**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, 2005**                                                                                                                                                                                                                            |
| **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 registrant asspecified in its charter)**
| **NEVADA**                | **88-0310433**                        |
|---------------------------|---------------------------------------|
| (State of  incorporation) | (I.R.S. Employer  Identification No.) |

 

**1700 South Industrial Road,Las Vegas, Nevada 89102**

**(Address of principal executiveoffices)**

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

**Registrant’s website:  **www.gpigaming.com

**Securities registered pursuant toSection 12(b) of the Act:**  None

**Securities registered pursuant toSection 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 thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. xYes oNo

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 30,2005, based on the closing price as reported on the Nasdaq National Market of$19.00 per share:  **$[48,852,933].**

The number of sharesoutstanding of each of the registrant’s classes of common stock, as of March 24,2006, was **7,917,827**shares of Common Stock.

**Documents Incorporated byReference:**

Portionsof the Registrant’s definitive proxy statement to be filed pursuant toRegulation 14A within 120 days after Registrant’s fiscal year end of December 31,2005, are incorporated by reference into Part III of this Report.

 

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**TABLE OF CONTENTS**

| PART I                                                                          |   | 1                                                                                                                      |
|--------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------|
| Item 1.                                                                              |   | Business.                                                                                                              |   | 1 |
| Item  1.A.                                                                           |   | Risk Factors.                                                                                                          |   | 14 |
| Item 1.B.                                                                            |   | Unresolved Staff Comments.                                                                                             |   | 17 |
| Item 2.                                                                              |   | Properties.                                                                                                            |   | 17 |
| Item  3.                                                                             |   | Legal  Proceedings.                                                                                                    |   | 18 |
| Item 4.                                                                              |   | Submission of Matters to a Vote of Security Holders.                                                                   |   | 18 |
| PART II                                                                         |   | 19                                                                                                                     |
| Item 5.                                                                              |   | Market for Registrant’s Common Equity and Related  Stockholder Matters, and Issuer Purchases of Equity Securities |   | 19 |
| Item 6.                                                                              |   | Selected Financial Data.                                                                                               |   | 20 |
| Item 7.                                                                              |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations.                           |   | 22 |
| Item 7A.                                                                             |   | Quantitative and Qualitative Disclosures About Market  Risk.                                                           |   | 36 |
| Item 8.                                                                              |   | Financial Statements and Supplementary Data.                                                                           |   | 37 |
| Report of Independent Registered Public Accounting  Firm                             |   | 39                                                                                                                     |
| Consolidated Balance Sheets                                                          |   | 40                                                                                                                     |
| Consolidated Statements of Income                                                    |   | 41                                                                                                                     |
| Consolidated Statements of Stockholders’ Equity and  Other Comprehensive Income |   | 42                                                                                                                     |
| Consolidated Statements of Cash Flows                                                |   | 43                                                                                                                     |
| Notes to Consolidated Financial Statements                                           |   | 44                                                                                                                     |
| Item 9.                                                                              |   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure.                                 |   | 65 |
| Item 9A.                                                                             |   | Controls and Procedures.                                                                                               |   | 65 |
| Item  9B.                                                                            |   | Other  Information                                                                                                     |   | 65 |
| PART III                                                                        |   | 65                                                                                                                     |
| Item 10.                                                                             |   | Directors and Executive Officers of the Registrant.                                                                    |   | 65 |
| Item 11.                                                                             |   | Executive Compensation.                                                                                                |   | 66 |
| Item 12.                                                                             |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters.             |   | 66 |
| Item 13.                                                                             |   | Certain Relationships and Related Transactions.                                                                        |   | 67 |
| Item 14.                                                                             |   | Principal Accountant Fees and Services.                                                                                |   | 67 |
| PART IV                                                                         |   | 67                                                                                                                     |
| Item 15.                                                                             |   | Exhibits, Financial Statement Schedules.                                                                               |   | 67 |
| EXHIBIT INDEX                                                                        |   | 71                                                                                                                     |
|                                                                                      |        |                                                                                                                        |  |  |  |  |

 

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**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 1.A. Risk Factors.*

**Company Overview**

Effective September 1, 2004, Paul-Son GamingCorporation, a Nevada corporation, completed its name change to Gaming PartnersInternational Corporation, or GPIC. GPIC and each of its subsidiaries aresometimes collectively referred to herein as the “Company,” “us,” “we” 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 Paul-SonTM, Bourgogne et Grasset®,or B&G, Bud Jones®, and T-KTM, remain unchanged. The Company’ssubsidiary, Paul-Son Gaming Supplies, Inc., changed its name toGaming Partners International USA, Inc., or GPI-USA. The Company’ssubsidiary, Etablissements Bourgogne et Grasset S.A., also changed its name toGaming Partners International SAS, or GPI-SAS. The Company’s subsidiary,Paul-Son Mexicana, S.A. de C.V., changed its name, effective as of January 22,2005, to GPI Mexicana S.A. de C.V., or GPI-Mexico.

On September 12, 2002, the businesses of GPIC,GPI-SAS and GPI-SAS’ then wholly-owned subsidiary, The Bud JonesCompany, Inc., or Bud Jones, were combined, with GPI-SAS and BudJones becoming wholly-owned subsidiaries of GPIC, or the Combination. TheCombination was accounted for as a purchase transaction for financialaccounting 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-SASwas the purchaser of GPIC. On December 31, 2002, Bud Jones merged into GPI-USA,which was a wholly-owned subsidiary of GPIC and GPI-USA was the survivingentity. Bud Jones was a gaming supply manufacturing company, which was also headquarteredin 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—Note1.)

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, wheels,playing cards, dice, gaming furniture, and miscellaneous table accessories suchas chip trays, drop boxes and dealing shoes, which are used in conjunction withcasino table games such as blackjack, poker, baccarat, craps and roulette.

We are headquartered in Las Vegas, Nevada, withmanufacturing facilities located in Las Vegas, Nevada, San Luis Rio Colorado,Mexico, and Beaune, France. Our primary sales offices are in Las Vegas, Nevadaand Atlantic City, New Jersey and Gulfport, Mississippi for the United States,and Beaune, France for the remainder of the world. Through our GPI-USAsubsidiary, we primarily sell our casino products manufactured in North Americato licensed casinos throughout the United States and Canada. Through our GPI-SASsubsidiary, we primarily sell our European-manufactured casino products andsome North American products to licensed casinos internationally in countriesother than the United States. Our revenues are derived primarily from the saleof casino table game products to casinos throughout the world. Most of ourproducts are sold directly to end-users. In some regions of the world, however,we sell through distributors. We also sell our non-casino poker chips to awholesaler in the United States.

We manufacture products to meet particular customerand industry specifications, which may include a wide range of shapes andsizes, varied color schemes and other graphics, and numerous security andanti-counterfeit features. The useful lives of our products typically rangefrom several hours in the case of playing cards and dice, to several months inthe case of layouts, and several years in the case of casino chips and gamingfurniture. As such, our primary business is the ongoing replacement sale ofthese products and 

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providing initial productsto new casinos. When a new casino opens, we strive to supply most of theproducts required to operate the casino’s table games. When successful,revenues are generated both from the initial sale to the new casino and on acontinuing basis as the new casino becomes part of our primary customer base.

GPI-USA was foundedin 1963 by our former Chairman, Paul S. Endy, Jr., and initiallymanufactured and sold dice to casinos in Las Vegas. The former Bud JonesCompany was founded in 1963 by Bud Jones and this entity eventually merged intoGPI-USA, formerly Paul-Son Gaming Supplies, Inc. GPI-SASwas formed by Mr. Bourgogne and Mr. Grasset in 1923 and becameoperational in 1925 in Beaune, France.

**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.)

**Recent Developments**

We have demolished the existing building on theproperty we purchased adjacent to our Las Vegas Headquarter in April of2005. We are currently in the process of constructing a paved parking lot whileawaiting the proper permits from the local government authorities. We expect tohave this completed in the second quarter of 2006.

In January 2006,Progressive Gaming International Corporation, a provider of diversified gaming productsand services, granted GPIC the exclusive rights in the U.S. and non-exclusiverights outside the U.S. to manufacture gaming chips with 13.56 MHz RFIDtechnology. GPIC has the ability to embed the 13.56 MHz RFID microchip in eachand every one of its popular brands of gaming chips. We offer casinos all ofour gaming chips, plaques and jetons with either this proprietary embedded highfrequency 13.56 MHz RFID microchip or our well known and reliable 125 KHzRFID microchips and readers, which technology we will support and continue developingin the future for the casinos particularly interested inCasino-Currency-Control.

**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 into eachchip. Our most sophisticated anti-counterfeiting feature is a radio frequencyidentification device, or “RFID,” which is a microchip that can be embedded inour 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, and generally between $0.75 and $2.00 per chip in the USA,depending upon the specification, quantities, design and security features. Atypical PaulsonTM brand clay chip with a microchip will sell for less thanapproximately $1.90 per chip. Given this relatively low cost and a gaming chip’sexpected lifespan of five or more years, we believe that competition isgenerally based upon factors 

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other than price. In 2005,we sold and manufactured approximately 20 million gaming chips, includingcasino chips, plaques and jetons.

Gaming chips can bedivided into three basic families:  (a) European-stylejetons and plaques; (b) American-style casino chips; and (c) commemorativechips. Jetons, plaques and all casino chips can also be manufactured with anembedded RFID microchip. Casino chips accounted for approximately 66% of totalsales in 2005.

*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 extensively in Asian countries. Jetons and plaques are made oflaminated cellulose acetate with a very large range of colors, shapes andsecurity and anti-counterfeit components, such as, UV print, numberserialization, laser print or “LaserLock”, gold lace material and RFIDtechnology. GPI-SAS created its original product line in 1925 and hasheld a leading position in this market since that time. Our production capacityin France for European-style jetons and plaques is approximately five millionchips, considering the use of three shifts.

*American-styleCasino Chips*

Casino chips areused worldwide for games originating in the United States of America. Originally,gaming chips in the United States were made of clay and called “clay chips.”  Clay was replaced many years ago by plasticmaterials. There are currently three main technologies used to produce thesetypes of chips: injection molding, sublimation and compression molding. Weproduce casino chips using all three of these methods. GPI-USAmanufactures our American-style casino chips under our brand names, PaulsonTMand Bud Jones®, at our facilities in San Luis Rio Colorado, Mexico and in LasVegas, Nevada. GPI-SAS also manufactures American—style casino chips in Beaune,France.

·       *Injection Molded Chips*.   Plasticinjection molded chips were created in the late 1960’s under the Bud Jonesbrand, manufactured in the U.S. Such chips are made with several injectionmolded colors, typically with a central metal piece for the weight and printeddecals. There are several standard diameters and a wide range of design andcolor combinations. Various security features are used to make the chipscounterfeit resistant, including UV pigments, UV prints, LaserLock, 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 brandand using a different type of plastic material with less vivid colors butrequiring no grinding and allowing a rougher surface. A particular line ofinjection molded gaming chips specifically designed and sold for optical readingidentification are also manufactured by GPI-SAS. The GPI-USA’s and GPI-SAS’lines of injection-molded chips allow a very good coverage of most casinos’requirements, which vary greatly around the world. Production capacity forinjection molded chips in the U.S. and France is approximately 12 million,considering the use of 2-3 shifts.

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·       *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 typeof casino chip by using a printing technology called “pad printing.”  This technology permits simultaneouslyprinting on the face and the edge of the chip. GPI-SAS holds severalpatents and patent applications for this technology, and refers to this casinochip as “Full Face.”  Security featuresfor sublimation chips include UV pigments and LaserLock. Production capacity atGPI-SAS is approximately two million chips, considering utilizing three shifts.

·       *Compression Molded Chips*.   Compressionmolded casino chips are manufactured from a proprietary formulation of morethan 13 raw materials using a compression molding system. Printed decals or“inlays” are incorporated in the chips during the molding steps. Customizeddesigns, 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 are manufactured under the Paul-SonTM brand atits GPI-Mexico facilities in San Luis Rio Colorado, Mexico. Varioussecurity features are used to make the chips more counterfeit resistant,including UV pigments, LaserLock, alpha-dot, customized rim and RFID technology.Our annual production capacity at our Mexico facilities is approximately 20million compression molded chips (based on a single shift and increased laboravailability). We believe that given our current anticipated production levelof compression molded chips per year, there will be sufficient manufacturingcapacity to meet potential increases in future demand. In 2005, GPI-Mexicoproduced approximately 14 million chips.

*Commemorative Chips*

Since 1994, GPIC hasmarketed chips that commemorate certain types of special events such as titleboxing matches, significant anniversaries and premier entertainment events. Casinopatrons often retain commemorative chips as souvenirs. Casinos benefit to theextent that casino chips purchased are not redeemed, thereby resulting in addedcash 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 other appearance or handling characteristics of the chips. These chips arenot only high quality casino gaming chips, but they are also reliable carriersof the data needed by the casinos to efficiently and securely manage theirtable game operations.

A sophisticated RFID microchip transponder is embeddedin each gaming chip. Read/write devices manufactured by us communicate quicklyand accurately with a large number of these RFID embedded gaming chips withouthuman contact. The authenticity and denomination of each chip is established,and then the data 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.

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Traditional jetons,plaques and casino chips could not easily and precisely be accounted for by thecasinos and the games that call for them, thus they could not be managed bycasinos as efficiently as slot systems. Casinos have a need for more streamlinedand automated accounting transactions between the pit and cage operations, thusthe 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 it isparticularly well adapted to the chip security and chip tracking applications.PGIC developed players tracking applications with this technology. GPICacquired the rights to the reader technology from Philips in 2001 and developedvery significantly the reading capabilities of this reader. Ten years ago GPICreaders could read only stacks of 10 chips, now several hundred of chips instacks of 20 can be read in a matter of a few seconds and new improvements arecoming. The 125 KHz Philips RFID microchip used by GPIC is now in its thirdgeneration and a fourth generation is planned.

Over the years RFID chips’ capabilities went up andcosts came down. The first B&G gaming chips with RFID technology that GPIsold in 1996, were priced above $6.00, more than $4.50 above the regular priceof a gaming chip. Today instead of $4.50, GPIC charges substantially less foran embedded 125 KHz RFID microchip transponder in a Paulson chip, programmingand royalty included. In parallel, the prices of the readers went down whiletheir capabilities increased.

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 U.S. 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 jointly by IGT and Shuffle Master to make and sell RFID chips in the U.S.Our patents and exclusive license apply to all RFID frequencies.

