amounts have been reclassifiedto conform to the 2006 presentation. These reclassifications had no impact onrevenues, net income, or total assets.

These reclassificationsinclude administrative expenses incurred by our manufacturing facility inMexico, which were initially recorded as general and administrative expenses inthe prior years and are now in cost of revenues; interest income which waspreviously shown in other income, net; and the consolidated balance sheetpresentation of long-term marketable securities to be consistent with the 2006presentation.

*Recently IssuedAccounting Standards*

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”(“FIN 48”). This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return, and providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. This Interpretation willbe effective for the Company on January 1, 2007, with the cumulativeeffect of the change in accounting principle recorded as an adjustment toopening retained earnings. We have completed an initial evaluation of the impactof the adoption of FIN 48 and determined that adoption will not have a materialimpact on our financial position or results of operations.

In September 2006, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”). SAB 108 provides interpretiveguidance on how the effects of the carryover or reversal of prior yearmisstatements should be considered by management in 

52

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 1.**   Nature of Business and Significant Accounting Policies(Continued)

quantifying a current yearmisstatement by evaluating errors using both a balance sheet and an incomestatement approach and concluding whether either approach results in amisstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. SAB 108 is effective for the fiscal years ending afterNovember 15, 2006. We applied the guidance in SAB 108 in the fourthquarter of 2006.

During our 2006 year-end financial closing process, wediscovered that, as the result of an error related to our conversion of fixedasset software in late 2003, depreciation was improperly recorded on a group ofassets in 2005 and 2004. This error caused depreciation expense to beunderstated by $240,000 and $54,000 for the years ended December 31, 2005and 2004, respectively.

SAB 108 permits the Company to adjust for thecumulative effect of errors relating to prior years in the carrying amount ofassets and liabilities as of the beginning of the current fiscal year, with anoffsetting adjustment to the opening balance of retained earnings in the yearof adoption. We have analyzed these amounts both quantitatively andqualitatively and have concluded that they are not material to the periodsaffected. Accordingly, these errors are reflected as a cumulative adjustmentreduction to retained earnings of $194,000, net of tax, as of January 1,2006.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 158, “Employers Accounting for DefinedPension and Other Postretirement Plans—an amendment of FASB Statement No. 87,88, 106 and 132R” (“SFAS 158”). SFAS 158 requires companies to (1) fullyrecognize, as an asset or liability, the overfunded or underfunded status ofdefined pension and other postretirement benefit plans; (2) recognizechanges in the funded status through other comprehensive income in the year inwhich the changes occur; (3) measure the funded status of defined pensionand other postretirement benefit plans as of the date of the Company’s fiscalyear-end; and (4) provide enhanced disclosures. The provisions of SFAS 158are effective for our year-end December 31, 2006. We have assessed theimpact of the adoption of SFAS 158 on its financial statements. For additionalinformation about our defined benefit pension and other post retirement benefitplans, refer to Note 15 of the Consolidated Financial Statements in our Form 10-K.

In February 2007, theFASB issued Statement of Financial Accounting Standard No. 159, “The FairValue Option for Financial Assets and Financial Liabilities-Including anAmendment of FASB Statement No. 115” (“SFAS 159”). The new statementallows entities to choose, at specified election dates, to measure eligiblefinancial assets and liabilities at fair value that are not otherwise requiredto be measured at fair value. If a company lacks the fair value option for aneligible item, changes in that item’s fair value and subsequent reportingperiods must be recognized in current earnings. SFAS 159 is effective forfiscal years beginning after November 15, 2007. We are currentlyevaluating the potential impact of SFAS 159 on our financial position andresults of operations.

53

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.   MarketableSecurities**

Marketablesecurities consist of investments in securities offered by French banks,primarily bond portfolios. As of December 31, marketable securitiesconsisted of the following (in thousands):

| ** **                       | ** ** | **2006** | ** ** | **2005**                    | ** ** |
|----------------------------------|------------|----------|------------|-----------------------------|------------|
| ** **                       | ** ** | **Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Fair  Value** | ** ** | **Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Fair  Value** | ** ** |
| Current  marketable securities   |       | $        | 4,707      |                        |       | $ | 3 |   |   | $ | 4,710 |   | $ | 9,066 |   |   | $ | 9 |   |   | $ | 9,075 |   |
| Long-term marketable  securities |       | $        | 683        |                        |       | $ | — |   |   | $ | 683 |   | $ | 1,645 |   |   | $ | — |   |   | $ | 1,645 |   |

 

Long-term marketablesecurities include 500,000 Euros ($658,500 at December 31, 2006) whichmust be maintained as a minimum balance as security for a loan obtained in June 2006.See Note 8.

**Note 3.**   Inventories

Inventoriesconsist of the following at December 31 (in thousands):

| ** **                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Raw materials                        |       | $        | 7,198      |     | $          | 6,356 |   |
| Work in process                      |       | 1,486    |       | 2,302    |       |
| Finished goods                       |       | 1,731    |       | 2,272    |       |
|                                 |       | 10,415   |       | 10,930   |       |
| Less: inventory  valuations reserves |       | (1,164   | )          | (1,035   | )          |
| Inventories                          |       | $        | 9,251      |     | $          | 9,895 |   |

 

**Note 4.   OtherCurrent Assets**

Othercurrent assets consist of the following at December 31 (in thousands):

| ** **                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Refundable  value-added tax |       | $        | 425        |     | $          | 533 |   |
| Current deposits            |       | 984      |       | 732      |       |
| Other assets                |       | 88       |       | 23       |       |
| Other current assets        |       | $        | 1,497      |     | $          | 1,288 |   |

 

**Note 5.   Property andEquipment**

Propertyand equipment consist of the following at December 31 (in thousands):

| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Land                            |       | $        | 1,763      |     | $          | 1,645 |   |
| Buildings and  improvements     |       | 7,797    |       | 5,790    |       |
| Furniture and  equipment        |       | 17,261   |       | 13,104   |       |
| Vehicles                        |       | 740      |       | 656      |       |
|                            |       | 27,561   |       | 21,195   |       |
| Less: accumulated  depreciation |       | (12,994  | )          | (9,983   | )          |
| Property and equipment,  net    |       | $        | 14,567     |     | $          | 11,212 |   |

 

54

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 5.**   Property and Equipment (Continued)

Depreciation expense forthe years ended December 31, 2006, 2005 and 2004 was $2,151,000,$1,558,000 and $1,673,000, respectively.

**Note 6.   Goodwill andOther Intangible Assets:**

Goodwill and otherintangible assets consist of the following at December 31 (in thousands):

| ** **                  | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** | ** **                | ** ** |
|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| ** **                  | ** ** | **Gross  Carrying  Amount**     | ** ** | **Accum.  Amortization**        | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accum.  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Estimated  Useful Life  (Years)** | ** ** |
| Goodwill(1)                 |       |                            | $          | 1,591                           |       |                      |       | $ | (67 | ) |   |   | $ | 1,524 |   |   |   | $ | 1,450 |   |   |   | $ | (64 | ) |   |   | $ | 1,386 |   |   | Indefinite |   |
| Trademarks                  |       |                            | 620        |                            |       |                      | (37        | ) |   |   | 583 |   |   |   | 620 |   |   |   | (37 | ) |   |   | 583 |   |   | Indefinite |   |
| Patents                     |       |                            | 1,242      |                            |       |                      | (725       | ) |   |   | 517 |   |   |   | 1,242 |   |   |   | (628 | ) |   |   | 614 |   |   | 8 to  14 |   |
| Customer  relationships     |       |                            | 432        |                            |       |                      | (357       | ) |   |   | 75 |   |   |   | 432 |   |   |   | (296 | ) |   |   | 136 |   |   | 7 |   |
| Non-compete  agreements     |       |                            | 730        |                            |       |                      | (660       | ) |   |   | 70 |   |   |   | 730 |   |   |   | (534 | ) |   |   | 196 |   |   | 5 to  6 |   |
| Subtotal other  intangibles |       |                            | 3,024      |                            |       |                      | (1,779     | ) |   |   | 1,245 |   |   |   | 3,024 |   |   |   | (1,495 | ) |   |   | 1,529 |   |   |   |   |
| Total intangibles           |       |                            | $          | 4,615                           |       |                      |       | $ | (1,846 | ) |   |   | $ | 2,769 |   |   |   | $ | 4,474 |   |   |   | $ | (1,559 | ) |   |   | $ | 2,915 |   |   |   |   |

----

(1)          The amount of goodwillrelated to GPI SAS for 2006 and 2005 above, included the net effect of foreigncurrency exchange of $150,000 and $12,000, respectively.

Amortization expense forthe years ended December 31, 2006, 2005 and 2004 was $287,000, $282,000and $324,000, respectively.

| **Estimated Amortization Expense for the  Years Ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **(in thousands)**                                                                                  | ** ** | ** ** | ** ** |
| 2007                                                                                                     |       | $          | 222        |   |
| 2008                                                                                                     |       | 122        |       |
| 2009                                                                                                     |       | 77         |       |
| 2010                                                                                                     |       | 31         |       |
| 2011                                                                                                     |       | 31         |       |
| Thereafter                                                                                               |       | 179        |       |
| Total                                                                                                    |       | $          | 662        |   |

 

55

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 7.   AccruedExpenses**

Accrued expenses consistof the following at December 31 (in thousands):

| ** **                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Accrued salaries  and wages                         |       | $        | 1,223      |     | $          | 977 |   |
| Accrued vacation,  bonuses and other employee costs |       | 2,807    |       | 1,846    |       |
| Accrued interest                                    |       | 6        |       | 9        |       |
| Accrued sales  taxes                                |       | 132      |       | 157      |       |
| Accrued sales  commissions                          |       | 100      |       | 148      |       |
| Other accrued  expenses                             |       | 289      |       | 450      |       |
| Accrued expenses                                    |       | $        | 4,557      |     | $          | 3,587 |   |

 

**Note 8.**   Long-TermDebt and Pledged Assets

Long-term debt consists ofthe following at December 31 (in thousands):

| ** **                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Note payable due  to a commercial bank in quarterly installments of 80,638 Euros ($106,200 at  December 31, 2006) including interest of 3.4% through June 2011                                                                                                                                                                                                                                         |       | $        | 1,793      |     | $          | — |   |
| Note payable due  to a commercial bank in quarterly installments of 110,659 Euros ($147,738 at  December 31, 2006) including a fixed interest rate of 5.10% through  February 2008. This note is guaranteed by the majority stockholder                                                                                                                                                                |       | 702      |       | 1,103    |       |
| Note payable to  bank in monthly installments of approximately $7,300 including variable  interest (approximately 9.125% and 8.0% at December 31, 2006 and 2005 respectively)  commencing April 1, 2002 with a maturity date of March 1, 2012 and  an approximate $883,000 balloon payment. The note is secured by a first deed  of trust on our headquarters in Las Vegas, Nevada |       | 948      |       | 959      |       |
| Note payable to  commercial bank, at a fixed rate of 3.6%, payable in monthly installments of  4,720 Euros ($6,216 at December 31, 2006) through May 2011,  collateralized by office and production buildings in France                                                                                                                                                                                |       | 304      |       | 328      |       |
| Other capital  lease obligations with varying fixed rates and maturities                                                                                                                                                                                                                                                                                                                                         |       | 49       |       | 152      |       |
| Capital lease  obligation payable for equipment, fixed interest rate of 8.309% payable in  monthly installments of approximately $11,000 through March 4, 2006                                                                                                                                                                                                                                         |       | —   |       | 37       |       |
| Various notes  payable to commercial banks, with fixed interest rates from 3.5% to 5.4% with  principal and interest payments due monthly through 2006                                                                                                                                                                                                                                                           |       | —   |       | 29       |       |
| Principal balance                                                                                                                                                                                                                                                                                                                                                                                                |       | 3,796    |       | 2,608    |       |
| Less: current  portion                                                                                                                                                                                                                                                                                                                                                                                           |       | (1,047   | )          | (716     | )          |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                                                                   |       | $        | 2,749      |     | $          | 1,892 |   |

 

In June 2006, GPI SAS entered into a 1.5 millionEuro (approximately $1.9 million) loan agreement with a French bank. Theloan has a five-year term at a fixed rate of 3.40% per annum. The loan isrepayable in fixed quarterly installments. The loan is secured by GPI SAS’marketable securities at the bank in which GPI SAS must maintain a minimumbalance of at least 500,000 Euros (see Note 2). There are no prepaymentpenalties or acceleration payment provisions in the loan agreement. Theproceeds of the loan are being used primarily to purchase (or to replaceavailable cash previously used to purchase) 

56

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 8.**   Long-Term Debt and Pledged Assets (Continued)

part of the productionequipment that will total approximately 2.0 million Euros (approximately$2.6 million). The production equipment is being used to increase theproduction capacity at GPI SAS’ facility in France due to increased demand.

In February 2001, GPI SAS borrowed approximately $2.2 millionfrom an unaffiliated party. Principal and interest payments are due quarterlyuntil February 2008. Interest accrues at the fixed rate of 5.1% per annum. Theloan is guaranteed by our majority stockholder, Holding Wilson, S.A. Under theterms of the GPI SAS loan agreement, GPI SAS must comply with certain financialcovenants that are calculated annually based on the financial statements of GPISAS. Specifically, GPI SAS’ ratio of total loans and similar debt (inclusive ofcapital lease obligations) to operating cash flow (defined under French GAAP asoperating income before depreciation and provisions) must not exceed 1.7, andthe ratio of total loans and similar debt (inclusive of capital leaseobligations) to stockholders’ equity must not exceed 0.5. GPI SAS’ actual ratioof total loans and similar debt (inclusive of capital lease obligations) tooperating cash flow and ratio of total loans and similar debt (inclusive ofcapital lease obligations) to stockholders’ equity were 0.27 and 0.17,respectively, as of December 31, 2006.