In 2003, PGIC started developing new player trackingsystems based on the higher frequency 13.56 MHz RFID microchips and readersdeveloped by an Australian company called Magellan. PGIC has an exclusiveagreement with Magellan for all gaming applications of these 13.56 MHz RFIDmicrochips and readers. As casinos have expressed an interest in PGIC’sproject, we developed efficient ways to embed this 13.56 MHz RFID tag in allwell known and widely accepted B&G, Paulson and Bud Jones chips includingB&G jetons and plaques. In January 2006, PGIC and GPIC signed anagreement by which we have the right to buy the 13.56 MHz RFID tags to makecasino chips, exclusive for the U.S. market and non-exclusive for the rest ofthe world. Casinos now have the choice between the two RFID technologies:125 KHz and 13.56 MHz.

The RFID chips and readers significantly increase thecasino protection against counterfeit chips. In addition, the RFID chips andreaders, with appropriate software programs, open the door to significantincreases in efficiency and cost savings. Chips can be tracked and accountedfor automatically and reliably everywhere in the casino. With appropriatesystems developed and sold by other companies, players can also be tracked formore objective comping.

As a result of RFID embeddedgaming chips, readers and computer systems, the necessary tools are nowavailable for the casinos to track their gaming chips and players and to managetheir tables as efficiently as their slots.

***Dice***

We manufacture our dice at our GPI-Mexicofacilities, from cellulose acetate specifically formulated to provide therequired clarity, hardness and dimensional stability. All dice are solddirectly by GPI-USA 

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to North America and theCaribbean Islands. GPI-SAS distributes dice to the other parts of theworld. We offer a variety of spot designs, which are inserted in the body ofthe dice and machined flat to the surface. We offer two different finishes andup to two monograms on the dice. A casino may request the imprinting of itsname and logo (in a variety and combination of colors), the insertion of ahidden security “key,” a special reverse spot, the addition of a security “glow”spot, the use of LaserLock, the serialization of the dice, or all, or acombination 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 $3.00 and $4.00 per pair. Wecurrently have the capacity to produce approximately 1 million pairs of diceper year (based upon one production shift) in Mexico. In 2005, we producedapproximately 789,000 pair of dice. We believe our capacity for dice productionis sufficient to accommodate 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-USAhas developed a comprehensive range of different quality layouts and variousprinting processes. GPI-USA manufactures PaulsonÒfelt and synthetic layouts made of FXÒ material for whichGPI-USA holds an exclusivity of supply in the U.S., as well as full graphiclayouts. We have a creative art department that can design any specific layoutto 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 have a remainingduration of 10 years and enable us to provide a full line of table gamesupplies and equipment.

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 $100to $300 in the United States, depending on the type of table, the complexity ofthe patterns and the variety and difficulty of color combinations.

We primarily sell ourlayouts manufactured from our Mexico facilities and occasionally, in Las Vegas;we also may sell a small quantity of full graphic sublimation layouts using anoutside vendor. Our layout production capacity is approximately 24,000 feltlayouts and approximately 20,000 synthetic layouts per year. In fiscal 2005, weproduced approximately 29,000 layouts, of which approximately 14,000 were feltand 15,000 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.

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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 in our GPI-Mexicofacilities. We purchased and leased additional equipment in fiscal 1999 toincrease our production capacity to satisfy the marketplace. The appropriatemarketing approach will permit management to offer better customer service toselected clients, providing a better return to us. In 2005, the Companyproduced approximately 4 million decks of playing cards.

Traditionally, theCalifornia card room market prefers the plastic playing cards while thetraditional hotel-casino markets generally prefer the paper cards. Ourcapacity, assuming a single shift, is approximately 8 million decks per year.

***Wheels***

GPI-SAS manufactures American and Frenchroulette wheels in Beaune, France and sells them primarily in Europe and incertain United States and Canadian-based jurisdictions where GPI-SAS islicensed (such as New Jersey, Washington State and Mississippi). Production inFrance consists in designing and assembling the different parts produced byvery specialized sub-contractors. In 2005, France produced and soldapproximately 100 roulette wheels mostly in Europe. Our capacity isapproximately 300 wheels.

Until the Combination, theformer two U.S. companies, Paul-Son and Bud Jones, manufactured roulette wheelsand “Big Six” wheels in their plants in Las Vegas. In October 2000 and September 2002,respectively, the former Bud Jones and the former Paul-Son administratively andvoluntarily surrendered their Nevada gaming manufacturer and distributorlicenses due to excessive license costs, and were no longer permitted toassemble or manufacture wheels in Nevada or sell wheels from Nevada. On November 18,2004, the Nevada Gaming Commission granted GPI-SAS and GPI-USAapproval, by way of transactional waivers, to manufacture and distributeroulette wheels to Nevada casinos. Also as a result of this ruling, bothcompanies may service roulette wheels for refurbishment.

***Gaming Furniture***

We sell a variety ofcasino gaming furniture, including tables and seating. Tables range in pricefrom approximately $1,500 for a blackjack table to approximately $3,000 for aroulette table (excluding the roulette wheel) and up to approximately $5,000for a craps game table. We offer a “Premier” line of gaming furniture and a “Select”line in response to the industry’s demand for a lower priced, quality line ofblackjack tables. We believe the “Select” line enables us to compete with theprice structure of our competitors while maintaining our quality standards. Wevigorously pursue gaming table sales because the sale of a gaming table willgenerally bolster our ability to sell gaming chips and consumable products suchas layouts, dice, cards, and other accessories to the table purchasers. Priorto 2000, we purchased our gaming tables from a third party and subsequently webegan manufacturing our own table game furniture components in our Mexicofacility. Tables are assembled by us in Mexico and completed by adding the feltlayout, drop boxes, trays and other table accessories in Las Vegas. Table gameseating is produced by nonaffiliated manufacturers and distributed by us. Wehave seen a growth in our sales of gaming furniture due to the openings and expansionsof new poker rooms. In 2005, GPI-Mexico produced approximately 2,300 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 plastic 

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products, includingdealing shoes in our Mexicana facility. Ancillary products include plasticmoney paddles, discard holders, drop boxes, dealing shoes, trays and covers,dice sticks and on/off pucks. These products are generally sold in conjunctionwith the sale of gaming tables and tend to have long useful lives. In 2005,GPI-Mexico produced approximately 11,000 ancillary products and sold inconjunction 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 incontending with secondhand smoke. Small air vent devices secured underneath thetable draw smoke from the surface and recycle it, dispensing the air outwardwhere the casino’s primary ventilation systems can distribute it. By filteringand dispersing the smoke-filled air, the Air-Rail System makes the casino’sprimary air circulation systems perform more efficiently and improves thecomfort of the nonsmoking casino dealers and patrons. In March 2005, wepurchased four patents, including one for the Air-Rail System.

**Sales, Advertising and Promotion**

We generally distribute our products in the UnitedStates, North America and the Caribbean Islands through our six-person****sales force, which primarily operates out of regionaloffices in Las Vegas, Nevada, Atlantic City, New Jersey and Gulfport,Mississippi. We generally distribute our products in the international marketthrough our four-person sales force, which operates out of our Beaune, Franceoffice.

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 ourselves asthe casino partners for the table operations. When direct selling is notfeasible because of local conditions, we may enter into agreements withcarefully selected local distributors. But, even in this case, we alwaysmaintain direct contact with the end clients.

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 casinos are identified,our representatives make personal contact with appropriate officers and/orpurchasing 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 table gamingproducts to casinos while they are in the development and licensing stage. Bythereafter maintaining a frequent contact program, we seek to realize asteadily increasing base of recurring sales for our consumable products such aslayouts, dice and cards, while capturing incremental sales to new casinos.

**Materials, Supplies and 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, and felt and synthetic fabric, which are readilyavailable from several suppliers. We believe that our practice of purchasingfrom diversified sources minimizes the risk of interrupting the supply of rawmaterials.

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Our backlog of productionorders amounted to approximately $4.5 million for the U.S. and $21.2 millionfor our France operation as of December 31, 2005. At December 31,2004, our backlog was approximately $4.5 million for the U.S. and $10.0 millionfor our France operation. We believe that all of our backlog will be filled in2006.

**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 inrecent years become an increasingly competitive area of the gaming supplybusiness. Currently, our major competitors and their respective locations areChipco International Ltd. and RT Plastics in the United States, Abbiati inItaly, Dolphin in Australia, Matsui Gaming Machines in Japan and other localmanufacturers in each jurisdiction. We believe key competitive factors forgaming chip sales are: well established product and process security, respectof players’ and dealers’ habits, attractiveness, durability, quality of serviceand price.

*TableLayouts.*   Our primary competitors for casinotable layouts are Midwest Game Supply Co. and Gemaco Playing Card Co. in theUnited States, and TCS/John Huxley in the United Kingdom. We believe the keycompetitive factors for table layout sales are cloth quality, durability,printing processes and price.

*PlayingCards.**  *Our major competitors in thedomestic playing card market are The U.S. Playing Card Co. and GemacoPlaying Card Co. Our major competitors internationally are Angel Cards inJapan, primarily servicing the Asian market, and Carta Mundi in Belgium,primarily servicing the European market. We believe the primary competitivefactors for playing cards are price, intrinsic characteristics (snap memory,ease of handling, etc.), security, quality control, brand name identification,process security and reputation.

*GamingFurniture.**  *Our principal competitors forcasino gaming furniture are TCS/John Huxley in the United Kingdom andAbbiati in Italy and smaller regional wood shops in certain geographic areas.Competition is based on product ranges, quality service, industry know how, andprice.

*Dice.**  *Ourprincipal competitor for domestic casino dice sales is Midwest GameSupply Co. There is no significant market internationally for casino dice. Webelieve the primary competitive factors for dice sales are quality of theproduct and services and pricing. In addition, casino shift managers typicallyprefer that casinos purchase dice from more than one supplier due to industrysuperstition that dice from one of its suppliers may run “cold” for the housefrom time to time.

*TableAccessories and Other Products.**  *Our principal competitors fordistributing table accessories and other products, which include dropboxes, dealing shoes, chip trays and chip bank covers, foot rails are severallocal vendors. We believe that key competitive factors for these products arethe ability to be a single source supplier, service, convenient locations, andproduct quality.

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**Intellectual Property**

We have a portfolio ofregistered service marks, trademarks and logos, exclusive patent rights, andpatents that provide us with a competitive advantage, fostering futureprofitability and growth. The logos and trademarks include, but are not limitedto: “Gaming Partners InternationalÒ,”“GPI,” “PaulsonTM,” “Bud JonesÒ,” “SmartchipsTM,” “ChipsoftTM,”“SafeChipTM,” “Bourgogne et GrassetÒ,” “BGÒ,”“Paulson FXÒ,” “Paul-Son GamingTM,” “Air-RailÒ,”and “TKTM.”  We also retain an exclusivelicense to manufacture and sell gaming chips with embedded RFID microchips inthe United States until 2015. We believe that our trademarks, logos and patentrights are valuable to the operation of our Company and are important to ourmarketing strategy. Our policy is to actively pursue and maintain registrationof our trademarks and logos where our business strategy requires us to do soand to oppose vigorously any infringement or dilution of our trademarks, logosor patent rights. However, we cannot predict whether steps taken by us toprotect our proprietary rights will be adequate to prevent misappropriation ofthese rights or the use by others. It may be difficult for us to prevent othersfrom copying elements of our concepts, or our trade secrets, and any litigationto enforce our rights will likely involve significant costs.

**Environmental Matters**

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. The parcel of land that we purchasedin the second quarter of 2005 contained a building that has been demolished aswe plan to use the land primarily for parking. There is currently no violationof law and we plan on completing the parking lot construction in accordancewith all local laws and regulations.

**Employees**

At February 28, 2006,we employed approximately 870 persons. Approximately 450 of the employees werelocated at our Mexico facilities, approximately 320 employees were located inour Beaune, France facility and the remainder were located primarily in LasVegas, Nevada and Atlantic City, New Jersey. None of our employees are coveredby collective bargaining agreements and we believe that our relations with ouremployees are good.

**Regulation and Licensing**

*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 gaming activities.A list of the geographical locations of the jurisdictions in which we, throughour subsidiaries, are subject to licensing and/or regulatory control of thegaming 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 |

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| Louisiana   |   | Puerto Rico              |
|-------------|--------|--------------------------|
| Michigan    |   | Nova Scotia, Canada      |
| Minnesota   |   | Ontario, Canada          |
| Mississippi |   | Manitoba, Canada         |
| Missouri    |   | Saskatchewan, Canada     |
| Montana     |   | Quebec, Canada           |
| Nevada      |   | British Columbia, Canada |
| New Jersey  |   | Alberta, 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 beendenied a gaming related license, nor have any licenses been suspended orrevoked.

*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.

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 would faroutweigh any benefit to be gained by maintaining licensure in Nevada. Specifically,based upon an analysis of three factors: the potential market for our rouletteand Big Six wheels in Nevada; the benefits gained through our choice ofcorporate structure; and the administrative costs associated with compliancewith certain requirements of the Nevada Gaming Authorities, we concluded thatthe costs of maintaining licensure in Nevada upon the completion of theCombination 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 its licensure in other gaming jurisdictions or its 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 Nevada 

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gaming laws and for thelimited licensure of GPI-USA and GPI-SAS to manufacture anddistribute roulette wheels in Nevada. Company research showed that no currentlicensed manufacturers or distributors in Nevada were actively in the businessof manufacturing or selling roulette wheels and it was anticipated that Nevadacasino 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 GPIS-SASwere each licensed as manufacturers and distributors strictly limited to themanufacture, distribution and service of roulette wheels in Nevada, and subjectto administrative 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. The waivers granted were specifically found by theNevada State Gaming Commission to be consistent with the policies set forth forin the Nevada gaming laws. These waivers may, however, be withdrawn by theNevada State Gaming Control Board for any cause deemed reasonable. Upon suchwithdrawal, the Company would be subject to full registration and licensing.

*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 NewJersey Commission. The sale and distribution of gaming equipment to casinos inNew Jersey is also subject to the New Jersey Act and the regulationspromulgated thereunder by the New Jersey Commission. The New Jersey Commissionhas broad 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 information, duration of licenses, record keeping, causes forsuspension, standards for renewals or revocation of licenses, equal employmentopportunity requirements, fees and exemptions. In deciding to grant a license,the New Jersey Commission may consider, among other things, the financialstability, integrity, responsibility, good character, and reputation forhonesty, business ability and experience of the applicant and its directors,officers, management and supervisory personnel, principal employees andstockholders as well as the adequacy of the financial resources of theapplicant. New Jersey licenses are granted for a period of three or four years,depending on the length of time a company has been licensed, and if they arerenewable. The New Jersey Commission may impose such conditions upon licensing,as it deems appropriate. These include the ability of the New Jersey Commissionto require the applicant or licensee to report the names of all of itsstockholders as well as the ability to require any stockholders whom the NewJersey Commission finds not qualified to dispose of the stock, not receivedividends, not exercise any rights conferred by the shares, nor receive anyremuneration from the licensee for services rendered or otherwise. Failure ofsuch stockholder to dispose of such stockholder’s stock could result in theloss of the license. Licenses are also subject to suspension, revocation orrefusal for sufficient cause, including the violation of any law. In addition,licensees are also subject to monetary penalties for violations of the NewJersey Act or the regulations of the New Jersey Commission.

Our new combined structurerequired that each subsidiary company submit a new application for licensure. Upona satisfactory initial background investigation, each company as necessary hasobtained transactional waiver approval from the New Jersey Commission to engagein specific transactions with 

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NewJersey casinos pending the outcome of the complete investigation of eachsubsidiary’s respective license application.

*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, or the 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 U.S. Department of Justice. Inaddition, the Federal Act imposes gambling device identification and recordkeeping requirements. Violation of the Federal Act may result in seizure andforfeiture of the equipment, as well as other penalties. Our subsidiaries,which are involved in the manufacture and transportation of gaming devices, arerequired to register annually.

*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, or the IGRA, providesthe framework for federal and state control over all gaming on Native Americanlands and is administered by the National Indian Gaming Commission and the Secretaryof the U.S. Department of the Interior. The IGRA requires that a tribe and thestate in which the tribe is located enter into a written agreement, atribal-state compact, which governs the terms of the gaming activities. Tribal-statecompacts vary from state-to-state and in many cases require equipmentmanufacturers and/or distributors to meet ongoing registration and licensingrequirements. In addition, tribal gaming commissions have been established bymany Native American tribes to regulate gaming related activity on Indian lands.Our subsidiaries manufacture and distribute gaming supplies to Native Americantribes who have negotiated compacts with their respective states and havereceived federal approval. Currently, GPI-USA is authorized to sellproducts to Native American casinos in seventeen states and GPI-SAS isauthorized to sell products to Native American casinos in five states.

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*InternationalGaming Regulation*

Certain foreign countriespermit the importation, sale and operation of gaming supplies in casino andnon-casino environments. Certain jurisdictions require the licensing ofmanufacturers and distributors of gaming supplies. We and our subsidiariesmanufacture and/or distribute gaming supplies to various international marketsincluding Australia, the Caribbean, Canada, and other foreign countries. Wehave obtained the required licenses to manufacture and distribute our productsin the various foreign jurisdictions where 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 andSupplementary Data-Notes to Consolidated Financial Statements-Note 14 forcertain financial information by geographic area.

**Available Information**

Ourcurrent website is*www.gpigaming.com.*There we makeavailable, free of charge, our Annual Report on Form 10 K, Quarterly Reports onForm 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: Gaming Partners International Corporation, 1700 Industrial Road, LasVegas, Nevada 89102, Attn:  InvestorRelations.

**Item 1.A.**             RiskFactors.

Throughout this Annual Report on Form 10-K,we make some forward-looking statements, which do not relate to historical orcurrent facts, but are forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. These statements relate toanalyses and other information based on forecasts of future results andestimates of amounts not yet determinable that, while considered reasonable byus, are inherently subject to significant business, economic and competitiverisks and uncertainties, many of which are beyond our control and are subjectto change. The statements also relate to our future prospects and anticipate 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 and uncertainties.We do not intend, and undertake no obligation, to update our forward-lookingstatements to reflect future events or circumstances.

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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,particularly in Asia;

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

·        adecline in the public acceptance of gaming.

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

·        developmentof new proprietary technologies that could be applied by our competitors to makeour 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 competeeffectively;

·        successfulchallenge of the patents underlying our exclusive license in the U.S. regardingour RFID embedded gaming chips; and

·        ineffectiveor lack of enforcement of patents by our licensors.

**Our business isvulnerable 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;

·        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.

**We operate in a highly regulated industry and ourability to sell our products in certain jurisdictions could be adverselyaffected 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;

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·        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.

**Our success in the gaming industry depends in part onour ability to develop innovative products and would be adversely affected by:**

·        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, in particularour products with security features;

·        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; and

·        anincrease in the popularity of competitors’ products.

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

·        thecurrent executive officers and directors of our Company beneficially ownapproximately 68.0% of our outstanding common stock as of March 21, 2006. Asa result, the executive officers and directors of our Company can control themanagement and affairs of our Company and all matters requiring stockholderapproval, including the election of directors and approval of significant corporatetransactions;

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

·        this concentration ofownership also might adversely affect the market price of the common stock andthe voting and other rights of our Company’s other stockholders.

**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

·        creating a disadvantage tous compared to competitors with less indebtedness.

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**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

·        volatility in ourintercompany international operations.

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

·        the limited or uniquesuppliers for certain key raw materials for significant products;

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

·        adversechanges in the creditworthiness of 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 or outcomeof existing litigation;

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

·        casualtytheft 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.

In addition to the risksabove, new legislation or regulations requiring more stringent corporategovernance and financial reporting standards have led and will continue to leadto an increase in our costs of compliance. Section 404 of theSarbanes-Oxley Act of 2002 will require us to include an internal controlreport of management in our 2007 and post-2007 Annual Reports on 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.

**Item 1.B.**            UnresolvedStaff Comments.

Not applicable.

**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 located in anapproximately 60,000 square foot building. Our Las Vegas headquarters waspurchased in September 1995 for approximately $2,000,000.*

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*This facility houses the Las Vegas sales and corporateoffices, including a centralized warehouse for certain of our finished goodsinventory, several manufacturing departments, and a graphics art department. Inour Las Vegas headquarters, we also maintain a certain inventory of templates,graphic designs, logos, and tools and dies for casino customers’ gamingequipment. Maintaining such an inventory, results in time and cost savings forproduct manufacturing and delivery to our customers. Our Las Vegas headquarterssecures a deed of trust issued under our outstanding term loan. In the secondquarter of 2005, we acquired an approximately one acre parcel of land adjacentto our Las Vegas headquarters for approximately $800,000. We intend to use theproperty primarily for additional employee and visitor parking. (See PartII-Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations-Liquidity and Capital Resources.)*

*SanLuis Rio Colorado, Mexico.  **We manufacture some casino chips, allplaying cards, dice, all plastic products, some layouts and some processes fortables at two facilities in San Luis Rio Colorado, Mexico. These facilitiesinclude a 34,000 square foot leased facility in which casino chips and dice aremanufactured, 15,000 square feet where layouts are produced and anapproximately 66,000 square foot facility used for playing cards, some woodshopprocesses, and layout products production. We own the 66,000 square footfacility. We lease our main 34,000 square foot facility pursuant to a one-yearlease, which expired on March 31, 2004. In April 2004, we extended the leasefor an additional five years at the same monthly rent amount of approximately$0.35 per square foot, or $12,000, except that the amount may be prorated,commensurate with the space we elect to use. Effective March 1, 2006, weamended our current lease for an additional 17,500 square feet. This extensionhas the same five year term at the same monthly rent amount of approximately$0.35 per square feet, or $6,100. (See Part II-Item 8. Financial Statements andSupplementary Data-Notes to Consolidated Financial Statements Notes 13 and 16.)*

*Beaune,France.  **We own an approximately 34,000 square footmanufacturing and administrative facility, in Beaune, France.*OnJanuary 9, 2004, GPI-SAS entered into a 350,000 Euro (orapproximately $447,000 U.S. as of January 9, 2004) loan transaction,with Banque Nationale de Paris (B.N.P), a French bank, for a buildingexpansion, which included approximately 3,600 square feet of additional officeand production space and 1,350 square feet of storage space. This expansion wascompleted in the third quarter 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 the thirdquarter of 2005. The cost was approximately $320,000, totally paid for out ofour operating funds. In February 2006, we entered into a constructioncontract for a 5,400 square foot additional building to be completed in thethird quarter of 2006, to receive the equipment warehouse and the showroom. Weanticipate the cost to be approximately $350,000, to be paid for out of ouroperating funds.

*FacilityCapacity.**   With its current approximate 216,000 squarefeet as of December 31, 2005, of manufacturing facilities, plus the additionalspace of approximately 1,600 square feet, and other anticipated expansion in2006, resulting from the GPI SAS and GPI USA’s building expansions, we believethat we will have sufficient production capacity to meet anticipated futuredemand for all of our products in the United States and abroad.*

**Item 3.**                        LegalProceedings.

See Part II—Item 8. FinancialStatements and Supplementary Data—Notes to Consolidated Financial Statements Note9. For information regarding legal proceedings.

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

No matters were submittedto a vote of our security holders during the fourth quarter of the fiscal yearended December 31, 2005.

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**PART II**

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

**Market Information**

As of March 10, 2005, the Company moved its stocktrading from the NASDAQ SmallCap Market to the NASDAQ National Market, andcontinued trading under the symbol “GPIC.” Prior to the name change on September 1, 2004, the Company’s stocktraded under the symbol “PSON.”  The followingtable sets forth the quarterly high and low closing prices of our common stockas reported by NASDAQ during the periods indicated. All stock prices reflect afiscal year ending December 31. On March 24, 2006, the closing pricewas $14.22 per share.

| **Fiscal Year** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|------------|------------|----------|------------|---------|------------|
| 2004 First  Quarter  |       | 5.66       |       | 3.90     |       |
| 2004 Second  Quarter |       | 4.40       |       | 3.31     |       |
| 2004 Third  Quarter  |       | 8.85       |       | 3.85     |       |
| 2004 Fourth  Quarter |       | 25.44      |       | 9.55     |       |
| 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    |       |

 

**Holders**

There were 104 holders of record of our commonstock as of March 24, 2006. We estimate that there are approximately 1,215 beneficial holders of our commonstock based on the proxies distributed in connection with the May 2005meeting of stockholders.

**Dividend Policy**

On November 8, 2005,the Company’s Board of Directors declared a one-time cash dividend of $0.10 pershare paid on December 15, 2005 to shareholders of record at the close ofbusiness on November 21, 2005. The cash was paid from the Company’s normaloperations. This was the first time a cash dividend had ever been paid.The Boardof Directors 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 620115th Avenue,Brooklyn, New York 11219, and with a phone number of (718) 921-8247.

**Purchasesof Equity Securities by the Issuer**

The Company made nopurchase of GPIC equity securities during the fourth quarter of 2005.

**Unregistered Sales**

The Company reportedcertain unregistered sales of equity securities on Form 8-K,Item 3.01, filed with the Securities and Exchange Commission on March 3,2005. In addition, on September 12, 2005, GPIC issued an aggregate of29,500 shares of our common stock as a result of the exercise of antidilutionwarrants. The antidilution warrants were granted by us on September 12,2002 to the former stockholders of GPI-SAS in connection with the combinationtransaction between us and GPI-SAS. The former GPI-SAS stockholders weregranted antidilution warrants to purchase an aggregate of 459,610 shares of our

19

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commonstock, which was equal to the amount of options, warrants, convertiblesecurities and other similar rights to purchase our common stock that wereoutstanding immediately prior to the combination transaction. The purpose ofthe warrants was to provide antidilution protection to the former GPI-SASstockholders in the event that any of such underlying options, warrants,convertible securities or other similar rights were exercised after the closingdate of the combination transaction. The exercise price of the antidilutionwarrants is $0.01 per share. The antidilution warrants were approved by ourstockholders on September 12, 2002, and expire 30 days following the dateon which we notify the warrant holders that the last of the underlying options,warrants, convertible securities or other similar rights have been exercised,canceled or terminated. Of the 459,610 antidilution warrants, there were 91,500warrants exercisable at December 31, 2005, of which 21,366 warrants may beexercised in 2006 at $0.01 per share.

The antidilution warrantsonly become exercisable to the extent that the underlying options, warrants,convertible securities or other similar rights are exercised or converted. FromMarch 31, 2005 to May 31, 2005, stock options to purchase anaggregate of 29,500 shares were exercised pursuant to our Incentive Plan atexercise prices ranging from $8.0625 to $8.75, thereby triggering theexercisability of a corresponding number of the antidilution warrants. Theissuance of the shares underlying the stock options was registered pursuant toregistration statements on Form S-8 filed with the Securities andExchange Commission. None of the antidilution warrants or underlying shareshave been registered, and were issued and sold in reliance upon specificexemptions from registration, including Section 4(2) and Rule 506promulgated under Regulation D of the Securities Act of 1933, as amended. Thewarrant holders have the right to require us to register under the federal andstate securities laws of any GPIC shares that they obtain from us, Eric Endy orthe Endy Trust, including the antidilution shares. The exercise of the antidilutionwarrants and acquisition of the underlying shares were exempt under Rule 16b-3and Rule 16b-6(b).

**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 31,2005, 2004, and 2003 and as of December 31, 2005 and 2004, have beenderived from our audited consolidated financial statements included elsewhereherein. The selected consolidated financial data for the years ended December 31,2002 and 2001, and as of December 31, 2003, 2002 and 2001, have beenderived from our audited 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.). Atthe closing, the businesses of GPIC, GPIC-SAS and GPI-SAS’ thenwholly-owned subsidiary, the Bud Jones Company, Inc., or Bud Jones, werecombined, with GPI-SAS and Bud Jones becoming wholly-owned subsidiariesof GPIC, 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 was the purchaser of GPIC.   On December 31, 2002, Bud Jones mergedinto 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-USAand 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.)