GPI USA entered into a $995,000 loan transaction witha federal savings bank on March 5, 2002. The interest rate equals thegreater of 8% per annum (“Floor Rate”) or 362.5 basis points over the averageof the London Interbank Offered Rates (“LIBOR”) for six month dollar deposit inthe London market based on quotations of major banks. The interest rate shallnot be less than the Floor Rate or more than 12% per annum, nor shall theinterest rate increase or decrease by more than two percentage points per annumduring any twelve month period or one-half percentage point per annum duringany three month period. The maturity date is March 1, 2012. The Loan ispayable in arrears in equal monthly installments of principal and interest ofapproximately $7,300 (based upon a thirty year amortization schedule) beginningApril 1, 2002 and continuing on the first day of each month through andincluding March 1, 2012, at which time the entire remaining principalbalance of approximately $883,000 will be due and payable. The Loan is securedby a Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing(“Deed of Trust”) encumbering the Company’s Las Vegas, Nevada headquarters. GPICexecuted a Guaranty in favor of this federal savings bank by which GPICguaranteed the obligations of GPI USA under the Loan and Deed of Trust and therelated loan documents executed in connection with the Loan. The Loan may nowbe prepaid in part or in whole at any time without a prepayment premium. TheDeed of Trust restricts GPI USA from encumbering or transferring (1) theCompany’s Las Vegas, Nevada headquarters; and (2) ownership interests inGPI USA. Further, the Deed of Trust also grants to this federal savings bank asecurity interest in GPI USA’s personal property, including, but not limitedto, inventory, machinery, furniture, fixtures, licenses and income.

On May 7, 2004, GPI SAS entered into a 350,000Euro (approximately $423,000 at the May 7, 2004 exchange rate) loantransaction with a French bank, for the purposes of building expansion inFrance. Monthly principal and interest payments are 4,720 Euro; with an interest rate is 3.6%, fixed per annum.The loan is secured by amortgage on the building premises and is due May 2011.

57

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 8.**   Long-Term Debt and Pledged Assets (Continued)

Estimated annual principalmaturities of long-term debt and future minimum payments under capital leaseobligations at December 31, 2006 are as follows (in thousands):

| ** **                                             | ** ** | **Capital  Leases** | ** ** | **Long-Term  Debt** | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| 2007                                                   |       |                | $          | 44                  |       |   |   | $ | 1,008 |   |   |
| 2008                                                   |       |                | 10         |                |       |   | 610 |   |   |
| 2009                                                   |       |                | —     |                |       |   | 483 |   |   |
| 2010                                                   |       |                | —     |                |       |   | 501 |   |   |
| 2011                                                   |       |                |       |                |       |   | 258 |   |   |
| Thereafter                                             |       |                | —     |                |       |   | 887 |   |   |
| Total                                                  |       |                | 54         |                |       |   | $ | 3,747 |   |   |
| Less: amount  representing interest                    |       |                | (5         | )                   |       |   |   |   |   |
| Present value of  minimum lease payments               |       |                | 49         |                |       |   |   |   |   |
| Less: current  portion                                 |       |                | (39        | )                   |       |   |   |   |   |
| Long-term portion of  obligations under capital leases |       |                | $          | 10                  |       |   |   |   |   |   |

 

**Note 9.   Commitmentsand Contingencies**

***Operating Lease Obligations***

The following is aschedule by years of future minimum lease payments under operating leases as ofDecember 31, 2006 (in thousands):

| 2007                          |   | $   | 470    |   |
|-------------------------------|--------|-----|--------|--------|
| 2008                          |   | 418 |   |
| 2009                          |   | 224 |   |
| 2010                          |   | 46  |   |
| 2011                          |   | 27  |   |
| Thereafter                    |   | 27  |   |
| Total minimum lease  payments |   | $   | 1,212  |   |

 

Rent expense totaled$361,000, $267,000 and $285,000 for the years ended December 31, 2006,2005 and 2004, respectively.

***Legal Proceedings and Contingencies***

We are engaged in disputes and claims arising in thenormal course of business. We believe the ultimate outcome of these proceedingswill not have a material adverse impact on the consolidated financial positionor results of operations.

On or about August 25, 2006, the Company received a 60day notice from the Center for Environmental Health (“CEH”), a privateenvironmental advocacy firm, stating that CEH intended to bring suit againstthe Company in California for alleged failure to provide a warning requiredunder the California Safe Drinking Water and Toxic Enforcement Act of 1986(“Proposition 65” or the “Act”). Previously, a number of card room operatorsthroughout California received similar 60 day notice letters 

58

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 9.**   Commitments and Contingencies (Continued)

from CEH alleging theyfailed to meet warning requirements contained in the Act. We have sold gamingchips to some of these card room operators. The Act requires, among otherthings, that certain businesses in California must provide a “clear andreasonable warning” if they expose persons to chemical listed by the State ofCalifornia as a carcinogen and/or reproductive toxicant, unless the businesscan demonstrate the exposure is below a “No Significant Risk Level” for thatchemical. Failure to provide the warning can be enforced by the government orprivate citizens in an action for civil penalties and injunctive relief. Inthis case, the environmental group alleges that gaming chips contain leadand/or lead compounds and that no warning was given by the card room operatorsto its employees or customers. We have engaged outside counsel who is pursuingdiscussions with counsel for CEH. We have entered into a joint defenseagreement with several of the card room operators and a tolling agreement withCEH in order to continue discussions. No litigation has been commenced in thematter to date. In the meantime, we are now providing a Proposition 65 warningon all gaming chips sold in the State of California. We are pursuing rigorousefforts to reformulate our gaming chips to eliminate the need to provide suchwarnings in connection with future chip sales. While the maximum amount ofstatutory penalties for failing to provide a required Proposition 65 warningare substantial, based on our preliminary analysis, we do not believe that ourliability, if any, in this matter will have a material adverse effect on us orour business, operations or financial position.

The Company underwent sales tax audits for fourparishes in the state of Louisiana. As of December 31, 2006, all salestaxes were paid and current. The only unresolved issues concern the calculationand assessment of interest and penalties in two parishes for which an accrualhas been made at December 31, 2006.

On April 5, 2007, aputative class action complaint alleging violations of federal securities lawsbased on alleged misstatements and omissions by the Company, entitled *Natalie Gordon v. Gerard P. Charlier, Paul S. Dennis,Eric P. Endy, Alain Thieffry, Elisabeth Carrette, Robert J. Kelly, Charles R.Henry, Laura McAllister Cox and Gaming Partners International Corporation,*was filed in the United States District Court for the District of Nevada, underCase No. 2:07-cv-00448-RCJ-RJJ. The complaint seeksclass certification, unspecified damages, costs and expenses, andequitable relief against the Company, its directors and certain executiveofficers. The complaint was served on the Company on April 6, 2007. TheCompany has engaged counsel and intends to vigorously defend against the claimspresented.

***Commitments***

On October 25, 2001, GPI SAS entered into anexclusive patent license agreement with Enpat, Inc. The subject patentswere subsequently sold by Enpat, Inc. to Shuffle Master Inc. in the fourthquarter of 2004. Thereafter, in the second quarter of 2005, Shuffle Master Inc.sold 50% of its rights in the subject patents to International Game Technologyand later the other 50% of its rights in the subject patents also to InternationalGame Technology. The agreement grants GPI SAS (and its affiliated GPICcompanies) the exclusive rights to manufacture and distribute gaming chips andreaders in the United States under the patents for a gaming chip tracking systemand method, which utilizes gaming chips with embedded electronic circuitsscanned by antennas in gaming chip placement areas (gaming tables and casinocage), or RFID technology. The duration of the exclusive agreement is for thelife of the patents, the last of which expire in 2015. Minimum annual royaltypayments of $125,000 are required to be made by GPIC over the remaining life ofthe exclusive patent license agreement.

59

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 9.   Commitmentsand Contingencies (Continued)**

On November 3, 2005,GPI USA entered into an exclusive purchase agreement with a supplierfor particular raw materials used to manufacture finished goods. Thesupplier agreed to not compete in the sale of these finished goods in theUnited States during the five-year term of the agreement. GPI USA was requiredto purchase a certain amount of raw material initially, $569,000 in the firstyear, and $711,000 per year for the years two through five of the agreement.The prices negotiated under this agreement represent prevailing market pricesat the time of the agreement. As of December 31, 2006, GPIC had purchasedmore than the minimum required by the agreement.

***Employment Agreements***

The Company has employmentagreements with key employees which include severance commitments in the eventthe Company terminates the employee without cause. Total commitments under theagreements aggregate to approximately $467,000 as of December 31, 2006.

**Note 10.**   IncomeTax Matters

The Company accounts forincome taxes using the asset and liability approach required by  SFAS 109. The asset and liability approachrequires the recognition of deferred income tax liabilities and assets for theexpected future tax consequences of temporary differences between the carryingamounts of and the tax basis of the Company’s assets and liabilities. Futureincome tax benefits attributable to temporary differences are recognized to theextent that realization of such benefits is more likely than not. These futuretax benefits are measured by applying currently enacted tax rates. Thefollowing table provides an analysis of the Company’s provision for incometaxes for the years ended December 31 (in thousands):

| ** **                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                    |       |     |       |     |       |     |       |
| U.S. Federal                |       | $        | —     |     | $          | 50       |       | $ | (274 | ) |
| U.S. State                  |       | (9       | )          | (5       | )          | 36       |       |
| France                      |       | 2,929    |       | 2,794    |       | 1,609    |       |
| Total Current               |       | 2,920    |       | 2,839    |       | 1,371    |       |
| Deferred:                   |       |     |       |     |       |     |       |
| U.S. Federal                |       | 355      |       | (1,036   | )          | 41       |       |
| U.S. State                  |       | (6       | )          | 32       |       | 4        |       |
| France                      |       | 114      |       | (79      | )          | (264     | )          |
| Total Deferred              |       | 463      |       | (1,083   | )          | (219     | )          |
| Provision for  income taxes |       | $        | 3,383      |     | $          | 1,756    |       | $ | 1,152 |   |

 

Pre-tax income (loss)consisted of the following (in thousands):

| ** **     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------|------------|----------|------------|----------|------------|----------|------------|
| U.S.A.         |       | $        | 40         |     | $          | (5       | )          | $ | (266 | ) |
| France         |       | 8,472    |       | 6,089    |       | 4,032    |       |
| Pre-tax income |       | $        | 8,512      |     | $          | 6,084    |       | $ | 3,766 |   |

 

60

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 10.**   Income Tax Matters (Continued)

A reconciliation of ourincome tax expense as compared to the tax expense calculated by applying thestatutory federal tax rate to the income before income taxes for the yearsended December 31 is as follows:

| ** **                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed expected  income tax expense                                           |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| *Adjustments:*                                                                  |       |     |       |     |       |     |       |
| Foreign dividends  and IRC Sec 78 and 956 inclusions net of foreign tax credits |       | (13.4    | )%         | 31.9     | %          | 16.6     | %          |
| State taxes                                                                     |       | 0.1      | %          | 0.4      | %          | 0.7      | %          |
| Change in  valuation allowance                                                  |       | 18.9     | %          | (35.9    | )%         | (16.0    | )%         |
| French gain  (loss) on U.S. note receivable                                     |       | (0.5     | )%         | 4.2      | %          | (3.1     | )%         |
| Subpart F income  adjustment                                                    |       | 1.2      | %          | (6.8     | )%         | —   |       |
| Other, net                                                                      |       | (0.6     | )%         | 1.1      | %          | (1.6     | )%         |
| Income tax expense                                                              |       | 39.7     | %          | 28.9     | %          | 30.6     | %          |

 

In 2005 and 2006, GPI USA received non-cash dividendsfrom GPI SAS. In addition, management intends to distribute additional futurenon-cash dividends from GPI SAS to GPI USA. Management believes that thetaxable income resulting from these dividends will result in full utilizationof prior accumulated losses in the United States. Accordingly, we have notprovided a valuation allowance related to United States operating losses andother deferred tax assets, exclusive of foreign tax credits. The aforementioneddividends generate foreign tax credits which expire in 2015 and 2016 if notutilized. The Company has established a valuation allowance related to theseforeign tax credits for amounts which are estimated to expire before usage.

For state income tax purposes, the Company hasapproximately $151,000 in net operating loss carry forwards. These netoperating loss carry forwards expire in 2007 through 2021. The determination ofthe state net operating loss carry forwards is dependent upon the federal netoperating loss, apportionment percentages and other respective state laws,which can change year to year and impact the amount of the state net operatingloss carry forwards. Utilization of such federal and state net operating lossesis subject to certain limitations under federal and state income tax laws. TheCompany continues to record a full valuation allowance on state deferred assetsdue to the uncertainty of future state taxable income.

61

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 10.**   Income Tax Matters (Continued)

The primary components ofthe net deferred income tax assets at December 31 were as follows (inthousands):

| ** **                              | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| **Deferred tax assets:**                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating loss  carry forwards          |       | $          | 155        |       | $          | 988 |   |
| Bad debt reserves  and inventory        |       | 564        |       | 609        |       |
| French deferred  assets                 |       | 552        |       | 479        |       |
| Stock  compensation                     |       | 362        |       | 284        |       |
| Intangibles                             |       | 384        |       | 357        |       |
| Tax credits                             |       | 5,417      |       | 2,432      |       |
| Foreign Currency  Translation           |       | 135        |       | 203        |       |
| Other                                   |       | 109        |       | 78         |       |
| Total gross  deferred tax assets        |       | 7,678      |       | 5,430      |       |
| Less: valuation  allowance              |       | (4,178     | )          | (1,664     | )          |
| Total net  deferred tax assets          |       | 3,500      |       | 3,766      |       |
| **Deferred  tax liabilities:**          |       |       |       |       |       |
| Excess book basis  in shares of GPI SAS |       | 1,393      |       | 1,693      |       |
| Fixed assets                            |       | 59         |       | 101        |       |
| French deferred  liabilities            |       | 379        |       | 394        |       |
| Other                                   |       | 26         |       | 32         |       |
| Total deferred  tax liabilities         |       | 1,857      |       | 2,220      |       |
| Deferred tax  asset (liability), net    |       | $          | 1,643      |       | $          | 1,546 |   |

 

We have provided deferredtaxes on the excess book basis in the shares of GPI SAS, as the Company intendsto distribute non-cash dividends from our French subsidiary in 2007.