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The table below reflects historical information forthe year ended December 31, 2001 for GPI-SAS and for the former BudJones Company for the entire year, the chip manufacturing business of TrendPlastics, Inc. from August 2001 and T-K Specialty Company, Inc.from September 2001. The year ended December 31, 2002 includeshistorical information for GPI-SAS, the former Bud Jones Company, TrendPlastics, T-K Specialty Company, Inc. for the entire year and theformer Paul-Son Gaming Corporation and its subsidiaries from September 12,2002. The years ended December 31, 2003 to 2005 include historicalinformation for all entities described above, for the full years. 

| ** **                                            | ** ** | **Years Ended December 31,**                           | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                            | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Operations statement data:**                        |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                              |       | $                                                                     | 57,121     |   | $ | 44,585 |   | $ | 36,171 |   | $ | 21,861 |   | $ | 23,089 |   |
| Cost of revenues                                      |       | 34,140                                                                |       | 27,249 |   | 22,387 |   | 14,770 |   | 15,849 |   |
| Gross profit                                          |       | 22,981                                                                |       | 17,336 |   | 13,784 |   | 7,091 |   | 7,240 |   |
| Selling, general  and administrative expenses         |       | 17,142                                                                |       | 13,260 |   | 12,042 |   | 7,607 |   | 5,698 |   |
| Restructuring and  costs associated with Combination  |       | —                                                                |       | — |   | — |   | 622 |   | — |   |
| Operating income  (loss)                              |       | 5,839                                                                 |       | 4,076 |   | 1,742 |   | (1,138 | ) | 1,542 |   |
| Gain (loss) on  foreign currency transactions         |       | 133                                                                   |       | (155 | ) | (292 | ) | (529 | ) | 225 |   |
| Interest expense                                      |       | (199                                                                  | )          | (253 | ) | (264 | ) | (232 | ) | (170 | ) |
| Other income                                          |       | 311                                                                   |       | 98 |   | 148 |   | 128 |   | 124 |   |
| Total other  income (expense)                         |       | 245                                                                   |       | (310 | ) | (408 | ) | (633 | ) | 179 |   |
| Income (loss)  before income tax expense              |       | 6,084                                                                 |       | 3,766 |   | 1,334 |   | (1,771 | ) | 1,721 |   |
| Income tax  expense                                   |       | 1,756                                                                 |       | 1,152 |   | 101 |   | 383 |   | 737 |   |
| Net income (loss)                                     |       | $                                                                     | 4,328      |   | $ | 2,614 |   | $ | 1,233 |   | $ | (2,154 | ) | $ | 984 |   |
| Earnings (loss) per  share:                           |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                 |       | $                                                                     | 0.55       |   | $ | 0.34 |   | $ | 0.16 |   | $ | (0.42 | ) | $ | 0.24 |   |
| Diluted                                               |       | $                                                                     | 0.53       |   | $ | 0.34 |   | $ | 0.16 |   | $ | (0.42 | ) | $ | 0.24 |   |
| Weighted-average shares  of common stock outstanding: |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                 |       | 7,829                                                                 |       | 7,608 |   | 7,595 |   | 5,131 |   | 4,054 |   |
| Diluted                                               |       | 8,179                                                                 |       | 7,754 |   | 7,672 |   | 5,131 |   | 4,054 |   |

 

| ** **                               | ** ** | **December 31,**   | ** ** |
|------------------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| **Balance sheet data:(1)**               |       |                    |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents               |       | $                       | 4,573      |   | $ | 8,012 |   | $ | 4,186 |   | $ | 2,333 |   | $ | 4,254 |   |
| Marketable  securities                   |       | 9,075                   |       | 4,971 |   | 2,580 |   | 1,329 |   | 943 |   |
| Working capital                          |       | 9,563                   |       | 12,230 |   | 7,327 |   | 6,240 |   | 3,919 |   |
| Property and  equipment, net             |       | 11,212                  |       | 9,469 |   | 8,658 |   | 9,500 |   | 4,485 |   |
| Total assets                             |       | 48,716                  |       | 39,225 |   | 28,596 |   | 28,157 |   | 21,425 |   |
| Current  liabilities                     |       | 20,825                  |       | 13,960 |   | 9,219 |   | 8,672 |   | 8,772 |   |
| Long-term debt,  less current maturities |       | 1,892                   |       | 2,856 |   | 1,563 |   | 3,576 |   | 2,333 |   |
| Stockholders’ equity                |       | 25,999                  |       | 21,620 |   | 17,814 |   | 15,478 |   | 10,204 |   |
|                                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Cash dividends paid wereapproximately $787,000 for the period ended December 31, 2005 and $0 forall other periods.

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

**Recent Developments**

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 the thirdquarter of 2005. The cost was approximately $320,000, totally paid for out ofour operating funds. In February 2006, we entered into a constructioncontract for a 5,400 square foot additional building to be completed in thethird quarter of 2006, to receive the equipment warehouse and the showroom. Weanticipate the cost to be approximately $350,000, to be paid for out of ouroperating funds.

In January 2006,Progressive Gaming International Corporation, a provider of diversified gaming productsand services, granted GPIC the exclusive rights in the U.S. and non-exclusiverights outside the U.S. to manufacture gaming chips with the 13.56 MHz RFIDtechnology. GPIC can now successfully embed the faster 13.56 MHz RFID microchipin each and every one of its popular brands of gaming chips. We can now offer casinosall of our gaming chips, plaques and jetons with either this proprietaryembedded high frequency 13.56 MHz RFID microchip or our well known 125 KHz RFIDmicrochips and readers, which technology we will support and continue developingin the future years for the casinos particularly interested inCasino-Currency-Control.

**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 following discussion is intended toassist in the understanding of our results of operations and our presentfinancial condition. The consolidated financial statements and the accompanyingnotes contain additional detailed information that should be referred to whenreviewing this material. Statements in this discussion may be forward-looking. Suchforward-looking statements involve risks and uncertainties that could causeactual results to differ significantly from those expressed. See Item 1A, “RiskFactors.”

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.). Atthe closing, the businesses of GPIC, GPIC-SAS and GPI-SAS’ thenwholly-owned subsidiary, the Bud Jones Company, Inc., or Bud Jones, werecombined, with GPI-SAS and Bud Jones becoming wholly-owned subsidiariesof GPIC, 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, BudJones merged into GPI-USA, which was a wholly-owned subsidiary of GPICand GPI-USA was the surviving entity. Bud Jones was a gaming supplymanufacturing company, which was also headquartered in Las Vegas. Both formeroperations (GPI-USA and Bud Jones) have been consolidated into onefacility at the Company’s headquarters in Las Vegas, Nevada with the new nameof GPI-USA. (See Part II-Item 8. Financial Statements andSupplementary 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, table accessories and other productsthat are used with casino table games such as blackjack, poker, baccarat, crapsand roulette. We generally sell our casino products to licensed casinos for newopenings and to existing casino operations, worldwide. We are headquartered inLas Vegas, Nevada, with offices in Beaune, France, San Luis Rio Colorado,Mexico, Atlantic City, New Jersey and Gulfport, Mississippi.

On March 3, 2005, we received approval from NASDAQ totransfer the listing for our common stock from the NASDAQ SmallCap Market tothe NASDAQ National Market. We elected to transfer our 

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listing because we believethat listing on the NASDAQ National Market will provide increased visibilityfor the Company and liquidity for our common stock. Our common stock begantrading on the NASDAQ National Market effective March 10, 2005, under the sameticker symbol, GPIC.

Our products on display at the 2006 and 2005 Global GamingExpo in Las Vegas, Nevada and the 2006 and 2005 ICE show in London, Englandincluded our gaming chips with embedded RFID technology and corresponding chipreaders. We have been working for several years to apply the RFID technologiesto gaming chips. RFID microchips are available for each brand and type of ourgaming chips. We hold several patents concerning the embedding process of RFIDmicrochips and an exclusive license for the use of these RFID chips in gamingchips in the United States. We also sell several types of related gaming chipreaders that can be used by the casinos at the cages, vaults, tables, or by thepit bosses. Our gaming chips with embedded RFID microchips and readers help toprotect the casinos from redeeming at face value, counterfeit or stolen chipsand 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 U.S. based gaming companies overseas. Of particularimportance has been the opening of new and existing casinos in Macao in 2005and the anticipated openings in 2006. Macao is controlled by the PeoplesRepublic of China. Any material adverse change in the gaming regulatorystructure or any reductions in the growth rate of new and existing casinos in Macaomay have a material adverse effect on our businesses and results of operation.

·       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.

·       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.

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**Results of Operations**

The following table summarizes selected items from theCompany’s Consolidated Statements of Income as a percentage of revenues for theperiods indicated:

| ** **                                                                                                                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                                                                                                                                                     |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                           |       | 59.8                                        | %          | 61.1 | % | 61.9 | % |
| Gross profit                                                                                                                                                                 |       | 40.2                                        | %          | 38.9 | % | 38.1 | % |
| Selling, general and  administrative expenses                                                                                                                                |       | 30.0                                        | %          | 29.8 | % | 33.3 | % |
| Operating income                                                                                                                                                             |       | 10.2                                        | %          | 9.1 | % | 4.8 | % |
| Gain (loss) on foreign  currency transactions                                                                                                                                |       | 0.2                                         | %          | (0.3 | )% | (0.8 | )% |
| Interest expense                                                                                                                                                             |       | (0.3                                        | )%         | (0.5 | )% | (0.7 | )% |
| Other income, net                                                                                                                                                            |       | 0.6                                         | %          | 0.2 | % | 0.4 | % |
| Income tax  expense                                                                                                                                                          |       | (3.1                                        | )%         | (2.6 | )% | (0.3 | )% |
| Net income                                                                                                                                                                   |       | 7.6                                         | %          | 5.9 | % | 3.4 | % |

 

The following table details the Company’s historicalrevenues by product line:

| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **(in thousands)**                     | ** ** |
| Revenues:                            |       |                                        |       |   |   |   |   |
| Casino chips                         |       | $                                           | 37,959     |   | $ | 26,566 |   | $ | 18,200 |   |
| Table layouts                        |       | 4,949                                       |       | 4,516 |   | 4,270 |   |
| Playing cards                        |       | 3,906                                       |       | 4,440 |   | 4,472 |   |
| Gaming furniture                     |       | 2,576                                       |       | 1,843 |   | 1,785 |   |
| Dice                                 |       | 2,711                                       |       | 2,669 |   | 2,701 |   |
| Table accessories and other products |       | 5,020                                       |       | 4,551 |   | 4,743 |   |
| Total                                |       | $                                           | 57,121     |   | $ | 44,585 |   | $ | 36,171 |   |

 

**Comparisonof Operations for the Years Ended December 31, 2005 and 2004**

*Revenues.*   Forthe year ended December 31, 2005, revenues were approximately $57.1million, an increase of approximately $12.5 million, versus revenues ofapproximately $44.6 million for the year ended December 31, 2004. Theincrease in revenues for 2005 was principally the result of GPI-SAS’sales to new casinos in Asia of approximately $8.0 million. Sales by GPI-USAamounted to $31.0 million for the year 2005, an increase of approximately $5.0million, primarily as a result of sales revenues to a new casino opening in LasVegas of approximately $1.8 million, sales revenue to a wholesaler totaling$1.0 million and large reorders of approximately $2.2 million.

*Costof Revenues.*   Cost of revenues, as a percentageof sales decreased to 59.8% for 2005, compared to 61.1% for 2004. The decreasein cost of revenues as a percentage of sales occurred principally due to thebetter absorption of fixed costs due to the higher sales volume, and theincreased efficiency achieved by the realignment and restructuring of ourproduction facilities.

*GrossProfit.*   Gross profit for the year ended December 31,2005 increased in absolute dollars by approximately $5.6 million from 2004. Thisoccurred as a result of the aforementioned increase in revenues ofapproximately $12.5 million and the decrease in cost of revenues as apercentage of sales.

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| ** **                     | ** ** | **Operating Expenses  Years Ended December 31,**(dollars 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    |       | 11,236                                                                                               |       |   | 19.6 | % |   | 8,075 |   |   | 18.1 | % |   |
| Total operating  expenses      |       | $                                                                                                    | 17,142     |   |   | 30.0 | % |   | $ | 13,260 |   |   | 29.8 | % |   |

 

*Operating Expenses.*   Operatingexpenses, which include product development; marketing and sales; depreciationand amortization; and general and administrative costs, increased toapproximately $17.1 million for the year ended December 31, 2005 fromapproximately $13.3 million for the year ended December 31, 2004. Thisincrease of approximately $3.8 million was primarily attributable to anincrease in general and administrative expenses of $3.1 million. The increasein general and administrative expenses was primarily the result of one-timeexpenses of approximately $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 $352,000in information technology. Additionally, we incurred expenses of approximately$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 increasedapproximately $587,000. The increases were mainly due to costs associated withsales commissions of $160,000 related to the increase in sales, the cost ofreorganization of personnel in France of approximately $353,000, and the costof remolding the G2E Convention booth of $74,000.

| ** **                                                | ** ** | **Other Income (Expense),  (excluding Interest Expense)  Years Ended December 31,**(dollars in thousands) | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                                                                                                                               | ** ** | **Revenue%** | ** ** | **2004** | ** ** | **Revenue%** | ** ** |
| Gain (loss) on  foreign currency transactions             |       | $                                                                                                                                                      | 133        |   |   | 0.2 | % |   | $ | (155 | ) |   | (0.3 | )% |   |
| Gain on sale of  marketable securities                    |       | 102                                                                                                                                                    |       |   | 0.2 | % |   | 55 |   |   | 0.1 | % |   |
| Other income, net                                         |       | 209                                                                                                                                                    |       |   | 0.4 | % |   | 43 |   |   | 0.1 | % |   |
| Total other income  (expense), excluding interest expense |       | $                                                                                                                                                      | 444        |   |   | 0.8 | % |   | $ | (57 | ) |   | (0.1 | )% |   |

 

*Other Income (Expense),(excluding Interest Expense).*   During the yearended December 31, 2005, other income (expense), including gain (loss) onforeign currency transactions, interest income, gains on sales of marketablesecurities, and other income (expense) increased to approximately $444,000 inincome from approximately $57,000 in expense during the year ended December 31,2004. This increase of approximately $501,000 was principally the result of thechange in foreign currency exchange rates, resulting in a loss of $155,000 in2004 and a gain of $133,000 in 2005. Foreign currency transaction gainsoccurred as a result of an increase in the U.S. dollar to Euro exchange ratesduring 2005. Gain on the sale of marketable securities increased by $47,000between the periods. Other income (expense) showed an increase in income of$166,000 primarily due to the interest income earned on a higher balance ofmarketable securities in 2005.

*Interest Expense.*   Forthe year ended December 31, 2005, interest expense decreased toapproximately $199,000 from approximately $253,000 for the year ended December 31,2004. This decrease of approximately $54,000 was primarily caused by a decreasein the average outstanding debt amounts in 2005 as compared to 2004, due tonormal payments.

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*Income Taxes.*   Duringthe year ended December 31, 2005, we recorded an income tax expense ofapproximately $1.8 million as compared to a tax expense of approximately $1.2million for the year ended December 31, 2004. The increase in income taxexpense for the year ended December 31, 2005 was primarily a result of theCompany’s higher foreign income. 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 carryforwards, 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. Ifsuch dividends occur, it is likely that the Company’s net operating losses willbe diminished, and that the Company will generate excess foreign tax credits,which will carry forward for 10 years. The utilization of the foreign taxcredits will depend upon whether the Company generates foreign source incomeprospectively.

**Comparisonof Operations for the Years Ended December 31, 2004 and 2003**

*Revenues.**  **For the year ended December 31, 2004,revenues were approximately $44.6 million, an increase of approximately $8.4million, versus revenues of approximately $36.2 million for the year endedDecember 31, 2003. This increase in revenues for 2004 was principally theresult of GPI SAS’ sales to new casinos in Asia in the second and the fourthquarters of 2004. In the fourth quarter of 2004, GPI SAS had an increase insales of approximately $4.0 million compared to the same period in 2003. Thisincrease was due mainly to sales to new and existing casinos opening in Macao.In the second quarter of 2004, GPI SAS had an increase in sales of $4.7 millioncompared to the same period in 2003. This increase was due to sales in Myanmar,the Philippines and Canada for $2.3 million, $1.7 million and $700,000,respectively. In the second quarter of 2004, the U.S. operations had a sale toa casino in Canada for approximately $1.0 million. These second and fourthquarter increases in revenue, were partially offset by decreased revenues inthe first quarter of 2004 due to the timing and demand variability for casinoopenings and expansion. For the year ended December 31, 2003, revenues includedapproximately $1.2 million in sales for a large U.S. casino opening in thesecond quarter of 2003, and sales to an Asian casino for approximately $1.9million during the second quarter of 2003 and $1.8 million during the fourthquarter of 2003.*

*Cost of Revenues.**  **Cost of revenues, as a percentage ofsales, decreased to 61.1% for 2004, compared to 61.9% during 2003. The decreasein cost of revenues as a percentage of sales occurred principally due to thebetter absorption of fixed costs due to the higher sales volume, and theproduct mix at GPI SAS, which had a higher percentage of the European gamingchip production in the 2004 year, compared to 2003.*

*Gross Profit.*   Grossprofit for the year ended December 31, 2004 increased in absolute dollars byapproximately $3.6 million from 2003. This occurred as a result of theaforementioned increase in revenues of approximately $8.4 million and thedecrease in cost of revenues as a percentage of sales.

| ** **                     | ** ** | **Operating Expenses  Years Ended December 31,**(dollars in thousands) | ** ** |
|--------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2004**                                                                                             | ** ** | **Revenue%** | ** ** | **2003** | ** ** | **Revenue%** | ** ** |
| Product  development           |       | $                                                                                                    | 259        |   |   | 0.6 | % |   | $ | 154 |   |   | 0.4 | % |   |
| Marketing and  sales           |       | 3,768                                                                                                |       |   | 8.5 | % |   | 3,168 |   |   | 8.8 | % |   |
| Depreciation and  amortization |       | 1,158                                                                                                |       |   | 2.6 | % |   | 1,460 |   |   | 4.0 | % |   |
| General and  administrative    |       | 8,075                                                                                                |       |   | 18.1 | % |   | 7,260 |   |   | 20.1 | % |   |
| Total operating  expenses      |       | $                                                                                                    | 13,260     |   |   | 29.8 | % |   | $ | 12,042 |   |   | 33.3 | % |   |

 

*Operating Expenses.*   Operatingexpenses, which include product development; marketing and sales; depreciationand amortization; and general and administrative costs, increased approximatelyto $13.3 million during the year ended December 31, 2004 fromapproximately $12.0 million during the year ended December 31, 2003. Thisincrease was primarily attributable to an increase in product development 

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and marketing andsales expense of approximately $705,000 due to costs associated with the namechange and new catalogs and advertising, Enpat and Shuffle Master royalties,CIAS fees, sales commissions and bonuses. As a result of the relocation of theKansas chip manufacturing operations to Las Vegas, $341,000 in expenses wereincurred in the second and third quarters of 2004. Our legal and regulatorylicense fees for the years ended December 31, 2004 and 2003 amounted to$456,000 and $264,000, respectively; primarily due to increases in legalexpenses due to the name change and issues associated with public reporting.

| ** **                                       | ** ** | **Other Income (Expense),  (excluding Interest Expense)  Years Ended December 31,**(dollars in thousands) | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                                                                                                                               | ** ** | **Revenue%** | ** ** | **2003** | ** ** | **Revenue%** | ** ** |
| Loss on foreign  currency transactions           |       | $                                                                                                                                                      | (155       | ) |   | (0.3 | )% |   | $ | (292 | ) |   | (0.8 | )% |   |
| Gain on sale of  marketable securities           |       | 55                                                                                                                                                     |       |   | 0.1 | % |   | 98 |   |   | 0.3 | % |   |
| Other income, net                                |       | 43                                                                                                                                                     |       |   | 0.1 | % |   | 50 |   |   | 0.1 | % |   |
| Total other  expense, excluding interest expense |       | $                                                                                                                                                      | (57        | ) |   | (0.1 | )% |   | $ | (144 | ) |   | (0.4 | )% |   |

 

*Other Income (Expense),(excluding Interest Expense).*   During the yearended December 31, 2004, other income (expense), including losses onforeign currency transactions, interest income, gains on sales of marketablesecurities, and other income (expense) decreased to approximately $57,000 inexpense from approximately $144,000 in expense during the year ended December 31,2003. This decrease of approximately $87,000 was principally the result of adecrease in foreign currency exchange losses from $292,000 in 2003 compared to$155,000 in 2004. The variation in foreign currency transactions occurred as aresult of an increase in the Euro and the sales activity in foreign currenciesbetween the quarterly periods. This was partially offset by a decrease in bothother income and gain on sale of marketable securities.

*Interest Expense**.**  **For the year ended December 31, 2004,interest expense decreased to approximately $253,000 from approximately$264,000 for the year ended December 31, 2003. This decrease of approximately$11,000 was primarily caused by a slight decrease in the average outstandingdebt amounts in 2004 as compared to 2003, due to normal payments.*

*Income Taxes.**  *During the year ended December 31, 2004, werecorded an income tax expense of approximately $1,152,000 as compared to a taxexpense of approximately $101,000 for the year ended December 31, 2003. Theincrease in income tax expense for the year ended December 31, 2004 isprimarily a result of the Company’s higher foreign income. It is likely that inthe future the Company will dividend amounts from GPI-SAS, to GPI-USA. If suchdividends occur, it is likely that the Company’s net operating losses will bediminished, and that the Company will generate excess foreign tax credits,which will carry forward 10 years. The utilization of the foreign tax creditswill depend upon whether the Company generates foreign source incomeprospectively.

**Liquidityand Capital Resources**

*Overview.**  **We believe that the combination of cashflow from operations and cash on hand should be sufficient to fund expensesfrom routine operations on a short-term basis. As of December 31, 2005, we hadapproximately $4.6 million in cash and cash equivalents and $9.1 million inmarketable securities. For the longer term, in addition to these cash sources,management will evaluate other cash source alternatives, including otherlending facilities in the U.S. or abroad. Due to negative tax consequences,there may be difficulty in moving cash between France and the U.S. There can beno assurance that the other cash sources will be available to us on terms andconditions acceptable to us.*

*Working Capital and CashFlow (See Consolidated Balance Sheet).*   Workingcapital totaled approximately $9.6 million at December 31, 2005, comparedto approximately $12.2 million in working capital at December 31, 2004. Workingcapital decreased by approximately $2.6 million in 2005 primarily due to an increasein current assets of $4.2 million, offset by an increase in current liabilitiesof $6.8 

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million. Overall,cash decreased by approximately $3.4 million from December 31, 2004 to December 31,2005.

The increase in currentassets in 2005 was due primarily to an increase in the net purchase ofmarketable securities of $4.1 million, an increase in inventory ofapproximately $2.5 million and an increase in accounts receivable of $1.1million.

The increase in currentliabilities in 2005 was due primarily to an increase in customer deposits ofapproximately $7.0 million, as a result of our increased sales and backlog; anincrease of approximately $1.0 million in accrued expenses primarily due to anincrease in accrued wages and vacation expenses for increased personnel inFrance; and an increase of approximately $1.1 million of deferred income taxliability, primarily related to U.S. income taxes.

*Net Cash Flow (SeeConsolidated Statements of Cash Flow).**  *Net cash flow provided by operatingactivities was approximately $9.0 million during 2005 compared to $8.2 millionduring 2004. In 2005, the primary operational sources of cash were related tonet income before depreciation and amortization, and the increase in customerdeposits of $7.7 million; partially offset by increased inventory purchases anddeferred income taxes. In 2004, the primary operational sources of cash werealso related to net income, and the increase in customer deposits of $1.9 million;partially offset by increased inventory purchases.

Our investing activitiesresulted in net cash used of approximately $10.6 million for 2005, compared toapproximately $5.1 million in net cash used in investing activities for 2004.During 2005, we used net cash of $4.9 million to purchase marketable securitiesas compared to net cash used to purchase marketable securities in 2004 of $1.9million. In addition, we used cash of approximately $3.8 million to purchaseproperty and equipment to facilitate increased production.

Net cash flow used infinancing activities for the year ended December 31, 2005 of $1.1 millionrelated to the repayment of long-term debt of $1.0 million compared to therepayment of long-term debt of $794,000 in 2004; additionally, for the firsttime, we paid a cash dividend of approximately $787,000 in the fourth quarterof 2005; partially offset by proceeds from stock options exercised ofapproximately $700,000. In 2005, our employees and directors exercised 169,366options, including warrants, at an average exercise price of $4.13 per sharebut excluding the non-cash vesting of the 100,000 stock options to the CEO.Overall, our cash balance decreased from December 31, 2004 to December 31,2005 by approximately $3.4 million.

*Long-TermDebt (See Consolidated Balance Sheet).*   In February 2001,GPI-SAS borrowed approximately $2.2 million from an unaffiliatedparty. Principal and interest payments are due quarterly in the originalapproximate amount of $116,000 until February 2008, varying with thefluctuation in the Euro to U.S. Dollar rate. Interest accrues at the fixed rateof 5.1% per annum. The loan is guaranteed by our majority stockholder, HoldingWilson, S.A. Under the terms of the GPI-SAS loan agreement, GPI-SASmust comply with certain financial covenants that are calculated annually basedon the financial statements of GPI-SAS. Specifically, GPI-SAS’ratio of total loans and similar debt (inclusive of capital lease obligations)to operating cash flow (defined under French GAAP as operating income beforedepreciation and provisions) must not exceed 1.7, and the ratio of total loansand similar debt (inclusive of capital lease obligations) to stockholders’equity must not exceed 0.5. GPI-SAS’ actual ratio of total loans andsimilar debt (inclusive of capital lease obligations) to operating cash flowand ratio of total loans and similar debt (inclusive of capital leaseobligations) to stockholders’ equity were 0.25 and 0.12, respectively, as ofDecember 31, 2005.

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In March 2002, GPI-USA entered into a$995,000 loan transaction secured by a Deed of Trust on its Las Vegas building,which matures on March 1, 2012, at an interest rate equal to the greaterof (i) 8% per annum, or (ii) 362.5 basis points over the average ofthe London Interbank Offered Rates for six-month dollar deposits in the Londonmarket based on quotations of major banks, or LIBOR, but may not exceed 12% perannum. This loan is payable in arrears in equal monthly installments throughand including March 1, 2012, at which time the entire remaining principalbalance of approximately $874,000 will be due and payable. As ofDecember 31, 2005, there was no prepayment penalty.

On January 9,2004, GPI-SAS entered into a 350,000 Euro (approximately $447,000 U.S.at the January 9, 2004 exchange rate) loan transaction, with BanqueNationale de Paris (B.N.P.), a French bank, for the purposes of buildingexpansion in France. The general terms of this loan are as follows:

·       *Interest Rate.*3.6%, fixed per annum.

·       *Maturity Date*. The maturity date isJanuary 2010.

·       *Security.*The loan is secured by a mortgage on the building premises.

·       *Monthly Payment.*4,720 Euros; no balloon payment.

*Seasonality.**  *We donot typically experience seasonality relative to our revenues, except,potentially, for the third quarter of each year, when the French location(office and manufacturing facility) is closed for a substantial part of themonth of August, due to holiday.

*LasVegas, Nevada Facilities.**  **In May 1997, we purchased our currentcorporate headquarters, an approximately 60,000 square foot building located inLas Vegas. 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.*

*San Luis Rio Colorado, Mexico Facilities.*   Welease a 34,000 square foot facility pursuant to a one-year lease, which expiredon March 31, 2004. In April 2004 and March 2006, we extended thelease for an additional five years at the same monthly rent amount ofapproximately $0.35 per square foot, or $12,000 and $61,000, respectively,except that the rent amount may be prorated, commensurate with the space thatwe elected to use. We also own an approximately 66,000 square foot facilityused for the manufacture of playing cards, tables, and layouts products that isadjacent to the leased building. (See Part II-Item 8. Financial Statementsand Supplementary Data-Notes to Consolidated Financial Statements-Note 13.)

*Beaune,France Facilities.**  *Weown an approximately 34,000 square foot manufacturing and administrativefacility in Beaune, France. In January 9, 2004, GPI-SAS entered intoa 350,000 Euro (or approximately $447,000 U.S. as of January 9, 2004)loan agreement, with Banque Nationale de Paris (B.N.P), a French bank, forbuilding expansion. See “Secured Debt” above. On December 22, 2004, weentered into a construction contract for a 1,600 square foot additionalexpansion to be completed in the second quarter of 2005, to extend the jetonand plaque production area. We anticipate the cost to be approximately$174,000, which will be paid for out of our operating funds. Additionalexpansion is planned for other production operations in 2005, but has not yetbeen finalized.

*Capital Expenditures.*   Wecurrently plan to purchase approximately between $3.0 to $4.0 million incapital equipment and improvements in 2006.

**ContractualObligations and Commercial Commitments**

The following table presents contractual obligationsand commercial commitments as of December 31, 2005.

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Theimpact that our contractual obligations are anticipated to have on our liquidityand cash flow in future periods is reflected in the table below. We have noother significant contractual obligations or commercial commitments either onor off balance sheet as of December 31, 2005. Operating leases on amonth-to-month basis are not included in the table below. (See Part II-Item 8.Financial Statements and Supplementary Data-Notes to Consolidated FinancialStatements-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)                             |       | $                                                              | 2,419      |   |   | $ | 571 |   |   |   | $ | 786 |   |   |   | $ | 159 |   |   | $ | 903 |   |
| Capital lease  obligations                    |       | 189                                                            |       |   | 145 |   |   |   | 44 |   |   |   | — |   |   | — |   |
| Purchase and  other commitment obligations(2) |       | 5,744                                                          |       |   | 4,141 |   |   |   | 728 |   |   |   | 250 |   |   | 625 |   |
| Interest                                      |       | 617                                                            |       |   | 135 |   |   |   | 262 |   |   |   | 150 |   |   | 70 |   |
| Operating leases                              |       | 1,014                                                          |       |   | 308 |   |   |   | 561 |   |   |   | 145 |   |   | — |   |
| Total Contractual Cash  Obligations           |       | $                                                              | 9,983      |   |   | $ | 5,300 |   |   |   | $ | 2,381 |   |   |   | $ | 704 |   |   | $ | 1,598 |   |
|                                               |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(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, but excluding any agreements that are cancelable withoutpenalty.