GPIC and GPI USA are beingaudited by the United States’ Internal Revenue Service for the tax year 2004. Weare not aware of any concerns or findings.

The French TaxAdministration has completed their audit of GPI SAS for tax years 2004, 2005and 2006. On March 29, 2007, we received a notice seeking additional taxesof 550,963 Euros ($735,354 at March 31, 2007) be paid based on theirfindings. GPI SAS disagrees with their analysis and expects a significantreduction or possible elimination of the additional tax sought by the FrenchTax Administration.

**Note 11.**   StockOption Programs, Warrants and Stock-Based Compensation Expense

***Stock OptionPrograms and Warrants***

We have stock option programs, which consist of the1994 Long-Term Incentive Plan (the “Incentive Plan”) and the 1994 Directors’Stock Option Plan (the “Directors’ Plan”). The Incentive Plan provides for thegrant of stock options to executive officers, key employees, outsideconsultants and employee-directors. On July 29, 1996, the Board ofDirectors amended and the stockholders subsequently approved an increase in theaggregate shares issuable under the Incentive Plan to 1,000,000 from 500,000shares. In general, an initial option grant under the Incentive Plan vests overa four year period, with one-fourth of the option 

62

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 11.**   Stock Option Programs, Warrants and Stock-Based CompensationExpense (Continued)

grantvesting at the end of each year, however, the vesting schedule for individualparticipants may vary. The options granted under the Incentive Plan expire 10years after the date of the grant.

The Directors’ Plan, asamended in September 2002, provides that each non-employee director, uponjoining the Board of Directors, will receive an option to purchase 6,000 sharesof common stock. In October 2003, the Board of Directors amended and thestockholders subsequently approved an amendment to the Directors’ Plan to: (i) increasethe number of shares of our common stock for which options may be granted to150,000, an increase of 75,000, and (ii) extend the expiration date of theplan to January 31, 2009 from January 31, 2004, an increase of fiveyears. The initial option grant vests over a 3-year period, withone-third of the option grant vesting at the end of each year. At the beginningof the fourth year of service on the Board of Directors, and each yearthereafter, each non-employee director receives an annual grant to purchase2,000 shares of common stock. In addition, each year each non-employee directorreceives options to purchase 1,500 shares of common stock for serving on thefollowing committees of the Board of Directors for at least six months prior tothe date of grant: the Audit Committee; the Compensation Committee; and theCompliance Committee. No option is exercisable sooner than six months and oneday after the date of the grant. The options expire on the tenth anniversary ofthe date of grant, nine months after retirement or two years after death. Optionscovering 20,500 shares were granted to non-employee directors during the periodof January 1, 2006 through December 31, 2006, at a weighted-averageexercise price of $18.97 per share. The following is a summary of optionactivity for the years ended December 31, 2004, 2005 and 2006:

| ** **                                | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Terms** | ** ** | **Aggregate  Intrinsic  Value  (in 000’s)** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Outstanding at  December 31, 2003    |       |                     | 558,000    |                                   |       |                                                 | $          | 4.94                                                  |       |   |   |   |   |   |   |   |   |   |
| Granted                                   |       |                     | 12,500     |                                   |       |                                                 | 8.44       |                                                  |       |   |   |   |   |   |   |   |   |
| Canceled                                  |       |                     | (2,000     | )                                      |       |                                                 | 3.40       |                                                  |       |   |   |   |   |   |   |   |   |
| Exercised(1)                              |       |                     | (79,500    | )                                      |       |                                                 | 8.18       |                                                  |       |   |   |   |   |   |   |   |   |
| Outstanding at December 31, 2004     |       |                     | 489,000    |                                   |       |                                                 | 4.92       |                                                  |       |   |   |   |   |   |   |   |   |
| Granted                                   |       |                     | 28,500     |                                   |       |                                                 | 14.28      |                                                  |       |   |   |   |   |   |   |   |   |
| Canceled                                  |       |                     | —     |                                   |       |                                                 | —     |                                                  |       |   |   |   |   |   |   |   |   |
| Exercised(2)                              |       |                     | (89,866    | )                                      |       |                                                 | 7.77       |                                                  |       |   |   |   |   |   |   |   |   |
| Outstanding at December 31, 2005     |       |                     | 427,634    |                                   |       |                                                 | 4.95       |                                                  |       |   |   |   |   |   |   |   |   |
| Granted                                   |       |                     | 20,500     |                                   |       |                                                 | 18.97      |                                                  |       |   |   |   |   |   |   |   |   |
| Canceled                                  |       |                     | —     |                                   |       |                                                 | —     |                                                  |       |   |   |   |   |   |   |   |   |
| Exercised(3)                              |       |                     | (100,634   | )                                      |       |                                                 | 7.58       |                                                  |       |   |   |   |   |   |   |   |   |
| Outstanding at December 31, 2006(4)  |       |                     | 347,500    |                                   |       |                                                 | $          | 5.02                                                  |       |   |   | 5.6 years |   |   |   | $ | 4,563 |   |   |
| Exercisable at  December 31, 2006(4) |       |                     | 131,500    |                                   |       |                                                 | $          | 5.97                                                  |       |   |   | 5.0 years |   |   |   | $ | 1,598 |   |   |

----

(1)          Does not includewarrants of 55,000 that were exercised during the fourth quarter of 2004.

(2)          Does not includewarrants of 79,500 that were exercised during 2005.

63

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 11.**   StockOption Programs, Warrants and Stock-Based Compensation Expense (Continued)

(3)          Does not includewarrants of 91,501 that were exercised during 2006.

(4)          All warrants have beenexercised or expired as of December 31, 2006

A maximum of 1,000,000 and 150,000 shares, of commonstock have been reserved for issuance under the Incentive Plan and theDirectors’ Plan, respectively. The Incentive Plan expired on January 30,2004, except as to the stock options outstanding on that date. None of theoptions can be granted at less than the fair market value of our common stockon the date of grant.

Pursuant to the terms of his employment agreement, ourChief Executive Officer was granted 100,000 stock options in 2002 underour Incentive Plan, which vest if and when we report audited net profit aftertax of at least $2.0 million. These performance-based options aretherefore subject to variable accounting. Compensation expense of $778,000 wasrecorded in the fourth quarter of 2005 when we assessed that it was probablethat the performance vesting condition would be met. The compensation expensewas measured based on the intrinsic value of the performance options as of December 31,2005.

Prior to the Combination with GPI SAS, GPIC hadgranted options, warrants, or other convertible securities or rights topurchase GPIC common stock to some of GPI USA’s employees and directors. Aspart of the consideration for the GPI SAS shares in connection with theCombination, GPIC issued to the former stockholders of GPI SAS, antidilutivewarrants to purchase that number of shares of GPIC common stock which equalsthe total number of shares of GPIC common stock issuable pursuant thoseoptions, warrants, or other convertible securities or rights to purchase GPICcommon stock which were outstanding immediately prior to the closing. Theformer stockholders of GPI SAS can only exercise those antidilutive warrants,however, if, when and to the extent that GPIC issues common stock upon exerciseor conversion of any of those options, warrants, securities or rights. Theantidilutive warrants will expire 30 days after the date on which GPICnotifies the antidilutive warrant holder that the last of those options,warrants, securities or rights has been exercised, canceled or terminated. Thepurpose of the warrants is to provide antidilutive protection to the formerstockholders of GPI SAS in the event any of those options, warrants, securitiesor rights are exercised after the closing.

The former GPI SASstockholders were issued warrants to purchase an aggregate of 459,610 shares,of which 84,610 warrants were immediately exercised at the close of theCombination, 55,000 warrants were exercised in the fourth quarter of 2004, and79,500 warrants were exercised during 2005 and 91,501 were exercised during2006. In addition, 149,000 warrants were cancelled or terminated on November 17,2005. As such, there were no warrants remaining at December 31, 2006.

***Stock-Based Compensation Expense***

Thefollowing table summarizes our reported share-based compensation expenseincluded in our consolidated statements of income as of December 31, 2006:

| General and  administrative stock option share-based compensation |   | $       | 234,180 |   |
|-------------------------------------------------------------------|--------|---------|---------|--------|
| Tax benefit                                                       |   | (84,305 | )       |
| Total share-based  compensation, net of tax                       |   | $       | 149,875 |   |

 

64

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 11.**   Stock Option Programs, Warrants and Stock-Based CompensationExpense (Continued)

Thefollowing table compares net income, including SFAS 123(R) share-basedcompensation net of tax of $149,875, reported as of December 31, 2006compared to the prior period’s pro forma SFAS 123 fair value compensation forthe years 2005 and 2004, respectively, net of tax, under which no compensationcost was required to be recognized, (in thousands, except per share amounts):

| ** **                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Reported net  income                                       |       | $        | 5,129      |     | $          | 4,328    |       | $ | 2,614 |   |
| Pro forma  stock-based compensation, net of tax            |       | —   |       | 501      |       | —   |       |
| Additional pro  forma stock-based compensation, net of tax |       | —   |       | (565     | )          | (97      | )          |
| Comparative net  income                                    |       | $        | 5,129      |     | $          | 4,264    |       | $ | 2,517 |   |
| Basic EPS as  reported                                     |       | $        | 0.64       |     | $          | 0.55     |       | $ | 0.34 |   |
| Basic EPS (prior  year pro forma)                          |       | $        | 0.64       |     | $          | 0.54     |       | $ | 0.33 |   |
| Diluted EPS as  reported                                   |       | $        | 0.62       |     | $          | 0.53     |       | $ | 0.34 |   |
| Diluted EPS (prior year  pro forma)                        |       | $        | 0.62       |     | $          | 0.52     |       | $ | 0.32 |   |

 

Asummary of the status of the Company’s stock option plans at December 31,2006, 2005 and 2004 is presented in the table below:

| ** **                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Option valuation assumptions:**                               |       |     |       |     |       |     |       |
| Dividend yield                                                  |       | None     |       | None     |       | None     |       |
| Expected  volatility                                            |       | 98.3     | %          | 111.9    | %          | 64.0     | %          |
| Risk free  interest rate                                        |       | 4.79     |       | 4.73     |       | 3.63     |       |
| Expected term of  options                                       |       | 5.6      |       | 5.6      |       | 2.0      |       |
| Weighted average  fair value of options granted during the year |       | $        | 14.31      |     | $          | 11.20    |       | $ | 1.67 |   |
| **Exercises  under all share-based payment arrangements:**      |       |     |       |     |       |     |       |
| Cash received,  net                                             |       | $        | 764,074    |     | $          | 699,431  |       | $ | 649,000 |   |
| Tax benefit realized for  tax deductions from option exercises  |       | $        | 529,000    |     | $          | 527,000  |       | $ | — |   |

 

For the year ended December 31,2006, the total intrinsic value of options exercised was $1,321,831; the totalintrinsic value of warrants exercised was $1,816,571.

As of December 31,2006, there was a total of $192,526 of unrecognized compensation expenserelated to stock options, which cost is expected to be recognized as follows:

| 2007       |   | $      | 113,248 |   |
|------------|--------|--------|---------|--------|
| 2008       |   | 60,564 |    |
| 2009       |   | 18,714 |    |
| Thereafter |   | — |    |
| Total      |   | $      | 192,526 |   |

 

65

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 12.**   Allowancefor Doubtful Accounts

Werecord, based on periodic reviews of our accounts receivables, allowances forestimated uncollectible trade accounts receivable. A summary of provisions forestimated bad debts and the related write-offs related to the allowance fordoubtful accounts are as follows (in thousands):

| **Years Ended December 31,** | ** ** | ** ** | ** ** | **Beginning  of Year  Balance** | ** ** | **Provisions** | ** ** | **Write-offs,  Net of  Recoveries** | ** ** | **End  of Year  Balance** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------------------|------------|----------------|------------|------------------------------------------|------------|--------------------------------|------------|
| 2006                                        |       |       | $          | 398                                  |       |           |       | $                                        | (63        | )                              |       |   | $ | — |   |   |   | $ | 335 |   |   |
| 2005                                        |       |       | $          | 296                                  |       |           |       | $                                        | 189        |                           |       |   | $ | (87 | ) |   |   | $ | 398 |   |   |
| 2004                                        |       |       | $          | 382                                  |       |           |       | $                                        | 37         |                           |       |   | $ | (123 | ) |   |   | $ | 296 |   |   |

 

**Note 13.**   RelatedParty Transactions

We lease two manufacturing facilities totaling 66,500square feet located in San Luis Rio Colorado, Mexico from an entity controlledby the family of the General Manager of GPI Mexicana. The lease was extended inApril 2004, for an additional five years, at the same monthly rent amountof approximately $0.35 per square foot, or $23,300. If we elect, at ourdiscretion, to use more or less square footage, our rent will be increased ordecreased accordingly on a pro rata basis. Also, in the second quarter of 2006,we began renting, on a month-to-month basis, a residential property from theGeneral Manager of GPI Mexicana’s brother at approximately $800 per month.

An employee of our manufacturing facility in Mexicoalso owns and operates a small independent machine shop. In 2006, we used hismachine shop to build small metal parts. For the fiscal year ended December 31,2006, GPI USA paid this employee, through his business, approximately $30,000.

Neither of these twoemployees are a director nor an executive officer. The charter of the AuditCommittee of the Board of Directors requires the Audit Committee to review andapprove related party transactions involving our directors and executiveofficers.