**Related Party Transactions**

Ron-Lyn Enterprises, a company co-owned by Ron Coiro,former East Coast Sales Manager of GPI-USA, provided miscellaneous tablegame plastic accessories to GPI-USA, including dealing shoes, moneypaddles and discard holders. Since December 31, 2004, we have notpurchased any products from Ron-Lyn Enterprises. For the fiscal years ended December 31,2005, 2004, and 2003, GPI-USA paid Mr. Coiro, through Ron-LynEnterprises, approximately $0, $186,000 and $113,300, respectively.

We lease our main 34,000 square foot manufacturingfacility located in San Luis Rio Colorado, Mexico from an entity controlled bythe family of Frank Moreno, General Manager of GPI-Mexico. The currentlease was extended in April 2004, for an additional five years at the samemonthly rent amount of approximately $0.35 per square foot, or $12,000. If weelect, at our discretion, to use more or less square footage, our rent will beincreased or decreased accordingly. We also own an approximately 66,000 squarefoot facility used for the manufacture of playing cards, tables, and layoutsproducts that is adjacent to the leased building. On March 1, 2006, weamended our current lease for an additional 17,500 square feet. This extensionhas the same five year term at the same monthly rent amount of approximately$0.35 per square feet, or $6,100. (See Part II-Item 8. Financial Statementsand Supplementary Data-Notes to Consolidated Financial Statements-Note 13.)

Neither Mr. Coiro norMr. Moreno is a director or executive officer. The charter of the Board ofDirectors requires the Audit Committee to review related party transactionsinvolving our directors and executive officers.

**Critical Accounting Estimates**

Our consolidated financialstatements are prepared in conformity with accounting principles generallyaccepted in the United States of America. Certain of our accounting estimates,including revenue recognition, accounting for stock-based compensation, thedepreciable lives of our assets, the 

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recoverabilityof deferred tax assets, the allowance for doubtful accounts receivable,write-downs of obsolete, excess or slow moving inventories, and the estimatedcash flows in assessing the recoverability of long-lived assets, require thatwe apply significant subjective judgment in defining the appropriateassumptions for calculating financial estimates. By their nature, thesejudgments are subject to an inherent degree of uncertainty. Our judgments arebased on our historical experience, terms of existing contracts, our observanceof industry trends, information provided by or gathered from our customers andinformation available from other outside sources, as appropriate. There can beno assurance that actual results will not differ from our estimates. Theestimates discussed below are considered by management to be those in which ourestimates and judgments have a significant impact on issues that are inherentlyuncertain. To provide a further understanding of the methodology we apply, oursignificant accounting estimates are discussed where appropriate in thisdiscussion and analysis and in the notes to our consolidated financialstatements.

*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, theproducts are deemed delivered. We typically sell our products with paymentterms of net 30 days or less and generally require a 50% down payment.

We offer a limited standardwarranty on some of our products, primarily in France. Warranty reserves areprovided under the accrual basis and are based on estimates of future costsassociated with fulfilling the warranty obligation. The estimates are derivedfrom historical cost experience.

*Property andEquipment*

We have significantcapital invested in our property and equipment, which represented approximately24% of our total assets for both years ended 2005 and 2004. Judgments are madein determining the estimated useful lives of assets, salvage value to beassigned to the assets and if or when an asset has been impaired. Theseestimates and the accuracy thereof affect the amount of depreciation expenserecognized in the financial results and whether we have a gain or a loss on thedisposal of the asset. We assign lives to our assets based on our standardpolicy, which is established by management as representative of the useful lifeof each category of asset. The carrying value of property and equipment isreviewed whenever events and circumstances indicate that the carrying value ofan asset may not be recoverable from the estimated future cash flows expectedto result from its use and eventual disposition. The factors considered bymanagement in performing this assessment include: current operating results,trends and prospects, historical data, useful life changes, as well as theeffect of obsolescence, market price changes, demand, competition and othereconomic factors. Our estimates have been within our expectations and the lifeand depreciation amounts established. However, a change in our estimates mayresult in an adjustment to our depreciation expense or to the gain or lossrealized on the disposal of an asset(s), which could have a material adverseeffect on our consolidated results of operations.

*Goodwill and OtherIntangible Assets*

Effective November 1, 2002, in connection withthe implementation of Statement of Financial Accounting Standards “SFAS” No. 142,“Goodwill and Other Intangible Assets,” goodwill and trademarks with indefiniteuseful lives are not amortized. We review goodwill and all intangibles withindefinite lives 

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for impairment, annuallyas of December 31, and whenever events or changes in circumstancesindicate that the carrying value of an asset may not be recoverable inaccordance with SFAS No. 142. We completed the annual goodwill impairmenttest in 2005, and as a result of this test, no impairment of goodwill wasdeemed necessary. Management made its judgment about the fair value of ourgoodwill with assistance from an independent accountant and reviewed by anappraiser.

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.We evaluate these intangible assets with definite lives for potentialimpairment whenever events or changes in circumstances indicate the carryingvalue may not be 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 we consider important that could trigger an impairment review oradjustment, that may cause it to not be 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

·       theloss of key personnel

·       asignificant change in the manner of our use of our acquired assets or thestrategy for 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 carryback 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.

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The amount of income taxes we pay is subject to ongoingaudits by federal, state and foreign tax authorities, which may result inproposed assessments. Our estimate for the potential outcome for any uncertaintax issue is highly subjective and judgmental. We believe we have adequatelyprovided for any reasonably foreseeable outcome related to these matters. However,our future results may include favorable or unfavorable adjustments to ourestimated tax liabilities due to closure of income tax examinations, newregulatory or judicial pronouncements, or other relevant events. As a result,our effective tax rate may fluctuate significantly on a quarterly 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 year inwhich 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 our reserves for bad debts. Our estimates have been within ourexpectations and the provisions established. However, a change in the financialcondition of specific customers or in overall trends experienced may result infuture adjustments 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 demands in establishing and evaluating ourinventory reserves.

*Equity CompensationPlans*

We currently account for stock option plans under SFASNo. 123 “Accounting for Stock-Based Compensation” and AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees”. The Company generally has not incurred compensation expense foremployee stock options when the exercise price is at least 100% of the marketvalue of the Company’s common stock on the date of grant.

In December 2004, the FASB issued SFASNo. 123 “SFAS 123(R)”, which replaces SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”) and supersedes Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123(R) requires companies tomeasure compensation costs for share-based payments to employees, includingstock options, at fair value and to expense such compensation over the serviceperiod beginning with the first annual period after June 15, 2005. The proforma disclosures previously permitted under SFAS 123 will no longer be an 

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alternative to financialstatement recognition. We are required to adopt SFAS 123(R) in the firstquarter of fiscal 2006. Under SFAS 123(R), companies must determine theappropriate fair value model to be used for valuing share-based payments. Wehave chosen to continue applying the Black-Scholes model for SFAS123(R) as we have done for SFAS 123. We must also choose the vesting oramortization method for the compensation cost. We will continue to use thestraight-line method for future grants as well as previously granted optionsunder SFAS 123(R). Under SFAS 123(R), we must estimate forfeitures as of thegrant date, however, our historical forfeitures have been negligible. There aretwo allowable transition alternatives—the modified-prospective transition orthe modified-retrospective transition. We will apply the modified-prospectivetransition. Under the modified-prospective transition, we will begin applyingthe valuation and other criteria to stock options granted beginningJanuary 1, 2006. We will begin recognizing expense for the unvestedportion of previously issued grants at the same time, based on the valuationand attribution methods originally used to calculate the disclosures. Webelieve the impact of adopting SFAS 123(R) will result in additionalexpense for 2006. The amount of such additional expense is subject to changebased on a number of factors, including the actual number of stock optionawards granted, number of warrants exercised, and changes in assumptionsunderlying the option value estimates, such as the risk-free interest rate.

*Earnings Per Share or EPS*

Inaccordance with SFAS No. 128, “Earnings per Share,” basic EPS iscalculated by dividing net income by the weighted-average number of commonshares outstanding for the period. Diluted EPS reflects the effect of potentialcommon stock, which consists primarily of assumed stock option and warrantexercises. The weighted-average number of common shares outstanding used in thecomputation of basic and diluted earnings per share as of December 31 isas follows:

| ** **                                                    | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|---------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Weighted-average  number of common shares outstanding-Basic   |       | 7,828,748 |       | 7,607,900 |       | 7,594,900 |       |
| Potential  dilution from equity grants                        |       | 350,042   |       | 146,300   |       | 77,354    |       |
| Weighted-average number  of common shares outstanding-Diluted |       | 8,178,790 |       | 7,754,200 |       | 7,672,254 |       |

 

For the years ended December 31,2005, 2004, and 2003, 97,554, 270,000 and 203,500 shares respectively, wouldhave been included in the calculation of diluted EPS; however the exerciseprice of those options exceeded the average market price.

**RecentlyIssued and Adopted Accounting Guidance**

In November 2004, theFASB issued SFAS No. 151 “Inventory Costs—an amendment of AccountingResearch Bulletin (“ARB”) No. 43, Chapter 4.”  The amendment clarifies that abnormal amountsof idle facility expense, freight, handling costs, and wasted materials(spoilage) should be recognized as current-period charges and requires theallocation of fixed production overheads to inventory based on the normalcapacity of the production facilities. The guidance is effective for our fiscalyear beginning on January 1, 2006. Upon the adoption of this amendmentthere was no material impact to our overall results of operations or financialposition.

In December 2004, theFASB issued SFAS No. 123 “SFAS 123(R)”, which replaces SFAS No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”) and supersedes Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123(R) requires companies tomeasure compensation costs for share-based payments to employees, includingstock options, at fair value and to expense such compensation over the serviceperiod beginning with the first annual period after June 15, 2005. The proforma disclosures previously permitted under SFAS 123 will no longer be an 

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alternativeto financial statement recognition. We are required to adopt SFAS 123(R) inthe first quarter of fiscal 2006. Under SFAS 123(R), companies must determinethe appropriate fair value model to be used for valuing share-based payments,the amortization or vesting method for compensation cost and the transitionmethod to be used at date of adoption. We have chosen to continue applying theBlack-Scholes model for SFAS 123(R) as we have done for SFAS 123. We must alsochoose the vesting or amortization method for the compensation cost. We willcontinue to use the straight-line method for future grants as well aspreviously granted options under SFAS 123(R). Under SFAS 123(R), we mustestimate forfeitures as of the grant date, however, our historical forfeitureshave been negligible. There are two allowable transition alternatives—themodified-prospective transition or the modified-retrospective transition. Wewill apply the modified-prospective transition. Under the modified-prospectivetransition, we will begin applying the valuation and other criteria to stockoptions granted beginning January 1, 2006. We will begin recognizing expensefor the unvested portion of previously issued grants at the same time, based onthe valuation and attribution methods originally used to calculate the disclosures.We believe the impact of adopting SFAS 123(R) will result in additionalexpense for 2006. The amount of such additional expense is subject to changebased on a number of factors, including the actual number of stock optionawards granted, number of warrants exercised, and changes in assumptionsunderlying the option value estimates, such as the risk-free interest rate.

In December 2004, theFASB issued SFAS No. 153, (“SFAS 153”), “Exchanges of Nonmonetary Assets”,amending APB Opinion No. 29, which treated nonmonetary exchanges ofsimilar productive assets as an exception from fair value measurement. SFAS 153replaces this exception with a general exception from fair value measurementfor exchanges of nonmonetary assets that do not have commercial substance. Nonmonetaryexchanges have commercial substance if the future cash flows of an entity areexpected to change significantly as a result of the exchange. We adopted thisstatement for nonmonetary asset exchanges beginning on July 1, 2005. Theadoption did not result in a material impact to our results of operations,financial position or cash flows.

In March 2005, FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations” (FIN 47) an interpretation of FASB Statement No. 143, “Accountingfor Asset Retirement Obligations” (SFAS 143), clarifies the term conditionalasset retirement obligation as used in SFAS 143. The term refers to a legalobligation to perform an asset retirement activity in which the timing and (or)method of settlement are conditional on a future event that may or may not bewithin the control of the entity. The obligation to perform the assetretirement activity is unconditional even though uncertainty exists about thetiming and (or) method of settlement. Thus, the timing and (or) method ofsettlement may be conditional on a future event. Accordingly, an entity isrequired to recognize a liability for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonablyestimated. The fair value of a liability for the conditional asset retirementobligation should be recognized when incurred—generally upon acquisition,construction, or development and (or) through the normal operation of the asset.Uncertainty about the timing and (or) method of settlement of a conditionalasset retirement obligation should be factored into the measurement of theliability when sufficient information exists. FIN 47 was effective for fiscalyears ending after December 15, 2005. The adoption did not result in amaterial impact to our results of operations, financial position or cash flows.

In May 2005, the FASBissued SFAS No. 154, (“SFAS 154”), “Accounting Changes and ErrorCorrections.” This statement replaces APB Opinion No. 20 and SFAS No. 3and changes the requirements for the accounting for and reporting of a changein accounting principle. APB No. 20 previously required that mostvoluntary changes in accounting principle be recognized by including in netincome of the period of the change the cumulative effect of changing to theaccounting principle. SFAS 154 requires retrospective application to priorperiods’ financial statements of voluntary changes in accounting principles. SFAS154 is effective for accounting changes and corrections of errors made infiscal years 

35

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beginningafter December 15, 2005. We do not expect the adoption of SFAS 154 willhave a significant impact on the results of operations, financial position andcash flows.

**Item7A.**                Quantitativeand Qualitative Disclosures About Market Risk.

Market risk refers to thepotential losses arising from changes in interest rates, foreign currencyfluctuations and exchange rates, equity prices and commodity prices includingthe correlation among these factors and their volatility. We are primarilyexposed to foreign currency fluctuations and exchange risk and interest raterisk.

*Foreign Currency Risk.*   Thereare two types of foreign currency exchange risks that we may be subjectto:  transaction and translation gainsand losses. Foreign exchange transaction gains or losses are distinguished fromtranslation 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 foreigncurrency exchange risk relating to the translation of GPI-SAS’ assets,liabilities, and income and expense accounts. The translation adjustment forassets and liabilities is reflected in the other accumulated comprehensiveincome (loss) caption included in the stockholders’ equity section on ourconsolidated balance sheets. GPI-SAS uses the local currency as itsfunctional currency.