66

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 14.**   BusinessSegments

SFAS 131, “Disclosuresabout Segments of an Enterprise and Related Information,” requires publicbusiness enterprises to report selected reporting information about operatingsegments in annual financial statements and requires public businessenterprises to report selected information about operating segments in interimand annual financial reports. We manufacture and sell casino table gameequipment and have determined that we operate in one operating segment—casinogame equipment products. The segment is comprised of the following productlines: casino chips, table layouts, playing cards, gaming furniture, dice, andtable accessories and other products. Although the Company derives its revenuesfrom a number of different product lines, the Company does not allocateresources based on the operating results from the individual product lines nordoes it manage each individual product line as a separate business unit. Thefollowing tables present certain data by geographic area as of and for theyears ended December 31 (in thousands):

| ** **                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales to external  customers:                   |       |     |       |     |       |     |       |
| U.S.A.                                              |       | $        | 29,369     |     | $          | 28,675   |       | $ | 23,609 |   |
| Europe                                              |       | 6,697    |       | 4,802    |       | 4,921    |       |
| Asia                                                |       | 33,595   |       | 20,523   |       | 12,513   |       |
| Other(1)                                            |       | 4,293    |       | 3,121    |       | 3,542    |       |
| Total consolidated net  sales to external customers |       | $        | 73,954     |     | $          | 57,121   |       | $ | 44,585 |   |

----

(1)          Includes Canada, Africa,Australia, South America and other countries.

Thefollowing table represents our net sales by product line for the years ended December 31(in thousands):

| ** **                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues:                            |       |     |       |     |       |     |       |
| Casino chips                         |       | $        | 53,605     |     | $          | 37,959   |       | $ | 26,566 |   |
| Table layouts                        |       | 5,124    |       | 4,949    |       | 4,516    |       |
| Playing cards                        |       | 4,183    |       | 3,906    |       | 4,440    |       |
| Gaming furniture                     |       | 2,918    |       | 2,576    |       | 1,843    |       |
| Dice                                 |       | 2,555    |       | 2,711    |       | 2,669    |       |
| Table accessories and other products |       | 5,569    |       | 5,020    |       | 4,551    |       |
| Total                                |       | $        | 73,954     |     | $          | 57,121   |       | $ | 44,585 |   |

 

Sales by GPI USA are to casinos primarily in theUnited States and represent our entire product line; sales generated by GPI SASare primarily casino chips sold to casinos in Asia and Europe. One customercomprised 19%, 29% and 14% of our total revenue for 2006, 2005 and 2004,respectively. In 2006, a different customer represented 18% of our revenue.

67

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 14.**   Business Segments (Continued)

The following tablerepresents our property and equipment by geographic area as of December 31(in thousands):

| ** **                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Property and equipment,  net: |       |     |       |     |       |
| United States                 |       | $        | 5,832      |     | $          | 6,311 |   |
| France                        |       | 7,351    |       | 3,547    |       |
| Mexico                        |       | 1,384    |       | 1,354    |       |
| Total                         |       | $        | 14,567     |     | $          | 11,212 |   |

 

The following tablerepresents goodwill and intangibles by geographic area as of December 31(in thousands):

| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Goodwill and  intangibles, net: |       |     |       |     |       |
| United States                   |       | $        | 1,445      |     | $          | 1,729 |   |
| France                          |       | 1,324    |       | 1,186    |       |
| Total                           |       | $        | 2,769      |     | $          | 2,915 |   |

 

68

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 15.**   PensionPlan

GPISAS sponsors a noncontributing, defined benefit plan for both its salaried andhourly-rated employees who meet certain age and service requirements. Theplan calls for benefits to be paid to eligible employees at retirement based onyears of participation and compensation rates in the last years prior toretirement. The following amounts relate to GPI SAS’ defined benefit pensionplan as of December 31 (in thousands):

| ** **                                                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Change in benefit  obligation:                                                            |       |     |       |     |       |     |       |
| Benefit obligation at beginning of year                                                   |       | $        | 224        |     | $          | 219      |       | $ | 139 |   |
| Service cost                                                                              |       | 22       |       | 20       |       | 63       |       |
| Interest cost                                                                             |       | 10       |       | 9        |       | —   |       |
| Actuarial loss                                                                            |       | 44       |       | 7        |       | —   |       |
| Benefits paid                                                                             |       | (7       | )          | —   |       | —   |       |
| Effect of foreign exchange rate changes                                                   |       | 29       |       | (31      | )          | 17       |       |
| Benefit obligation at end of year                                                         |       | 322      |       | 224      |       | 219      |       |
| Change in plan  assets:                                                                   |       |     |       |     |       |     |       |
| Fair value of plan assets at beginning of year                                            |       | 419      |       | 468      |       | 419      |       |
| Actual return on plan assets                                                              |       | 16       |       | 15       |       | 15       |       |
| Benefits paid                                                                             |       | (7       | )          | —   |       | —   |       |
| Effect of foreign exchange rate changes                                                   |       | 49       |       | (64      | )          | 34       |       |
| Fair value of plan assets at end of year(1)                                               |       | 477      |       | 419      |       | 468      |       |
| Funded status                                                                             |       | 155      |       | 195      |       | 249      |       |
| Unrecognized transition asset as of April 1998,  being recognized over 15 years |       | —   |       | (110     | )          | (146     | )          |
| Prepaid benefit  cost                                                                     |       | $        | 155        |     | $          | 85       |       | $ | 103 |   |

----

(1)          Comprisedof equity securities.

| Weighted-average  assumptions: |   |   |   |   |   |   |   |
|--------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Discount rate                  |   | 4.25   | %      | 4.25   | %      | 4.50   | %      |
| Expected return on plan assets |   | 3.50   | %      | 3.50   | %      | 3.50   | %      |
| Rate of  compensation increase |   | 2.00   | %      | 2.00   | %      | 2.00   | %      |

 

The accumulated benefit obligation at December 31,2006 was $215,951.

69

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 15.**   Pension Plan (Continued)

In September 2006,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 158, “Employers Accounting for Defined Pensionand Other Postretirement Plans—an amendment of FASB Statement No. 87, 88,106 and 132R” (“SFAS 158”). In accordance with SFAS 158, the unrealizedtransition asset at the beginning of the year has been entered through othercomprehensive income. In 2006, we did not make any contribution to the pensionplan, and we do not expect to make any contributions to the pension plan in2007. In 2006, the prepaid benefit cost of $155,000 is recognized in theconsolidated balance sheets as deposits in other assets; in 2005 the prepaidbenefit cost of $85,000 was recognized in other current assets. The Companyrecognized the following adjustments to the consolidated balance sheets at December 31,2006 (in thousands):

| **Balance sheet line items** | ** ** | ** ** | ** ** | **Before  application of  SFAS 158** | ** ** | **Adjustments** | ** ** | **After  application of  SFAS 158** | ** ** |
|---------------------------------------------|------------|------------|------------|------------------------------------------------|------------|-----------------|------------|-----------------------------------------------|------------|
| Other assets,net                            |       |       | $          | 522                                            |       |            |       | $                                             | 94         |   |   |   | $ | 616 |   |   |
| Long-term  deferred income tax liability    |       |       | $          | 159                                            |       |            |       | $                                             | 23         |   |   |   | $ | 182 |   |   |
| Accumulated other  comprehensive income     |       |       | $          | 1,509                                          |       |            |       | $                                             | 71         |   |   |   | $ | 1,580 |   |   |

 

Netpension expense for the years ended December 31 consists of the following(in thousands):

| ** **                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost-benefits  earned during the period |       | $        | 22         |     | $          | 20       |       | $ | 18 |   |
| Interest expense  on benefit obligation         |       | 10       |       | 9        |       | 8        |       |
| Expected return  on plan assets                 |       | (16      | )          | (15      | )          | (14      | )          |
| Actuarial loss                                  |       | 44       |       | 7        |       | 37       |       |
| Amortization of  unrecognized transition asset  |       | (17      | )          | (16      | )          | (18      | )          |
| Total                                           |       | $        | 43         |     | $          | 5        |       | $ | 31 |   |

 

Projectedbenefit payments from the plan as of December 31, 2006 are estimated to beas follows (in thousands):

| 2007        |   | $      | — |   |
|-------------|--------|--------|--------|--------|
| 2008        |   | — |   |
| 2009        |   | 48     |   |
| 2010        |   |   |   |
| 2011        |   | — |   |
| 2012 - 2016 |   | 34     |   |

 

At December 31, 2004 and 2005, we had an accrualof $134,000 related to payments for employees at our Mexico facility in theevent they were involuntarily terminated. Based on our current understanding ofMexican labor law and having no plans to close our Mexican facility, we haveeliminated this accrual as of December 31, 2006.

We maintain a 401(k) planfor employees in the United States who work over one year and are 21 yearsof age or older. During 2003, the former Paul-Son Gaming Supplies, Inc.plan and the former Bud Jones Company plan were combined into one plan. Contributionsto the plan were based on the 

70

----

**GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 15.**   Pension Plan (Continued)

amountscontributed by the eligible employees. Eligible employees could elect tocontribute up to the lesser of the IRS limit or fifteen percent of theirearnings into the plan. We contribute $0.50 for each $1.00 contributed by aparticipant in the plan up to four percent of the participant’s wages. The 401(k) employercontributions in the United States made during the years ended December 31,2006, 2005 and 2004 under the combined plan were $52,000, $48,000 and $36,000respectively.

**Note 16.**   Earningsper Share or “EPS”

Inaccordance with SFAS 128, “Earnings per Share”, basic EPS is calculated bydividing net income by the weighted-average number of common shares outstandingfor the period. Diluted EPS reflects the effect of potential common stock,which consists primarily of assumed stock option and warrant exercises.Potentially dilutive securities are not taken into account when their effectwould be antidilutive. The weighted-average number of common shares outstandingused in the computation of basic and diluted earnings per share as of December 31is as follows:

| ** **                                                         | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Weighted-average  number of common shares outstanding—Basic   |       | 7,974,066 |       | 7,828,748 |       | 7,607,900 |       |
| Potential  dilution from equity grants                             |       | 251,670   |       | 350,042   |       | 146,300   |       |
| Weighted-average number  of common shares outstanding—Diluted |       | 8,225,736 |       | 8,178,790 |       | 7,754,200 |       |

 

We have outstandingcertain stock options to purchase common stock, which have an exercise pricegreater than the average market price. These antidilutive options have beenexcluded from the computation of diluted net income per share for therespective fiscal years. These outstanding antidilutive options for the yearsended December 31, 2006, 2005 and 2004 were approximately 13,223, 97,554and 270,000, respectively.

**Note 17.**   OtherComprehensive Income

Accumulatedother comprehensive income, which is presented net of tax, consists of thefollowing as of December 31 (in thousands):

| ** **                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Foreign currency  translation           |       | $        | 1,506      |     | $          | 440 |   |
| Unrealized gain/(loss)  on securities   |       | 3        |       | 6        |       |
| Pension and other  postretirement plans |       | 71       |       | —   |       |
|                                    |       | $        | 1,580      |     | $          | 446 |   |

 

71

----

**Item9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.

Moss Adams LLP has beenretained as the Company’s independent registered auditor for the fiscal yearended December 31, 2006. The consolidated financial statements of GPIC forfiscal years ended December 2005 and 2004 were audited byDeloitte & Touche LLP. No disagreements exist with these independentauditors.

**Item9A.**                Controls andProcedures.

The Company maintains disclosure controls andprocedures that are designed to ensure that all information required to bedisclosed in reports under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to management,including the Chief Executive Officer and Chief Financial Officer, to allowtimely decisions regarding required disclosure.

The Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, has conducted an evaluation ofthe effectiveness of disclosure controls and procedures pursuant to SecuritiesExchange Act of 1934 Rule 13a-15(c) as of December 31, 2006. Duringthat evaluation, management identified material weaknesses in the Company’sdisclosure controls and procedures which are discussed below. A materialweakness is a control deficiency, or a combination of control deficiencies,that result in more than a remote likelihood that a material misstatement ofthe annual or interim financial statements will not be prevented or detected. TheCompany’s Chief Executive Officer and the Chief Financial Officer haveconcluded that, as of December 31, 2006, the end of the period covered bythis annual Form 10-K, the Company’s disclosure controls and procedureswere not effective due to the following material weaknesses and therefore haveexercised additional management oversight over these disclosure controls andprocedures to ensure fair presentation of the consolidated financial statementsin accordance with generally accepted accounting principles.

As disclosed in the Company’s December 31, 2005 Form 10-K,management became aware of a material weakness relating to internal controlsover financial reporting involving the design and operation of controls overshare-based payment accounting. Specifically, the controls in place were notadequate to ensure that the correct accounting treatment was used for stockoptions which were granted to the Chief Executive Officer in September 2002,conditioned on the Company attaining a specific performance target. (See Item12). Prior to filing the December 31, 2005 Form 10-K, the Companydetermined that variable accounting was required with respect to theseparticular stock options in order to comply with generally accepted accountingprinciples. The Company recorded the resulting compensation expense in thefourth quarter of 2005, which management had concluded was the proper periodbased on the considerations of the specific performance target. The Company hasnot granted any other such performance-based stock options or similarsecurities that have unknown vesting dates to any other employee or person.During 2006, the Company adopted SFAS 123(R) which requires expense bemeasured and recorded for each share-based payment award whereas, prior to SFAS123(R), expense often was not recorded. In connection with the preparation ofeach of the Company’s Form 10-Qs and its Form 10-K, errors wereidentified in the calculations and disclosures related to stock options. TheCompany implemented a new stock option tracking system late in 2006 and theCompany intends to continue to implement procedures to remediate the materialweakness in the design and operation of controls over the accounting forshare-based payment to ensure that the financial reporting for all share-basedcompensation is in compliance with generally accepted accounting principles.The errors noted were corrected in the quarter in which they were found. Noquarter was materially impacted. The Company has appropriately recognizedshare-based payment expense in the financial statements included in this annualForm 10-K.

The Companydetermined that as of December 31, 2006, a material weakness existed inthe Company’s financial reporting processes because, in the United Statesoperations, which includes the 

72

----

corporatereporting function, the Company did not have sufficient personnel withrequisite knowledge of generally accepted  accounting principles and related practices toensure an effective closing process in the United States or to properlydocument the Company’s important accounting policy and transaction conclusions.The Company also did not have sufficient personnel with requisite knowledge ofgenerally accepted accounting principles to ensure proper preparation of thefinancial statements and disclosures for the Form 10-K. The Company’sChief Executive Officer and Chief Financial Officer based this conclusion on anumber of factors, including:

·       TheCompany’s system of internal control for its United States operations requiressignificant reliance on detective rather than preventive controls to properlyrecord adjustments to inventory, fixed assets and depreciation which impactsthe Company’s ability to generate timely and complete consolidated financial statements.

·       Duringpost-closing and audit processes in connection with preparing the consolidatedfinancial statements for the year ended December 31, 2006, certain issueswere discovered by management and the independent registered auditors thatresulted in adjustments to these financial statements. For example, the Companyhad difficulty related to new disclosures in the financial statements such asSFAS 158, “Employers Accounting for Defined Pension and Other PostretirementPlans”.

The Company’s management reviewed these issues andmade the proper adjustments to the consolidated financial statements. However,management concluded that the failure to discover these items in the regularclosing process is a result of a significant deficiency that constitutes amaterial weakness in the design or operation of internal controls overfinancial reporting. Management continues to implement corrective actions whererequired to improve the effectiveness and timeliness of internal controls,including the enhancement of systems and procedures. The Company is in theprocess of evaluating accounting department needs and hired a new ChiefFinancial Officer in December 2006. Management also plans to providetraining to existing employees and supplement the team in certain key positions.

In light of the material weaknesses described above,additional analysis and other post-closing procedures were performed to ensurethat the consolidated financial statements were prepared in accordance withgenerally accepted accounting principles. Accordingly, management believes thatthe consolidated financial statements included in this report fairly present inall material respects the Company’s financial condition, results of operationsand cash flows for the periods presented.

Changes in internal control over financial reporting:

There were no changes ininternal controls over financial reporting during the fourth fiscal quarter of2006 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

**Item9B.**               OtherInformation.

None.

**PART III**

**Item10.**                 Directors,Executive Officers and Corporate Governance.

**Directors andExecutive Officers**

The following table sets forth the name, age andcurrent office of our executive officers and directors as of April 30,2007, and a director nominee for election at our next annual meeting ofstockholders. Our Board of Directors currently consists of seven directors. Thecurrent term of office for each of our 

73

----

directors expires at ournext annual meeting of stockholders. We have not presently established a datefor our 2007 annual meeting of stockholders.

Uponcompletion of the combination with B&G, on September 12, 2002, HoldingWilson S.A. and the late Francois Carrette (succeeded by his wife, ElisabethCarrette) agreed to vote all shares of our common stock held by them in favorof the election of Eric P. Endy to the Board of Directors for a period offive years from the completion of the combination and executed an irrevocableproxy in favor of Mr. Endy. Likewise, Mr. Endy agreed to vote allshares of our common stock beneficially owned by him in the manner directed byHolding Wilson S.A. with respect to the election or removal of directors duringthe same five-year period and executed an irrevocable proxy in favor of HoldingWilson S.A.

| **Name**                             | ** ** | ** ** | ** ** | **Age**                                          | ** ** | **Title** |
|--------------------------------------|------------|------------|------------|--------------------------------------------------|------------|-----------|
| *Gerard P. Charlier*(4),  (5)   |       | 68         |       | President, Chief  Executive Officer and Director |
| *David W. Grimes*                    |       | 48         |       | Chief Financial  Officer                         |
| *Laura McAllister Cox*(4)            |       | 47         |       | Chief Legal and  Gaming Compliance Officer       |
| *Gay A. Nordfelt*                    |       | 57         |       | Secretary                                        |
| *Elisabeth Carrette*                 |       | 62         |       | Director                                         |
| *Eric P. Endy*(5)               |       | 52         |       | Director                                         |
| *Alain Thieffry*(1)                  |       | 51         |       | Director                                         |
| *Robert J. Kelly*(1),  (2), (3), (4) |       | 51         |       | Director                                         |
| *Charles R. Henry*(2), (3)           |       | 69         |       | Director                                         |
| *Paul S. Dennis*(1), (2)             |       | 69         |       | Director                                         |
| *Martin A. Berkowitz*                |       | 58         |       | Director Nominee                                 |

----

(1)          Member of theCompensation Committee of the Board of Directors.

(2)          Member of the AuditCommittee of the Board of Directors.

(3)          Member of the Nominatingand Governance Committee of the Board of Directors.

(4)          Member of the ComplianceCommittee of the Board of Directors.

(5)          Member of the Directors’Plan Committee of the Board of Directors.

Additional biographical information for each of ourdirectors and executive officers is presented below.

*Gerard P.Charlier***hasbeen a director and our President and Chief Executive Officer since September 2002.Mr. Charlier served as our Secretary from September 2002 until December 2006and as our interim Chief Financial Officer from August 2006 to December 2006.Mr. Charlier has been President and Chief Executive Officer of GPI SASsince 1994 and President and Chief Executive Officer of the former Bud JonesCompany from 2000 to 2002, when it merged into Gaming Partners InternationalUSA, Inc. Mr. Charlier worked from 1965 to 1968 for CincinnatiMilling Machine in Cincinnati, Ohio. Mr. Charlier worked for Booz Allen &Hamilton in London and Paris in 1968 and 1969. He then joined Peat MarwickMitchell Management Consulting (now KPMG) in Paris in 1969 where he becamePartner in 1975 and acted as Partner in Charge of the German ManagementConsulting Department from 1978 to 1982. From 1982 to 1985, Mr. Charlierserved as Vice President of International Development of Dexi International, aFrench company specializing in the manufacture of cosmetic products distributedby party plans. From 1985 to 1988 and again from 1991 to 1994, Mr. Charlierwas an independent management consultant for G.C. Management, a firm that heowned. Between 1988 and 1991, Mr. Charlier served as 

74

----

the General Manager inFrance of Arthur D. Little, a management consulting firm based inCambridge, Massachusetts. Mr. Charlier holds a Mechanical EngineeringDegree from Ecole Nationale d’Arts et Metiers in Paris (1962), a M.S. in ElectricalEngineering from Stanford University, California (1963) and a MBA from INSEADin Fontainebleau, France (1968).

*DavidW. Grimes* was appointed as Chief Financial Officer ofthe Company in December 2006. From 1998 through 2006, Mr. Grimesserved as vice president at Artemis International, Inc., a provider ofspecialized natural colors and nutraceutical products. Between 1995 and 1998,he served as Chief Financial Officer and then as President and Chief ExecutiveOfficer of WFI Industries Ltd., a publicly-traded manufacturer of residentialand commercial geothermal heating and air conditioning systems. Between 1988and 1995, he served as Chief Financial Officer and Treasurer of Patton ElectricCompany, Inc., a manufacturer of fans, portable heaters and humidifiers,and as a financial analyst at Unisys Corporation. Mr. Grimes received amaster of business administration degree from Harvard Business School and aMaster of Accounting Science degree and a Bachelor of Science degree inaccountancy from the University of Illinois.

*LauraMcAllister Cox,* an attorney at law licensed topractice in New Jersey and Pennsylvania, has been Chief Legal and GamingCompliance Officer for the Company since December 2003. Previously, Ms. McAllisterCox was an attorney for 16 years with the Atlantic City law firm of CooperLevenson April Niedelman & Wagenheim, P.A. and became a partnerof the firm in 1996. A member of the Cooper Levenson Casino Law Department, Ms. McAllisterCox represented casino operators, gaming manufacturers and distributors, andcasino employees in all aspects of regulatory, licensing and litigation matters.As part of her practice, Ms. McAllister Cox handled gaming regulatorymatters for GPI SAS since 1997, for the former Bud Jones Company since 2000 andfor GPIC since 2002. Ms. McAllister Cox holds a Bachelor of Arts degree inUrban Studies from the University of Tennessee (1980) and a Juris Doctoratefrom Rutgers University School of Law (1987).

*GayA. Nordfelt* was appointed as Secretary of the Companyin December 2006. Ms. Nordfelt has served as Executive Secretary toGerard P. Charlier since December 2001. She has thirty years of experiencein secondary and post-secondary business education and administration and sheworked as an adjunct business instructor at Utah Valley State College from 1984to 2001. Ms. Nordfelt received an undergraduate degree in English andbusiness education from Weber State University and a Master of BusinessEducation Administrative Management and Organizational Behavior degree fromBrigham Young University.

*ElisabethCarrette* hasbeen a director since January 2005. Mrs. Carrette is the President ofthe Supervisory Board of Holding Wilson, S.A., a privately-held French companythat through its affiliates engages in consulting and food distribution. HoldingWilson, S.A. is the principal stockholder of the Company. Over more than twodecades, Mrs. Carrette has served on both the Executive and SupervisoryBoards of Holding Wilson, S.A. and helped define the strategy of the group.

*Eric P.Endy***hasbeen a director since our inception in 1993. Mr. Endy was our ExecutiveVice President from September 2002 to March 2003, and presentlyserves as a consultant to us. He served as our Secretary from May 1984 to March 2003,Chairman of the Board and Chief Executive Officer from November 1998 to September 2002,President from January 1994 to September 2002 and Treasurer from July 2001to September 2002. From May 1998 to July 1998, Mr. Endy wasour Treasurer and from January 1994 to July 1995, Mr. Endy wasour Chief Operating Officer. Mr. Endy was Chairman of the Board, Presidentand Chief Executive Officer of the former Paul-Son Gaming Supplies from November 1998to September 2002, and Executive Vice President and General Manager of theformer Paul-Son Gaming Supplies from July 1990 to November 1998.

*AlainThieffry***hasbeen a director since September 2002. Mr. Thieffry has served asPresident of the Executive Board of Holding Wilson S.A. since February 2002.He has been an executive officer of Holding 

75

----

Wilson S.A. since 1984. Since1995, Mr. Thieffry has also served as Chief Executive Officer of BridgeAtlantic Corporation and DeRoche, S.A., wholly-owned subsidiaries of HoldingWilson S.A., and of LFR, Inc., a wholly-owned subsidiary of Bridge AtlanticCorporation. Mr. Thieffry holds masters in law and business administrationand a CPA license in France.

*RobertJ. Kelly* has been a director since February 2006.Mr. Kelly received an MBA from Harvard in 1986 and an Engineering degreefrom Princeton in 1977. Since 2000, Mr. Kelly has been the founder, patentholder and primary stockholder of EarthSource Inc., Raynham, Massachusetts, awaste water treatment plant. He is also a civil engineer and responsible fordesigning the EarthSource process and managing its operations. From 1994 to2000, Mr. Kelly worked with LFR, Inc., an environmental engineeringcompany and affiliate of Holding Wilson, S.A., our principal stockholder. Priorto 1994, Mr. Kelly worked as a Division Manager for OHM Corporation, apublicly-traded company that provides technology-based, on-site hazardous wasteremediation environmental services, and as a Field Service Manager at ITCorporation, a publicly-traded company in the environmental engineeringbusiness, providing environmental consulting, engineering and construction andremediation services.

*CharlesR. Henry* has been a director since June 2006. Hewas appointed to the Board of Directors to fill the vacancy that resulted fromthe resignation of Benoit Aucouturier. Mr. Henry is a retired two-stargeneral, with 41 years of leadership experience, a distinguished militarycareer and an advanced law degree. He is the current Chief Operating Officerand a board member of CEG Company in Rico Rica, Arizona, a leading producer ofmilitary wiring harnesses for military vehicles. Prior to that, he was aconsultant in Washington D.C. for various companies on defense issues. In 2001he was also appointed Chief Executive Officer and President of the NationalVeterans Business Development Corporation, part of Public Law 106-50, which wascreated by Congress. From 1997 to 2001, Mr. Henry served as an officer(President) of LFR Levine Fricke, an environmental management and consultingfirm, which is an affiliate of the Company’s majority shareholder. Mr. Henryholds an undergraduate degree in economics from Middle Tennessee StateUniversity; he is a graduate of the United States Army War College and theUnited States Army Command and General Staff College; he holds degrees WoodrowWilson Law School: J.D.; Woodrow Wilson Law School: L.L.M.

*PaulS. Dennis***hasbeen a director since October 2000. Since 1977, Mr. Dennis has beenPresident and Chief Executive Officer of Associated Health Care ManagementCompany, Inc., Cleveland, Ohio, which manages congregate living facilities.Mr. Dennis also has served as a director and officer with variouscompanies and business ventures in the hardware distribution, pharmaceuticalsdistribution and steel fabrication industries and real estate investor. Mr. Denniswas an investor in, and for certain periods from 1997 to 2003 was a directorand officer of, Las Vegas Care Centers, Inc., a nursing home facility inLas Vegas, Nevada. At the request of the bank, a receiver was appointed in2001 to oversee the sale and disposition of Las Vegas Care Centers, Inc.’sassets. Mr. Dennis was previously licensed as a nursing home administratorin the states of Ohio and Nevada and was a member of the American College ofHealth Care Administrators.