The assets and liabilitiesof GPI-SAS are translated into U.S. dollars at the rate of exchange at December 31,2005. The income and expense accounts are translated using the average rate ofexchange during the period. GPI-SAS typically incurs gains or losses ofspecified foreign currency transactions and these amounts are occasionallymaterial. These gains and losses are reflected in our statements of income. The U.S. dollar strengthened against theEuro from $0.84440 at December 31, 2005 to $0.73310 at December 31,2004. For the year ended December 31, 2005, we did not have any forwards,options or other derivative contracts in force.

Although our manufacturingis partially performed in Mexico, the functional currency of GPI-Mexicois considered to be the U.S. dollar. GPI-Mexico is funded by our U.S.subsidiary in U.S. dollars and GPI-Mexico does not have significantfinancial transactions other than the receipt of U.S. dollar funds to payemployees and the payment of certain costs to operate its manufacturing plants.Balance sheet accounts of GPI-Mexico are maintained and reportedprincipally in U.S. dollar historical amounts. Therefore, the balance sheet ofGPI-Mexico is not subject to translation adjustment risk.

Because of our significantinternational operations, we are exposed to currency fluctuations and exchangerisk on all loans and contracts in foreign currencies. We may engage in hedgingas it relates to sale contracts between GPI-SAS and other foreigncountries, which have currencies that are different than the Euro. Although wehave not entered into any hedging agreements during the periods reflected inthis report, there is a possibility that we may enter into a hedging agreement,dependent on the world money market conditions and other foreign currencyfluctuation considerations. To minimize the financial impact of these items, weattempt to contract a majority of our services in U.S. dollars. We continuallymonitor the currency exchange risk associated with all transactions notdenominated in the U.S. dollar.

*Interest Rate Risk.*   Changesin interest rates may result in changes in the fair market value of ourfinancial instruments, interest income and interest expense. As of December 31,2005, we had total interest bearing debt and capital lease obligations ofapproximately $2.6 million. Of this amount, approximately $1.6 million has afixed rate of interest and we believe that these agreements have fair values,which approximate reported amounts.

The remainingapproximately $1.0 million of interest bearing obligations have variableinterest rates which are tied to the (i) U.S.-based prime borrowing rateof interest, and (ii) LIBOR, or a London 

36

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InterbankOffered Rate, for six-month dollar deposits, plus 362.5 basis points. To theextent there are significant changes to the U.S.-based prime lending rate,which is approximately 7.25% as of December 31, 2005, and to the extentthere are significant increases to LIBOR that would exceed a floor of 8.0%, wewould have increased interest expense on approximately $1.0 million of debtover the succeeding eight years. For each 1.0% increase in interest rates, wewould incur increased interest expense of approximately $10,000 over the nexttwelve-month period.

**Item8.**                        FinancialStatements and Supplementary Data.

Report of IndependentRegistered Public Accounting Firm

Consolidated BalanceSheets at December 31, 2005 and 2004

Consolidated Statements ofIncome for the Years Ended December 31, 2005, 2004 and 2003

Consolidated Statements of Stockholders’ Equity andOther Comprehensive Income for the Years Ended December 31, 2005, 2004 and2003

Consolidated Statements ofCash Flows for the Years Ended December 31, 2005, 2004 and 2003

Notes to ConsolidatedFinancial Statements

37

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**GAMINGPARTNERS INTERNATIONAL CORPORATIONAND SUBSIDIARIES**

**CONSOLIDATEDFINANCIAL STATEMENTS**

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

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

We have audited the accompanying consolidated balancesheets of Gaming Partners International Corporation (formerly known as Paul-SonGaming Corporation) and Subsidiaries (the “Company”) as of December 31,2005 and 2004, and the related consolidated statements of income, stockholders’equity and other comprehensive income, and of cash flows for each of the threeyears in the period ended December 31, 2005. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements 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 auditincluded 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 and Subsidiaries as of December 31,2005 and 2004, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2005, inconformity with accounting principles generally accepted in the United Statesof America.

DELOITTE & TOUCHELLP

Las Vegas, NevadaMarch 28, 2006

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**GAMINGPARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDecember 31, (dollars in thousands, except share amounts)**

| ** **                                                                                                                 | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| *ASSETS*                                                                                                                   |       |       |       |       |       |
| Current Assets:                                                                                                            |       |       |       |       |       |
| Cash and cash equivalents                                                                                                  |       | $          | 4,573      |       | $          | 8,012 |   |
| Marketable securities                                                                                                      |       | 9,075      |       | 4,971      |       |
| Accounts receivables, less allowance for doubtful  accounts of $398 and $296,  respectively                                |       | 4,734      |       | 3,591      |       |
| Inventories                                                                                                                |       | 9,895      |       | 7,358      |       |
| Prepaid expenses                                                                                                           |       | 623        |       | 488        |       |
| Deferred income tax asset                                                                                                  |       | 200        |       | 1,032      |       |
| Other current assets                                                                                                       |       | 1,288      |       | 738        |       |
| **Total current assets**                                                                                                   | ** ** | 30,388     |       | 26,190     | ** ** |
| Property and  equipment, net                                                                                               |       | 11,212     |       | 9,469      |       |
| Goodwill                                                                                                                   |       | 1,386      |       | 1,569      |       |
| Other intangibles,  net                                                                                                    |       | 1,529      |       | 1,580      |       |
| Deferred income  tax asset                                                                                                 |       | 2,407      |       | —     |       |
| Other assets, net                                                                                                          |       | 1,794      |       | 417        |       |
| **Total assets**                                                                                                           |       | $          | 48,716     |       | $          | 39,225 |   |
| *LIABILITIES  AND STOCKHOLDERS’ EQUITY*                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current Liabilities:                                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current maturities of long-term debt                                                                                       |       | $          | 716        |       | $          | 1,121 |   |
| Accounts payable                                                                                                           |       | 3,483      |       | 4,263      |       |
| Accrued expenses                                                                                                           |       | 3,587      |       | 2,705      |       |
| Customer deposits                                                                                                          |       | 10,506     |       | 3,532      |       |
| Income taxes payable                                                                                                       |       | 1,136      |       | 1,831      |       |
| Deferred income tax liability                                                                                              |       | 1,061      |       | —     |       |
| Other current liabilities                                                                                                  |       | 336        |       | 508        |       |
| **Total current liabilities**                                                                                              |       | 20,825     |       | 13,960     |       |
| Long-term debt, less current maturities                                                                                    |       | 1,892      |       | 2,856      |       |
| Deferred income tax liability                                                                                              |       | —     |       | 789        |       |
| **Total liabilities**                                                                                                      |       | 22,717     |       | 17,605     |       |
| 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, 7,898,766 and 7,729,400, respectively, issued and outstanding |       | 79         |       | 77         |       |
| Additional paid-in capital                                                                                                 |       | 16,904     |       | 14,901     |       |
| Treasury stock, at cost, 8,061 shares                                                                                      |       | (196       | )          | (196       | )          |
| Retained earnings                                                                                                          |       | 8,766      |       | 5,225      |       |
| Accumulated other comprehensive income                                                                                     |       | 446        |       | 1,613      |       |
| **Total stockholders’ equity**                                                                                        |       | 25,999     |       | 21,620     |       |
| **Total  liabilities and stockholders’ equity**                                                                       |       | $          | 48,716     |       | $          | 39,225 |   |

 

See Notes to Consolidated Financial Statements.

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**GAMINGPARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEYears Ended December 31, (dollars in thousands, except per share amounts)**

| ** **                                            | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Revenues                                              |       | $          | 57,121     |       | $          | 44,585     |       | $ | 36,171 |   |
| Cost of revenues                                      |       | 34,140     |       | 27,249     |       | 22,387     |       |
| **Gross profit**                                      |       | 22,981     |       | 17,336     |       | 13,784     |       |
| Product  development                                  |       | 330        |       | 259        |       | 154        |       |
| Marketing and  sales                                  |       | 4,284      |       | 3,768      |       | 3,168      |       |
| General and  administrative                           |       | 12,528     |       | 9,233      |       | 8,720      |       |
| **Operating income**                                  |       | 5,839      |       | 4,076      |       | 1,742      |       |
| Other income  (expense)                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gain (loss) on foreign currency transactions          |       | 133        |       | (155       | )          | (292       | )          |
| Interest expense                                      |       | (199       | )          | (253       | )          | (264       | )          |
| Other income, net                                     |       | 311        |       | 98         |       | 148        |       |
| **Income before income taxes**                        |       | 6,084      |       | 3,766      |       | 1,334      |       |
| Income tax expense                                    |       | 1,756      |       | 1,152      |       | 101        |       |
| **Net income**                                        |       | $          | 4,328      |       | $          | 2,614      |       | $ | 1,233 |   |
| Earnings per  share:                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                 |       | $          | 0.55       |       | $          | 0.34       |       | $ | 0.16 |   |
| Diluted                                               |       | $          | 0.53       |       | $          | 0.34       |       | $ | 0.16 |   |
| Weighted-average shares  of common stock outstanding: |       |       |       |       |       |       |       |
| Basic                                                 |       | 7,829      |       | 7,608      |       | 7,595      |       |
| Diluted                                               |       | 8,179      |       | 7,754      |       | 7,672      |       |

 

See Notes to Consolidated Financial Statements.

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**GAMINGPARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME Years Ended December 31, 2005, 2004 and 2003(dollars in thousands, except share amounts)**

| ** **                                  | ** ** | **Comprehensive** | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Treasury** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **             | ** ** |
|---------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|---------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **Income**        | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Stock**    | ** ** | **Earnings**                          | ** ** | **Income (Loss)** | ** ** | **Total** | ** ** |
| **Balance, January 1, 2003**           | ** ** |              | ** ** | ** **            |       | **7,594,900**           | ** ** |         | **$**      | **76**       | ** ** |                                  |       | **$**                  | **14,253** | ** ** |   |   | **$** | **(196** | **)** |   |   | **$** | **1,378** | ** ** |   |   | **$** | **(33** | **)** |   | **$** | **15,478** | ** ** |
| Net income                                  |       |              | $          | 1,233                 | ** ** |                    | **—** | ** **   |       | **—**   | ** ** |                                  |       | **—**             | ** ** |   |   | **—** | ** ** |   |   | 1,233 | ** ** |   |   | **—** |   |   | 1,233 |   |
| Unrealized loss on securities               |       |              | (34        | )                     |       | —                  |       |         | —     | ** **   |       |                                  | —     | ** **             |       |   | — | ** ** |   |   | — |   |   |   | (34 | ) |   | (34 | ) |
| Foreign currency translation adjustment     |       |              | 1,137      |                  |       | —                  |       |         | —     | ** **   |       |                                  | —     | ** **             |       |   | — | ** ** |   |   | — |   |   |   | 1,137 |   |   | 1,137 |   |
| Total comprehensive income                  |       |              | $          | 2,336                 |       |                    | —     |         |       | —       | ** ** |                                  |       | —                 | ** ** |   |   | — | ** ** |   |   | — |   |   |   | — |   |   | — |   |
| **Balance, December 31, 2003**         | ** ** |              | ** ** | ** **            |       | **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               |       |              | (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** | ** ** |

 

See Notes to Consolidated Financial Statements.

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**GAMINGPARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYears Ended December 31,(dollars in thousands)**

| ** **                                                                         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash Flows from Operating  Activities                                              |       |     |       |     |       |     |       |
| Net income                                                                         |       | $        | 4,328      |     | $          | 2,614    |       | $ | 1,233 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |     |       |     |       |     |       |
| Depreciation                                                                       |       | 1,558    |       | 1,673    |       | 1,796    |       |
| Amortization                                                                       |       | 282      |       | 324      |       | 326      |       |
| Provision for bad debt                                                             |       | 128      |       | (86      | )          | 48       |       |
| Provision for inventory obsolescence                                               |       | 253      |       | (46      | )          | 206      |       |
| Deferred income taxes                                                              |       | (1,126   | )          | (219     | )          | (24      | )          |
| Stock Based Compensation Expense                                                   |       | 778      |       | —   |       | —   |       |
| Excess tax benefit on exercise of stock options and  warrants                      |       | 527      |       | —   |       | —   |       |
| (Gain) loss on sale/disposal of property and  equipment                            |       | (23      | )          | 3        |       | —   |       |
| Gain on sale of marketable securities                                              |       | (102     | )          | (55      | )          | (98      | )          |
| Change  in operating assets and liabilities:                                       |       |     |       |     |       |     |       |
| Accounts receivable                                                                |       | (1,609   | )          | (88      | )          | 349      |       |
| Income tax refund                                                                  |       | —   |       | —   |       | 846      |       |
| Inventories                                                                        |       | (3,434   | )          | (1,930   | )          | 116      |       |
| Other current assets, including prepaid expenses                                   |       | (782     | )          | (269     | )          | (72      | )          |
| Accounts payable                                                                   |       | (74      | )          | 2,128    |       | (1,541   | )          |
| Customer deposits                                                                  |       | 7,727    |       | 1,931    |       | (575     | )          |
| Accrued expenses                                                                   |       | 1,168    |       | 602      |       | 157      |       |
| Income taxes payable                                                               |       | (469     | )          | 1,534    |       | 184      |       |
| Other current liabilities                                                          |       | (163     | )          | 34       |       | 135      |       |
| Net cash provided by operating activities                                          |       | 8,967    |       | 8,150    |       | 3,086    |       |
| Cash Flows from Investing  Activities                                              |       |     |       |     |       |     |       |
| Purchase of marketable securities                                                  |       | (29,137  | )          | (12,202  | )          | (12,770  | )          |
| Proceeds from sale of marketable securities                                        |       | 24,211   |       | 10,258   |       | 11,955   |       |
| Acquisition of property and equipment                                              |       | (3,781   | )          | (2,879   | )          | (2,214   | )          |
| Purchase of intangible assets                                                      |       | (235     | )          | —   |       | —   |       |
| Proceeds from sale of property and equipment                                       |       | 52       |       | —   |       | 450      |       |
| (Increase) decrease in other assets                                                |       | (1,718   | )          | (296     | )          | 25       |       |
| Net cash used in investing activities                                              |       | (10,608  | )          | (5,119   | )          | (2,554   | )          |
| Cash Flows from Financing  Activities                                              |       |     |       |     |       |     |       |
| Proceeds from long-term debt                                                       |       | —   |       | 599      |       | 446      |       |
| Repayment of long-term debt                                                        |       | (1,048   | )          | (794     | )          | (665     | )          |
| Cash dividend distribution                                                         |       | (787     | )          | —   |       | —   |       |
| Proceeds from issuance of common stock, net                                        |       | 700      |       | 649      |       | —   |       |
| Net cash provided by (used in) financing activities                                |       | (1,135   | )          | 454      |       | (219     | )          |
| Effect of exchange rate changes on cash                                            |       | (663     | )          | 341      |       | 1,540    |       |
| Net increase (decrease) in cash and cash equivalents                               |       | (3,439   | )          | 3,826    |       | 1,853    |       |
| Cash and cash equivalents, beginning of year                                       |       | 8,012    |       | 4,186    |       | 2,333    |       |
| Cash and cash equivalents, end of year                                             |       | $        | 4,573      |     | $          | 8,012    |       | $ | 4,186 |   |
| **Supplemental disclosure of cash  flow information:**                             |       |     |       |     |       |     |       |
| Cash paid for interest                                                             |       | $        | 185        |     | $          | 232      |       | $ | 252 |   |
| Cash paid for income taxes (received from refunds)                                 |       | 3,110    |       | 171      |       | (913     | )          |
| **Non-cash transactions:**                                                         |       |     |       |     |       |     |       |
| Currency translation adjustment                                                    |       | $        | (1,172     | )        | $          | 544      |       | $ | 1,137 |   |

 

See Notes to Consolidated Financial Statements.