*Martin A. Berkowitz*has been nominated by the Nominating Committee as a director for election atour next annual meeting of stockholders. Mr. Berkowitz would fill thedirector seat currently held by Mr. Dennis. Mr. Berkowitz is aconsultant in the areas of financial management and business development. Hewas chief financial officer for the Miami-Dade County Public Schools in 2005and 2006. From 2002 to 2004, Mr. Berkowitz held the positions of SeniorVice President and Chief Financial Officer then President and Chief ExecutiveOfficer of the National Veterans Business Development Corporation. He retiredas Senior Vice President from Prudential Financial in 2000 following atwenty-five year career where he served as Comptroller of the individualinsurance unit, Chief Financial Officer of the investment management businessunit, and the Corporate Comptroller. He played a major role in the conversionof Prudential from a mutual insurance company to a public shareholder ownedcompany. Mr. Berkowitz earned his Bachelor of Business Administrationdegree in accounting from the University of 

76

----

Massachusetts,Amherst in 1970 and his Master of Business Administration from St. John’sUniversity in 1975. He has attended executive programs at the University ofMichigan, Stanford University and Harvard University.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) of the Securities Exchange Actof 1934 requires our directors and executive officers, and persons who own morethan ten percent of a registered class of our equity securities, to file withthe SEC initial reports of ownership and reports of changes in ownershipof common stock and our other equity securities. Officers, directors, andstockholders holding more than ten percent of the class of stock are requiredby SEC regulation to furnish us with copies of all Section 16(a) formsthey file.

To our knowledge, basedsolely on a review of the copies of such reports furnished to us and writtenrepresentations that no other reports were required, during the fiscal yearended December 31, 2006, all reports required under Section 16(a) filingrequirements were filed as required, with the exception of certain reports on Form 4,which were inadvertently filed late by: (1) Eric P. Endy with respect to aForm 4 for a transaction on December 29, 2006, (2) ElisabethCarrette with respect to a Form 4 for a transaction on October 23,2006, (3) Gerard P. Charlier with respect to a Form 4 for atransaction on October 23, 2006, (4) Mary Diaz with respect to a Form 3for an appointment on August 9, 2006, (5) Eric P. Endy with respectto a Form 4 for a transaction on June 8, 2006, (6) Eric P. Endywith respect to a Form 4 for a transaction on May 30, 2006, and (7) PaulS. Dennis with respect to a Form 4 for a transaction on May 22, 2006.

**Code of Ethics**

We have adopted a Code ofEthics that applies to our Chief Executive Officer, Chief Financial Officer,Corporate Controller and other finance department employees and a Code ofConduct that applies to all employees. The form of the Code of Ethics,including the Code of Conduct, is publicly available on our website at *www.gpigaming.com*. If we make any substantive amendments tothe Code of Ethics or grant any waiver, including any implicit waiver, from aprovision of the Code of Ethics to our Chief Executive Officer, Chief FinancialOfficer or Corporate Controller, we will disclose the nature of such amendmentor waiver on that website.

**Audit Committee**

The Audit Committee, aseparately-designated standing audit committee established in accordance with Section 3(a)(58)(A) ofthe Securities Exchange Act of 1934, assists our Board of Directors inoverseeing the accounting and financial reporting processes of the Company andaudits of our financial statements, including the integrity of our financialstatements, compliance with legal and regulatory requirements, our independentpublic accountants’ qualifications and independence, the performance of ourinternal audit function and independent public accountants, and such otherduties as may be directed by our Board of Directors. The Audit CommitteeCharter requires that the Audit Committee consist of three or more boardmembers who satisfy the “independence” requirements of the SEC and The NASDAQGlobal Market for audit committee members. The current members of the AuditCommittee are Mr. Kelly, who is the committee chair, Mr. Henry and Mr. Dennis,each of whom satisfy these independent requirements. Our Board of Directorsbelieves that each member of the Audit Committee is able to read and understandfinancial statements, and that one of the members has past employmentexperience or background which results in his financial sophistication. Whilethe Board of Directors endorses the effectiveness of our Audit Committee, nomember of the Audit Committee currently meets the definition of an auditcommittee financial expert as set forth in Item 407(d)(5)(ii) of the SEC RegulationS-K. In 2006, the Audit Committee engaged the services of a financialconsultant who acted as an advisor to the Audit Committee on financial issues. Hisservices were terminated on 

77

----

February 6,2007. The Board of Directors believes that Mr. Berkowitz, our directornominee, would qualify as an audit committee financial expert upon his electionto the Board of Directors at our next annual meeting of stockholders.

**Item 11.**                 ExecutiveCompensation.

**CompensationDiscussion and Analysis**

***Compensation Program Overview and Objectives***

The Compensation Committee (for purposes of thisanalysis, the “Committee”) composed entirely of directors who have never servedas executive officers of the Company, recommends to the Board the compensationof the Company’s executive officers and administer the Company’s 1994 Long-TermIncentive Plan (the “Incentive Plan”). Throughout this report, the individualswho served as the Company’s Chief Executive Officer, Chief Financial Officerand Chief Legal and Compliance Officer are referred to as the “named executiveofficers.”

The objective of the Company’s compensation program isto (i) attract and retain individuals who are responsible for themanagement, development and success of the company (ii) reward namedexecutive officers for their performance and services to the Company and (iii) encouragethe named executive officers to stay with the Company.

The Committee relies upon the recommendations of theChief Executive Officer and their own judgment in making compensationdecisions, after reviewing the performance of the Company and carefullyevaluating an executive’s performance during the year against establishedgoals, leadership qualities, operational performance, businessresponsibilities, career with the company, current compensation arrangementsand long-term potential to enhance shareholder value. Typically, the ChiefExecutive Officer makes compensation recommendations to the CompensationCommittee with respect to executive officers who report to him. Such executiveofficers are not present at the time of these deliberations. The Committeegenerally does not adhere to rigid formulas or necessarily react to short-termchanges in business performance in determining the amount and mix ofcompensation elements. They incorporate flexibility into the compensationprograms and in the assessment process to respond to and adjust for theevolving business environment. The Committee believes the most importantindicator of whether the compensation objectives are being met is the Company’sability to motivate the named executives to deliver superior performance andretain them to continue their careers with the Company on a cost-effectivebasis.

The Committee’s goal isfor the Company to set base salaries for the named executive officers atappropriate levels which reflect the duties and scope of responsibilities ofeach officer’s position

***Elements of Compensation***

For fiscal 2006, the principal elements ofcompensation for named executive officers were base salary; standard employeebenefits such as health, dental, vision, and life insurance, 401(k) retirementparticipation; and other perquisites and personal benefits. In the past, somenamed executive officers have also been eligible to receive incentivecompensation in the form of stock options under the Incentive Plan. TheIncentive Plan expired in January 2004, except as to the stock optionsoutstanding on that date. Stock options are priced at the market value of theCompany’s common stock on the date of grant, and typically subject to afour-year vesting period with exercisability dependent on continued employment.None of the named executive officers received a stock option grant in fiscal2006.

78

----

*Base Salary*

The Company provides namedexecutive officers and other employees with base salary to compensate them forservices rendered during the fiscal year. Although the Committee believes thatthe Company’s overall financial performance is an important factor in the totalcompensation of the named executive officers, no specific quantitative factorsare applied in making compensation recommendations. The Committee alsorecognizes qualitative factors such as successful supervision of the Company’soperations, established relationships with key customers and key gamingindustry representatives and regulators and the development of corporateprojects and new products.

*Perquisites andOther Personal Benefits*

The Company provides named executive officers withperquisites and other personal benefits that the Company and the Committeebelieve are reasonable and consistent with its overall compensation program tobetter enable the Company to attract and retain superior employees for keypositions. The Committee periodically reviews the levels of perquisites andother personal benefits provided named executive officers.

Perquisites and otherpersonal benefits provided to certain named executive officers include ahousing allowance for housing in Las Vegas, tax preparation services, certainmedical expense reimbursements, use of a company automobile or a car allowance,and a severance payment upon termination of employment without cause, as morefully discussed under Potential Payments upon Termination or Change of Control below.

**SummaryCompensation Table**

| Name and Principal  Position | ** ** | ** ** | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Stock  Awards** | ** ** | **Option  Awards** | ** ** | **Non-Equity  Incentive  Plan  Compensation** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|------------|------------|----------|------------|------------|------------|-----------|------------|-------------------|------------|--------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| Gerard P. Charlier,                    |       |       | 2006       |     |       | $          | 244,325    | (1)       | —     |              |       | —             |       |                                          |       | —                                                                                      |       |                             |       | —    |       |   |   | — |   |   |   | $ | 62,343 | (5) |   | $ | 306,668 |   |
| Chief Executive Officer                |       |       |       |     |       |       |       |      |       |              |       |               |       |                                          |       |                                                                                        |       |                             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| and President                          |       |       |       |     |       |       |       |      |       |              |       |               |       |                                          |       |                                                                                        |       |                             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| David W. Grimes,                       |       |       | 2006       |     |       | $          | 4,308      | (2)       | —     |              |       | —             |       |                                          |       | —                                                                                      |       |                             |       | —    |       |   |   | — |   |   |   | $ | 300 | (6) |   | $ | 4,608 |   |
| Chief  Financial Officer               |       |       |       |     |       |       |       |      |       |              |       |               |       |                                          |       |                                                                                        |       |                             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Laura McAllister Cox,                  |       |       | 2006       |     |       | $          | 200,000    |      | $          | 7,692             | (4)        |               | —     |                                          |       |                                                                                        | —     |                             |       |      | —     |   |   |   | — |   |   |   | $ | 11,982 | (7) |   | $ | 219,674 |   |
| Chief Legal and                        |       |       |       |     |       |       |       |      |       |              |       |               |       |                                          |       |                                                                                        |       |                             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Gaming Compliance Officer              |       |       |       |     |       |       |       |      |       |              |       |               |       |                                          |       |                                                                                        |       |                             |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Melody Sullivan                        |       |       | 2006       |     |       | $          | 117,692    | (3)       | —     |              |       | —             |       |                                          |       | —                                                                                      |       |                             |       | —    |       |   |   | — |   |   |   | $ | 103,219 | (8) |   | $ | 220,911 |   |
| [Former Chief Financial  Officer]      |       |       |       |     |       |       |       |      |       |              |       |               |       |                                          |       |                                                                                        |       |                             |       |      |       |   |   |   |   |   |   |   |   |   |   |
|                                        |            |            |            |          |            |            |            |           |            |                   |            |                    |            |                                               |            |                                                                                             |            |                                  |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)                Mr. Charlier is President and CEO of GPIC; hereceived an annual salary of $100,000 from GPI USA and 115,000 Euros(approximately $144,325 as of December 31, 2006) from GPI SAS.

(2)                Mr. Grimes was appointed as the CFO effective December 7,2006. This amount reflects the portion of his $160,000 annual salary paidduring the 2006 fiscal year.

(3)                Ms. Sullivan resigned as CFO effective August 9,2006. This amount reflects the portion of her $180,000 annual salary earnedduring the 2006 fiscal year.

(4)                This amount represents a 2-week holiday bonus.

(5)                This amount reflects housing in the United States inthe amount of $19,555, tax preparation expenses in the United States in theamount of $1,500, automobile expense in the United States in the amount of$1,113, insurance (health, dental and life) in the United States in the amountof $4,461, housing expense in France in the amount of 12,960 Euros ($16,265),automobile expenses in France in the amount of 13,953 Euros ($17,511), andmedical insurance in France in the amount of 1,544 Euros ($1,938).

(6)                This amount reflects automobile expense in the amountof $300 in 2006. In 2007, he will be entitled to receive automobile allowancein the amount of $7,200; as well as health, dental, vision and life insurancepremiums; and 401(k) match.

(7)                This amount reflects $7,200 in automobile allowance,$1,053 insurance (dental, vision and life) and $3,729 in 401(k) match paidin 2006.

(8)                As a severance payment, Ms. Sullivanis entitled to receive six months of her annual salary, or $90,000, of which$62,308 was paid in 2006. She also received in $29,077 in vacation, $4,708 autoexpense, $3,103 insurance and $4,023 in 401(k) match.

79

----

**Outstanding Equity Awards atFiscal Year-End**
|                      | ** ** | **Option Awards** | ** ** | **Stock Awards**                                                              | ** ** |
|----------------------|------------|------------------------|------------|------------------------------------------------------------------------------------|------------|
| **Name**             | ** ** | ** **             | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Exercisable** | ** ** | **Number  of  Securities  Underlying  Unexercised  Options  (#)  Unexercisable** | ** ** | **Equity  Incentive  Plan  Awards:  Number  of  Securities  Underlying  Unexercised  Unearned  Options  (#)** | ** ** | **Option  Exercise  Price  ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number  of  Shares  or Units  of Stock  That  Have  Not  Vested  (#)** | ** ** | **Market  Value  of  Shares  or  Units of  Stock  That Have  Not  Vested  ($)** | ** ** | **Equity  Incentive  Plan  Awards:  Number  of  Unearned  Shares,  Units or  Other  Rights  That  Have  Not  Vested  (#)** | ** ** | **Equity Incentive  Plan Awards:  Market or  Payout  Value of  Unearned  Shares,  Units or  Other  Rights  That Have  Not  Vested  ($)** | ** ** |
| Gerard P. Charlier   |       |                   | 100,000    |                                                                               |       |   | — |   |   |   | — |   |   |   | 3.40 |   |   |   | 12/31/10 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Gerard P. Charlier   |       |                   | —     |                                                                               |       |   | 200,000 |   |   |   | — |   |   |   | 3.40 |   |   |   | 9/12/12 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| David W. Grimes      |       |                   | —     |                                                                               |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Laura McAllister Cox |       |                   | —     |                                                                               |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Melody Sullivan      |       |                   | —     |                                                                               |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                      |            |                        |            |                                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Pension Benefits**
| Name                  | ** ** | ** **               | ** ** | **Plan Name** | ** ** | **Number of Years  Credited  Service** | ** ** | **Present Value of  Accumulated  Benefit** | ** ** | **Payments During  Last Fiscal  Year** | ** ** |
|-----------------------|------------|--------------------------|------------|---------------|------------|--------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|
| Gerard P.  Charlier   |       | GPI  SAS Retirement Plan |       |          | 13 years   |                                             |       |                                                 | $          | 38,551                                           | (1)        |   |   | — |   |   |
| David W. Grimes       |       | —                   |       |          | —     |                                             |       |                                                 | —     |                                             |       |   | — |   |   |
| Laura McAllister  Cox |       | —                   |       |          | —     |                                             |       |                                                 | —     |                                             |       |   | — |   |   |
| Melody Sullivan       |       | —                   |       |          | —     |                                             |       |                                                 | —     |                                             |       |   | — |   |   |

----

(1)          Thepresent value of accumulated benefit is 29,272 Euros or $ 38,551 at the end of2006.

**Potential Payments upon Termination or Change of Control**

***Payments Made Upon Termination***

Pursuant to an employment agreement with Gerard P.Charlier, if we terminate Mr. Charlier’s employment for any reason otherthan death, Permanent Disability or Cause, we must continue to pay Mr. Charlier’ssalaries for the longer of (i) the remaining term of the employmentagreement or (ii) two years, and to provide him with medical benefits for12 months from termination. “Cause” is defined as a willful and continuedfailure to substantially perform his duties, willful misconduct materiallyinjurious to the company (monetarily or otherwise), a conviction of, or plea ofnolo contendere to, a felony, or a breach of the confidentiality, non-competitionor non-solicitation provisions of the employment agreement. “PermanentDisability” is defined as a failure to perform his duties for ninetyconsecutive calendar days due to physical or mental illness. Mr. Charlieralso entered into an agreement with Holding Wilson, S.A. whereby HoldingWilson, S.A. granted to Mr. Charlier a put option to sell Holding Wilson,S.A. the shares of our common stock that he acquired in the combination if Mr. Charlier’semployment with us is terminated voluntarily by Mr. Charlier, or by usother than for death, Permanent Disability or Cause. The per share sale pricewould be equal to the average closing price of our common stock for the 30trading days preceding the date Mr. Charlier exercises his option to sell.

80

----

Pursuant to a letter provided to David W. Grimes, ourChief Financial Officer, we have agreed to pay Mr. Grimes a severancepayment equal to three months of his salary if, after one year of employment,we terminate his employment without cause.

Pursuant to a letterprovided to Laura McAllister Cox, our Chief Legal and Gaming ComplianceOfficer, we have agreed to pay Ms. McAllister Cox a severance paymentequal to six months of her salary if we terminate her employment without cause.

**Director Compensation**

Directors who are not employees or consultants receivean annual fee of $18,000, plus $1,400 for attending in person (or $750 forparticipating by telephone) for each regular board of directors meeting andeach audit committee meeting, and $500 for attending each other committeemeeting. Each director may be reimbursed for certain expenses incurred inconnection with attendance at board of directors and committee meetings.

Each non-employee director also receives non-qualifiedstock options, subject to vesting over a three-year period, to purchase 6,000shares of common stock upon his/her commencement as a member of the board ofdirectors at an exercise price equal to the closing price of the common stockon the date of grant. Additionally, on the third anniversary of thecommencement date, and every year thereafter, each non-employee directorreceives non-qualified stock options to purchase 2,000 shares of common stockat an exercise price equal to the closing price of the common stock on the dateof grant. In addition, each non-employee director receives non-qualified stockoptions to purchase 1,500 shares of common stock for serving on the AuditCommittee, the Compliance Committee or the Compensation Committee for at leastsix months during the twelve months prior to the date of grant.

Our non-employee directors who are currently eligibleto participate in the Directors’ Plan are Elisabeth Carrette, Paul S.Dennis, Alain Thieffry, Robert J. Kelly and Charles R. Henry. Directors who arealso employed as regular salaried officers or employees do not receive any feesor additional remuneration to serve on our board or its committees.

The directors realizevalue from their stock options only when exercised, and only to the extent thatthe price of our common stock on the exercise date exceeds the price of ourcommon stock on the grant date.

**Director Compensation Table**

| **Name**               | ** ** | ** ** | ** ** | **Fees Earned** | ** ** | **Stock  Awards** | ** ** | **Option  Awards** | ** ** | **Non-Equity  Incentive Plan  Compensation** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|------------------------|------------|------------|------------|----------------------|------------|-------------------|------------|--------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| Elisabeth  Carrette    |       |       | $          | 22,500               |       |              |       | —             |       |                                              | $          | 16,660                                                                                      | (3)        |                             | —     |      |       |   | — |   |   |   | — |   |   | $ | 39,160 |   |
| Paul S. Dennis         |       |       | $          | 39,200               |       |              |       | —             |       |                                              | $          | 64,256                                                                                      | (4)        |                             | —     |      |       |   | — |   |   |   | — |   |   | $ | 103,456 |   |
| Eric P. Endy           |       |       | —     | (1)                  |       |              | —     |               |       | —                                            |       |                                                                                        | —     |                             |       |      | —     |   |   |   | — |   |   | — |   |
| Alain Thieffry         |       |       | $          | 28,100               |       |              |       | —             |       |                                              | $          | 56,945                                                                                      | (5)        |                             | —     |      |       |   | — |   |   |   | — |   |   | $ | 85,045 |   |
| Robert J. Kelly        |       |       | $          | 39,700               |       |              |       | —             |       |                                              | $          | 19,374                                                                                      | (6)        |                             | —     |      |       |   | — |   |   |   | — |   |   | $ | 59,074 |   |
| Benoit  Aucouturier(8) |       |       | $          | 19,800               |       |              |       | —             |       |                                              | —     |                                                                                        |       | —                           |       |      |       | — |   |   |   | — |   |   | $ | 19,800 |   |
| Charles R.  Henry(2)   |       |       | $          | 15,100               |       |              |       | —             |       |                                              | $          | 22,951                                                                                      | (7)        |                             | —     |      |       |   | — |   |   |   | — |   |   | $ | 38,051 |   |

----

(1)          Mr. Endy received$200,000 under his employment contract.

81

----

(2)          Mr. Henry wasappointed to the board of directors in June 2006.

(3)          Based upon 6,000 sharesissued in 1st quarter 2005 and vesting over three years.

(4)          Based upon 5,000 sharesissued and vested in 4th quarter 2006.

(5)          Based upon 3,500 sharesissued and vested in 2nd quarter 2006.

(6)          Based upon 6,000 sharesissued 1st quarter 2006 and vesting over three years.

(7)          Based upon 6,000 sharesissued 2nd quarter 2006 and vesting over three years.

(8)          Mr. Aucouturierresigned as a director effective June 30, 2006.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters. 

Thefollowing table sets forth information as of May 1, 2007 (except whereanother date is indicated) with respect to the beneficial ownership of ourcommon stock by persons known to us to own beneficially more than 5% of ourcommon stock, each of our executive officers, current directors, and directornominee, and all of our executive officers, current directors and directornominee as a group. We have no other class of equity securities outstanding. Thereare no family relationships between any of our directors, director nominees orexecutive officers.

| **Name of Beneficial Owner**                                                  | ** ** | ** ** | ** ** | **Ownership** | ** ** | **Options/Warrants  Exercisable Within   60 Days** | ** ** | **Beneficial  Ownership(1)** | ** ** | **Percent of  Class(2)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|---------------|------------|-------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| **Executive Officers and  Directors:**                                                       |       |       |       |          |       |                                                              |       |                         |       |                          |       |   |   |   |   |
| Elisabeth  Carrette                                                                          |       | 3,993,318  |       |          | 4,000      |                                                              |       |                         | 3,997,318  | (3)(4)                        |       |   | 49.30 | % |   |
| Eric P. Endy                                                                                 |       | 272,282    |       |          | —     |                                                              |       |                         | 272,282    | (5)                           |       |   | 3.36 | % |   |
| Gerard P.  Charlier                                                                          |       | 570,384    |       |          | 100,000    |                                                              |       |                         | 670,384    | (6)(4)                        |       |   | 8.17 | % |   |
| Paul S. Dennis                                                                               |       | 5,000      |       |          | 10,000     |                                                              |       |                         | 15,000     |                          |       |   | 0.18 | % |   |
| Alain Thieffry                                                                               |       | 9,000      |       |          | 3,500      |                                                              |       |                         | 12,500     | (7)                           |       |   | 0.15 | % |   |
| Laura McAllister  Cox                                                                        |       | —     |       |          | —     |                                                              |       |                         | —     |                          |       |   | 0.00 | % |   |
| Robert J. Kelly                                                                              |       | —     |       |          | 2,000      |                                                              |       |                         | 2,000      |                          |       |   | 0.02 | % |   |
| Charles R. Henry                                                                             |       | —     |       |          | 2,000      |                                                              |       |                         | 2,000      |                          |       |   | 0.02 | % |   |
| David W. Grimes                                                                              |       | —     |       |          | —     |                                                              |       |                         | —     |                          |       |   | 0.00 | % |   |
| Martin A.  Berkowitz                                                                         |       | —     |       |          | —     |                                                              |       |                         | —     |                          |       |   | 0.00 | % |   |
| All executive  officers, current directors and director nominee as a group (10 persons) |       | 4,849,984  |       |          | 121,500    |                                                              |       |                         | 4,971,484  |                          |       |   | 60.44 | % |   |
| **5% Stockholder:**                                                                          |       |       |       |          |       |                                                              |       |                         |       |                          |       |   |   |   |   |
| Magnet Fund, L.P.,  Magnet Management L.L.C., Jordan Kimmel                                  |       | 645,000    |       |          | —     |                                                              |       |                         | 645,000    | (8)                           |       |   | 7.96 | % |   |

----

(1)          Represents sum of sharesowned and shares which may be purchased upon exercise of options exercisablewithin 60 days of May 1, 2007.

(2)          Any securities notoutstanding which are subject to options, warrants or conversion privilegesexercisable within 60 days of May 1, 2007 are deemed outstanding forthe purpose of computing the percentage of outstanding securities of the classowned by any person holding such securities but are not deemed outstanding forthe purpose of computing the percentage of the class owned by any other person.Unless otherwise noted, the persons identified in this table have sole votingand investment power with regard to the shares beneficially owned.

82

----

(3)          Includes: (i) 3,973,216shares held by Holding Wilson, S.A. (“Holding Wilson”), of which the CarretteEstate is the principal stockholder; (ii) 19,750 shares held by the Estateof Francois Carrette (the “Carrette Estate”); (iii) 4,000 options topurchase common stock granted pursuant to the Company’s 1994 Directors’ StockOption Plan (the “Plan”) currently held by Mrs. Carrette. Does not include272,282 shares beneficially owned by Mr. Endy, which Holding Wilson, S.A.has the right to vote for the election or removal of directors pursuant to afive-year irrevocable proxy dated September 12, 2002.

(4)          Does not include anoption held by Mr. Charlier to sell to Holding Wilson, S.A. his shares ofthe Company’s common stock if his employment is terminated voluntarily by Mr. Charlieror by the Company other than for death, permanent disability or cause (asdefined in his employment agreement).

(5)          Includes (i) 235,924shares held by The Paul S. Endy, Jr. Living Trust, of which Eric P. Endyis the sole trustee and beneficiary, (ii) 18,000 shares held by trustsestablished for the benefit of Mr. Endy’s family, and (iii) 6,000 sharesheld by his spouse. Does not include 3,993,318 shares beneficially owned byElisabeth Carrette, which Mr. Endy has the right to vote for his electionas a director pursuant to a five-year irrevocable proxy dated September 12,2002. 

(6)          Includes 703 shares heldby Mr. Charlier’s spouse. Does not include options to purchase 200,000shares granted pursuant to the 1994 Long-Term Incentive Plan, none of which arecurrently exercisable. 

(7)          Does not include3,973,216 shares held by Holding Wilson, S.A., of which Mr.Thieffry is thePresident of the Executive Board. Mr. Thieffry disclaims beneficialownership of all shares held by Holding Wilson, S.A. 

(8)          Basedon written confirmation received by the Company on March 14, 2007.

**Equity CompensationPlan Information**

Thefollowing table sets forth certain information as of December 31, 2006about our equity compensation plans under which our equity securities areauthorized for issuance.

| ** **                                                  | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                          | ** ** | **(c)**                                                                                                     | ** ** |
|-------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
| Equity  compensation plans approved by security holders     |       |       | 347,500    | (1)                                                                                                                                              |       |                                                                                                        | $          | 5.02 |   |   |   | 12,000 | (2) |   |
| Equity  compensation plans not approved by security holders |       |       | None       |                                                                                                                                             |       |                                                                                                        | None       |   |   |   | None |   |   |
| **Total**                                                   |       |       | 347,500    |                                                                                                                                             |       |                                                                                                        | $          | 5.02 |   |   |   | 12,000 |   |   |
|                                                             |            |            |            |                                                                                                                                                  |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |

----

(1)          Reflects outstandingstock options to purchase 300,000 shares of common stock granted under our 1994Long-Term Incentive Plan, and stock options to purchase 47,500 shares of commonstock granted under our 1994 Directors’ Stock Option Plan. 

(2)          These shares were availablefor future issuance under our 1994 Directors’ Stock Option Plan. 

See Part II—Item 8.Financial Statements and Supplementary Data—Notes to Consolidated FinancialStatements—Note 11 for additional information about our equity-basedcompensation plans.

83

----

**CompensationCommittee Interlocks and Insider Participation**

No member of the Compensation Committee has ever beenan officer or employee of the Company or its subsidiaries. None of ourexecutive officers serves as a member of the board of directors or compensationcommittee of any entity that has one or more executive officers serving on ourBoard of Directors or Compensation Committee.

**THE FOLLOWING REPORT OF THE COMPENSATION COMMITTEESHALL NOT BE DEEMED TO BE SOLICITING MATERIAL OR TO BE FILED WITH THE SEC UNDERTHE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 ORINCORPORATED BY REFERENCE IN ANY DOCUMENT SO FILED.**

**COMPENSATIONCOMMITTEE REPORT**

TheCompensation Committee of the Company has reviewed and discussed theCompensation Discussion and Analysis required by Item 402(b) of RegulationS-K with management and, based upon such review and discussion, theCompensation Committee recommended to the Board of Directors that theCompensation Discussion and Analysis be included in this proxy statement.
| Dated: May 15, 2007 | COMPENSATION COMMITTEE                                      |
|--------------------------|-------------------------------------------------------------|
|                     | Alain Thieffry, *Chairman*  Paul S. Dennis  Robert J. Kelly |

 

**Item 13.**                 CertainRelationships and Related Transactions and Director Independence. 

**Related PartyTransactions**

We lease two manufacturing facilities totaling 66,500square feet located in San Luis Rio Colorado, Mexico from an entity controlledby the family of the General Manager of GPI Mexicana. The lease was extended inApril 2004, for an additional five years, at the same monthly rent amountof approximately $0.35 per square foot, or $23,300. If we elect, at ourdiscretion, to use more or less square footage, our rent will be increased ordecreased accordingly on a pro rata basis. Also, in the second quarter of 2006,we began renting, on a month-to-month basis, a residential property from theGeneral Manager’s brother at approximately $800 per month. 

An employee of our manufacturing facility in Mexicoowns and operates a small independent machine shop. In 2006, we used hismachine shop to build small metal parts. For the fiscal year endedDecember 31, 2006 GPI, USA paid this employee, through his business,approximately $30,000.

Neither of these employeesis a director nor an executive officer. The charter of the Audit Committee ofthe Board of Directors requires the Audit Committee to review and approverelated party transactions involving our directors and executive officers.

**DirectorIndependence**

Our Board of Directors has five standing committees:the Audit Committee, the Compensation Committee, the Compliance Committee, theNominating and Governance Committee and the Directors’ Plan Committee. TheBoard of Directors has determined that Messrs. Kelly, Henry and Denniseach meet, and that Benoit Aucouturier, who served as a director during a partof 2006, met the independence requirements of The NASDAQ Global Market.

 

84

----

Each member of the AuditCommittee and Nominating and Governance Committee is independent as definedunder the current NASDAQ listing standards. Other than Mr. Thieffry, eachmember of the Compensation Committee is independent as defined under thecurrent NASDAQ listing standards. Mr. Thieffry is not independent due tohis affiliation with Mrs. Carrette, who beneficially owns 49.3% of theoutstanding shares of the Company. Our Board of Directors has determined thatwe are a “controlled company” and are therefore exempt from certain of theNASDAQ rules, including the requirements for a majority independent board andindependent compensation and nominating committees. Mrs. Carrette and Mr. Endypreviously concluded that, as a result of the voting agreement and irrevocableproxies between them in connection with the election of directors (as describedabove), among other things, that they are acting as a group within the meaningof Section 13(d)(3) of the Securities Act of 1933, as amended.Mrs. Carrette and Mr. Endy have each publicly filed Schedules 13Dreporting the existence of a group between them. As a group, Mrs. Carretteand Mr. Endy beneficially own more than 50% of our voting power.

**Item 14.**                 PrincipalAccountant Fees and Services. 

Thefollowing table shows the fees for professional audit services provided by MossAdams LLP and Deloitte & Touche LLP for the fiscal year December 31,2006 and Deloitte & Touche LLP for the fiscal year December 31,2005 for the audit of our annual financial statements and the fees billed forother services rendered during those periods.

| ** **             | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Audit Fees(1)          |       |                        | $          | 515,125                     |       |   |   | $ | 383,000 |   |   |
| Audit-Related  Fees(2) |       |                        | —     |                        |       |   | 28,000 |   |   |
| Tax Fees(3)            |       |                        | 114,399    |                        |       |   | 278,605 |   |   |
| All Other Fees         |       |                        | —     |                        |       |   | — |   |   |
| Total                  |       |                        | $          | 627,524                     |       |   |   | $ | 689,605 |   |   |

----

(1)          Fees for theprofessional services rendered for the audit of GPIC’s annual financialstatements, review of financial statements included in our 10-Q filings,and services normally provided in connection with statutory and regulatoryfilings or engagements. The 2006 fees include fees for Moss Adams of $488,825and fees for Deloitte & Touche of $26,300 for first quarter review. Inaddition, Mazars rendered audit services resulting in fees totaling 60,278Euros ($75,649) and 52,141 Euros ($64,863) for the fiscal years ended December 31,2006 and 2005, respectively.

(2)          Fees for assurance andrelated services that are reasonably related to the performance of the audit orreview of GPIC’s financial statements. For December 31, 2005 this includedfees related to the review and analysis of our intercompany loans, the 401(k) planand other regulatory document reviews and related services.

(3)          Feesfor professional services rendered with respect to tax compliance, tax adviceand tax planning. This includes preparation of tax returns, claims for refunds,payment planning and tax law interpretation, including the analysis of:intercompany loans, fixed asset basis, and dividends. Deloitte &Touche provided tax strategy consulting in 2006 and 2005. We paid Deloitte &Touche $111,029 and Moss Adams $3,370 in 2006.

85

----

**PART IV**

**Item15.**                 Exhibits,Financial Statement Schedules.

***(a)(1)***   FinancialStatements 

Included in Part IIof this report: 

Consolidated BalanceSheets at December 31, 2006 and 2005. 

Consolidated Statements ofIncome for the Years Ended December 31, 2006, 2005 and 2004. 

Consolidated Statements ofStockholders’ Equity and Other Comprehensive Income for the Years Ended December 31,2006, 2005 and 2004. 

Consolidated Statements ofCash Flows for the Years Ended December 31, 2006, 2005 and 2004. 

Notes to ConsolidatedFinancial Statements 

***(a)(2)  ***Financial StatementSchedules

All required schedules areomitted because of the absence of conditions under which they are required orbecause the required information is given in the financial statements or notesthereto. 

***(a)(3) and (c)  ***Exhibits

| 2.01  |   | Agreement and Plan of Exchange and Stock Purchase by  and between Paul-Son Gaming Corporation and Etablissements Bourgogne et  Grasset S.A., as amended by the First Amendment thereto, incorporated herein  by reference to: Annex A to the Company’s definitive proxy statement dated  August 9, 2002, filed with the SEC on August 9, 2002 (the “Proxy  Statement”).                                                                                                                           |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.01  |   | Certificate of Amendment  and Restatement of Articles of Incorporation of Paul-Son Gaming Corporation,  incorporated herein by reference to Annex B to the Proxy Statement.                                                                                                                                                                                                                                                                                                                                           |
| 3.02  |   | Certificate of Amendment  to Articles of Incorporation of Gaming Partners International Corporation  filed on June 25, 2004.                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.01  |   | Specimen Common Stock  Certificate for the Common Stock of Gaming Partners International  Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.01 |   | Paul-Son Gaming  Corporation 1994 Directors’ Stock Option Plan (as amended September 12, 2002),  incorporated herein by reference to: Annex A of our definitive proxy  statement dated October 3, 2003 filed with the SEC on October 3,  2003.*                                                                                                                                                                                                                                              |
| 10.02 |   | Paul-Son Gaming  Corporation 1994 Long-Term Incentive Plan (as amended July 29, 1996)  incorporated herein by reference from our Registration Statement on  Form S-8 dated April 28, 1997, Exhibit 10.01.*                                                                                                                                                                                                                                                                                        |
| 10.03 |   | Lease dated May 17,  1993, by and between Paul-Son Mexicana S.A. de C.V., as lessee, and  Copropledad Arte Y Diseno, as lessor incorporated herein by reference from  our registration statement on Form S-1 (SEC No. 33-74758),  Part II, Item 16, Exhibit 10.05.                                                                                                                                                                                                                           |
| 10.04 |   | Promissory Note secured  by Deed of Trust dated February 22, 2002, in favor of Jackson Federal  Bank; Deed of Trust, Security Agreement, Assignment of Rents and Fixture  Filing dated February 22, 2002; Repayment Guaranty dated  February 22, 2002; Subordination and Attornment Agreement dated  February 22, 2002; and Assignment of Leases and Rents dated  February 22, 2002, incorporated by reference from our Form 8-K  dated March 5, 2002, Item 7, Exhibit 10.01. |

86

----

 

| 10.05 |   | Employment Agreement  dated September 12, 2002 between Gerard P. Charlier and the Company,  incorporated by reference to Exhibit 10.1 to our Quarterly Report on  Form 10-Q for the quarter ended August 31, 2002.*                                                                                                                                                                                                                      |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.06 |   | Employment Agreement  dated September 12, 2002 between Eric P. Endy and the Company,  incorporated by reference to Exhibit 10.2 to our Quarterly Report on  Form 10-Q for the quarter ended August 31, 2002. Amendment dated  March 27, 2003 to Employment Agreement between Eric Endy and us,  incorporated by reference to Exhibit 10.06 to our Annual Report on Form 10-K for  the year ended December 31, 2003.* |
| 10.07 |   | Lease Agreement dated  March 26, 2003, between Copropledad Arte Y Diseno, as lessor, and  Paul-Son Mexicana, S.A. de C.V., as lessee, incorporated by  reference to Exhibit 10.07 to Annual  Report on Form 10-K for the year ended December 31, 2003.                                                                                                                                                                         |
| 10.08 |   | Loan Agreement dated  February 21, 2001, between Bourgogne et Grasset, as borrower, and BNP  Paribas, S.A., as lender (English summary of French language document)  incorporated by reference to Exhibit 10.08 to our Annual Report on  Form 10-K for the year ended December 31, 2003.                                                                                                                                                 |
| 10.09 |   | Loan Agreement executed  January 9, 2004, between Bourgogne et Grasset, as borrower,and BNP  Paribas, S.A., as lender, incorporated by reference to Exhibit 10.09 to  our Annual Report on Form 10-K for the year ended December 31,  2004.                                                                                                                                                                                              |
| 10.10 |   | Second Amendment to  Lease Agreement dated March 1, 2006 between Copropiedad Arte y Diseno,  as lessor, and Paul-Son Mexicana, S.A. de C.V., as lessee, incorporated by  reference to Exhibit 10.10 to our Annual Report on Form 10-K for  the year ended December 31, 2005                                                                                                                                                              |
| 10.11 |   | Loan Agreement dated  June 29, 2006 between Lyonnaise de Banque and Gaming Partners  International SAS (English translation of French-language document)  incorporated by reference to Exhibit 10 to our Quarterly Report on  Form 10-Q for the period ended June 30, 2006.                                                                                                                                                         |
| 10.12 |   | Offer letter effective  December 7, 2006, relating to David W. Grimes, incorporated by reference  to Exhibit 99.2 to our Current Report on Form 8-K dated  December 7, 2006.*                                                                                                                                                                                                                                                            |
| 21.01 |   | List of subsidiaries,  incorporated by reference to Exhibit 21.01 to our Annual Report on  Form 10-K for the year ended December 31, 2005.                                                                                                                                                                                                                                                                                                    |
| 23.01 |   | Consent of Moss Adams  LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 23.02 |   | Consent of  Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1  |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as amended.                                                                                                                                                                                                                                                                                                     |
| 31.2  |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as amended.                                                                                                                                                                                                                                                                                                     |
| 32    |   | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                          |

----

*                    Managementcontracts or compensatory plans or arrangements required to be filed as exhibitsto this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K.

87

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized. 
|                          | GAMING PARTNERS INTERNATIONAL CORPORATION |
|--------------------------|-------------------------------------------|
| Date: May 15,  2007 | By:                                       | /s/  GERARD P. CHARLIER |
|                     |                                      | Gerard P.  Charlier |
|                     | * *                                  | *President  and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
| Date: May 15, 2007  | By:    | /s/ GERARD P. CHARLIER                             |
|--------------------------|--------|----------------------------------------------------|
|                     |   | Gerard P.  Charlier                                |
|                     |   | *Director,  President and Chief Executive Officer* |
|                     |   | *(Principal  Executive Officer)*                   |
| Date: May 15,  2007 | By:    | /s/  DAVID W. GRIMES                               |
|                     |   | David W. Grimes                                    |
|                     |   | *Chief  Financial Officer*                         |
|                     |   | *(Principal  Financial and Accounting Officer)*    |
| Date: May 15,  2007 | By:    | /s/  ERIC P. ENDY                                  |
|                     |   | Eric P. Endy                                       |
|                     |   | *Director*                                         |
| Date:                    | By:    |                                               |
|                     |   | Paul S. Dennis                                     |
|                     |   | *Director*                                         |
| Date: May 15,  2007 | By:    | /s/  ALAIN THIEFFRY                                |
|                     |   | Alain Thieffry                                     |
|                     |   | *Director*                                         |
| Date: May 15,  2007 | By:    | /s/  CHARLES R. HENRY                              |
|                     |   | Charles R. Henry                                   |
|                     |   | *Director*                                         |
| Date: May 15,  2007 | By:    | /s/  ROBERT J. KELLY                               |
|                     |   | Robert J. Kelly                                    |
|                     |   | *Director*                                         |
| Date:                    | By:    |                                               |
|                     |   | Elisabeth  Carrette                                |
|                     |   | *Director*                                         |

 

88

----

**EXHIBIT INDEX**

| EXHIBIT NO. | ** ** | ** **                                                                                                                                                                          | ** ** | **DESCRIPTION** |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.02        |       | Certificate of  Amendment to Articles of Incorporation of Gaming Partners International  Corporation filed on June 25, 2004.                                                   |
| 4.01        |       | Specimen Common  Stock Certificate for the Common Stock of Gaming Partners International  Corporation.                                                                              |
| 23.01       |       | Consent of Moss  Adams LLP                                                                                                                                                          |
| 23.02       |       | Consent of  Deloitte  & Touche LLP                                                                                                                                         |
| 31.1        |       | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as amended.                                 |
| 31.2        |       | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as amended.                            |
| 32          |       | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

 

89

----