43

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

**Note 1.   Nature of Business and SignificantAccounting 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.”  Thename change was approved by a vote of stockholders at the Company’s annualmeeting held on May 26, 2004. The Company’s established brand names suchas Paul-Son, Bourgogne et GrassetÒ,or B&G, Bud JonesÒ, and T-KTMbrands 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.The Company’s subsidiary, Paul-Son Mexicana, S.A. de C.V., changed itsname to GPI Mexicana S.A. de C.V., or GPI-Mexico.

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.). Atthe closing, the businesses of GPIC, GPI-SAS and GPI-SAS’ thenwholly-owned subsidiary, the former Bud Jones Company, Inc., or 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 commonstock as a result of the Combination, the Combination was accounted for as areverse acquisition in which GPI-SAS is the purchaser of GPIC.   On December 31, 2002, Bud Jones mergedinto 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-USAand Bud Jones) have been consolidated into one facility at the Company’s headquartersin 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, including GPI-SAS,GPI-USA and GPI-Mexico. The assets and liabilities of our inactiveformer wholly-owned subsidiary, Authentic Products, Inc. were transferredinto GPIC during the second quarter of 2004. All material intercompany balancesand transactions have been eliminated in consolidation. The consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America.

A summary of oursignificant accounting policies follows:

*Cash and CashEquivalents*

We consider all highlyliquid investments and repurchase agreements with maturities of three months orless at the date of purchase to be cash and cash equivalents.

44

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

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

*Fair Value of Financial 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.

*Accounts Receivables and Customer Deposits*

We perform ongoing creditevaluations of our customers and generally require a fifty percent deposit formanufactured or purchased products at the discretion of management. Thesecustomer deposits are classified as a current liability on the balance sheet.

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.

*Marketable Securities*

We account for ourinvestments in marketable securities in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 115, “Accounting For Certain Investmentsin Debt and Equity Securities” No. 115. Under SFAS No. 115, oursecurities are classified as available-for-sale and, as such, are carried atfair value with unrealized holding gains and losses excluded from earnings andreported within accumulated other comprehensive income. The first-in, first-outmethod is used to determine the cost of securities disposed of. Marketablesecurities consist of investments in securities offered by French banks,primarily bond portfolios, that are designated by these banks as “risk free orminimum risk instruments.” These investments are primarily held with one majorfinancial institution in our 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 of America. Finishedgoods inventories consist of dice, cards, chips, other gaming equipment andsupplies.

*Property andEquipment*

Propertyand equipment are stated at cost, net of depreciation. We include capitalizedlease equipment in our property and equipment for financial statement purposes.Depreciation is computed primarily on the straight-line method for financialreporting purposes over the following estimated useful lives:

| ** **                  | ** ** | **Years** | ** ** |
|-----------------------------|------------|-----------|------------|
| Buildings and  improvements |       | 10-27     |       |
| Furniture and  equipment    |       | 5-10      |       |
| Vehicles                    |       | 4-7       |       |

 

45

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

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

*Goodwill and OtherIntangible Assets*

Effective November 1, 2002, in connection withthe implementation of SFAS No. 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 No. 142. We completed the annual goodwill impairment test as of December 31,2005, and as a result of this test, no impairment of goodwill was deemednecessary. Management derives the annual fair value of our goodwill with yearlyassistance from an independent accountant after an initial review by anappraiser.

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 obligations fromcapitalized leases in our long and short-term debt captions for financialstatement purposes.

*Revenue Recognition*

Substantially all revenue is recognized when productsare shipped to our customers, according to the shipping terms. We typicallysell our products with payment 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 No. 109, “Accounting for IncomeTaxes,” for financial accounting and reporting for income taxes. A current taxliability or asset is recognized for the estimated taxes payable or refundableon tax returns for the current year. A deferred tax liability or asset isrecognized for the estimated future tax effects, based on provisions of theenacted law, attributable to temporary differences and carryforwards.

GPIC and our subsidiariesfile separate income tax returns in our respective jurisdictions. Income taxesare provided for the tax effects of transactions reported in the financialstatements and consist of taxes currently due plus deferred taxes relatedprimarily to differences between the basis of assets and liabilities acquiredfor financial and income tax reporting. The deferred tax assets and liabilitiesrepresent the future tax consequences of those differences, which will eitherbe taxable or deductible when the assets and liabilities are recovered orsettled. Deferred taxes also are recognized for operating losses that areavailable to offset future income taxes.

46

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

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

*Foreign Currency Transactions*

The financial statementsof GPI-SAS are measured using the Euro as the functional currency. Assetsand liabilities of GPI-SAS are translated into the U.S. Dollar atexchange rates as of the balance sheet date. Revenues and expenses aretranslated into the U.S. Dollar at average rates of exchange in effect duringthe year. The resulting cumulative translation adjustments have been recordedin accordance with the provisions of SFAS No. 52, “Foreign CurrencyTranslation” and are shown within accumulated other comprehensive income.

Transaction gains andlosses that arise from exchange rate fluctuations on transactions denominatedin a currency other than the functional currency are included in the results ofoperations as incurred.

*Comprehensive Income*

Comprehensive incomeincludes net earnings as well as additional other comprehensive income. Ourother comprehensive income also consists of unrealized gains and losses onavailable-for-sale securities recorded net of tax, and cumulative translationadjustments.

Comprehensiveincome consists of the following:

| ** **                                        | ** ** | **Years Ended December 31,  (in thousands)** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                        |       | $                                                           | 4,328      |   | $ | 2,614 |   | $ | 1,233 |   |
| Unrealized gain (loss)  on securities, net of tax |       | 5                                                           |       | (1 | ) | (34 | ) |
| Foreign currency  translation adjustment          |       | (1,172                                                      | )          | 544 |   | 1,137 |   |
| **Total Comprehensive Income**                    |       | $                                                           | 3,161      |   | $ | 3,157 |   | $ | 2,336 |   |

 

*Estimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Estimates and assumptions have been made in determining thedepreciable 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.

*Long-Lived Assets*

In accordance with SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets,” we review for impairment oflong-lived assets and certain identifiable intangibles whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. In general, we will recognize an impairment loss when the sumof undiscounted 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, 2005.

47

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

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

Assets are grouped andevaluated for impairment at the lowest level for which there are 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 and, to alesser extent, production assets in and through which business operations andproducts are manufactured and distributed.

*Earnings Per Shareor “EPS”*

Inaccordance with SFAS No. 128, “Earnings per Share,” basic EPS iscalculated by dividing net income by the weighted-average number of commonshares outstanding for the period. Diluted EPS reflects the effect of potentialcommon stock, which consists primarily of assumed stock option and warrantexercises. Potentially dilutive securities are not taken into account whentheir effect would be antidilutive. The weighted-average number of commonshares outstanding used in the computation of basic and diluted earnings pershare as of December 31 is as follows:

| ** **                                                         | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Weighted-average  number of common shares outstanding—Basic   |       | 7,828,748 |       | 7,607,900 |       | 7,594,900 |       |
| Potential  dilution from equity grants                             |       | 350,042   |       | 146,300   |       | 77,354    |       |
| Weighted-average number  of common shares outstanding—Diluted |       | 8,178,790 |       | 7,754,200 |       | 7,672,254 |       |

 

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, 2005, 2004 and 2003 were approximately 97,554, 270,000and 203,500, respectively.

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

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

*Equity Compensation Plan Information*

Weaccount for our stock option plans under Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees,” under which nocompensation cost is generally required to be recognized. Had compensation costfor these plans been determined consistent with SFAS No. 123, “Accountingfor Stock Based Compensation,” and SFAS No. 148, “Accounting for Stock-BasedCompensation- Transaction and Disclosure, an Amendment to SFAS No. 123,”our net income and earnings per share would have been reduced to the followingpro forma amounts for the fiscal years ended December 31, 2005, 2004 and2003 (dollars in thousands, except per share amounts):

| ** **                             | ** ** | ** **                                                                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net income:                            |       | As reported                                                                                     |       | $          | 4,328      |       | $          | 2,614      |       | $ | 1,233 |   |
| Add:                                   |       | Stock-based employee  compensation expense included in reported net income, net of tax          |       | 501        |       | —     |       | —     |       |
| Deduct:                                |       | Total stock-based  employee compensation expense determined under fair value method, net of tax |       | (565       | )          | (97        | )          | (128       | )          |
|                                   |       | Pro forma net income                                                                            | ** ** | $          | 4,264      |       | $          | 2,517      |       | $ | 1,105 | ** ** |
| Net earnings per share: |       | As reported:                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                   |       | Basic                                                                                           |       | $          | 0.55       |       | $          | 0.34       |       | $ | 0.16 |   |
|                                   |       | Diluted                                                                                         |       | $          | 0.53       |       | $          | 0.34       |       | $ | 0.16 |   |
|                                   |       | Pro forma:                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                   |       | Basic                                                                                           |       | $          | 0.54       |       | $          | 0.33       |       | $ | 0.14 |   |
|                                   |       | Diluted                                                                                         |       | $          | 0.52       |       | $          | 0.32       |       | $ | 0.14 |   |

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forgrants in the years ended 2005, 2004 and 2003, respectively:  dividend yield of zero percent for all years;expected volatility of 111.9%, 64%, and 45% for the years ended 2005 and 2004and for the years ended December 31, 2003, respectively; risk-freeinterest rates of 4.73%, 3.63% and 3.38% respectively, and an expected life of5.6, 2.0, and 5.0 years for each of the options granted. Although a cashdividend was paid in 2005, we currently do not have an intention to paydividends in the forseeable future.

| ** **                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| The  weighted-average fair value of options granted |       | $        | 11.20      |     | $          | 1.67     |       | $ | 1.12 |   |
|                                                     |            |          |            |          |            |          |            |  |  |  |

 

We estimate that stockbased compensation expense in 2006 related to the vesting of optionsoutstanding at December 31, 2005, excluding stock options potentiallygranted to directors during 2006, will be approximately $212,000.

*Recently Issued Accounting Guidance*

In November 2004, the FASB issued SFAS No. 151“Inventory Costs—an amendment of Accounting Research Bulletin (“ARB”) No. 43,Chapter 4.”  The amendment clarifies thatabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterials (spoilage) should be recognized as current-

49

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

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

period charges andrequires the allocation of fixed production overheads to inventory based on thenormal capacity of the production facilities. The guidance is effective for ourfiscal year beginning on January 1, 2006. Upon the adoption of thisamendment there was no material impact to our overall results of operations orfinancial position.

In December 2004, theFASB issued SFAS No. 123 “SFAS 123(R)”, which replaces SFAS No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”) and supersedes Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123(R) requires companies tomeasure compensation costs for share-based payments to employees, includingstock options, at fair value and to expense such compensation over the serviceperiod beginning with the first annual period after June 15, 2005. The proforma disclosures previously permitted under SFAS 123 will no longer be analternative to financial statement recognition. We are required to adopt SFAS123(R) in the first quarter of fiscal 2006. Under SFAS 123(R), companiesmust determine the appropriate fair value model to be used for valuingshare-based payments. We have chosen to continue applying the Black-Scholesmodel for SFAS 123(R) as we have done for SFAS 123. We must also choosethe vesting or amortization method for the compensation cost. We will continueto use the straight-line method for future grants as well as previously grantedoptions under SFAS 123(R). Under SFAS 123(R), we must estimate forfeitures asof the grant date, however, our historical forfeitures have been negligible.There are two allowable transition alternatives—the modified-prospectivetransition or the modified-retrospective transition. We will apply themodified-prospective transition. Under the modified-prospective transition, wewill begin applying the valuation and other criteria to stock options grantedbeginning January 1, 2006. We will begin recognizing expense for the unvestedportion of previously issued grants at the same time, based on the valuationand attribution methods originally used to calculate the disclosures. Webelieve the impact of adopting SFAS 123(R) will result in additionalexpense for 2006. The amount of such additional expense is subject to changebased on a number of factors, including the actual number of stock optionawards granted, number of warrants exercised, and changes in assumptionsunderlying the option value estimates, such as the risk-free interest rate.

In December 2004, theFASB issued SFAS No. 153, (“SFAS 153”), “Exchanges of Nonmonetary Assets”,amending APB Opinion No. 29, which treated nonmonetary exchanges ofsimilar productive assets as an exception from fair value measurement. SFAS 153replaces this exception with a general exception from fair value measurementfor exchanges of nonmonetary assets that do not have commercial substance. Nonmonetaryexchanges have commercial substance if the future cash flows of an entity areexpected to change significantly as a result of the exchange. We adopted thisstatement for nonmonetary asset exchanges beginning on July 1, 2005. Theadoption did not result in a material impact to our results of operations,financial position or cash flows.

In March 2005, FASB Interpretation No. 47, “Accountingfor Conditional Asset Retirement Obligations” (FIN 47) an interpretation ofFASB Statement No. 143, “Accounting for Asset Retirement Obligations”(SFAS 143), clarifies the term conditional asset retirement obligation as usedin SFAS 143. The term refers to a legal obligation to perform an assetretirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. The obligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timing and (or) methodof settlement. Thus, the timing and (or) method of settlement may beconditional on a future event. Accordingly, an entity is required to recognizea liability for the fair value of a conditional asset retirement obligation ifthe fair value of the liability can be reasonably estimated. 

50

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

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

The fair value of aliability for the conditional asset retirement obligation should be recognizedwhen incurred—generally upon acquisition, construction, or development and (or)through the normal operation of the asset. Uncertainty about the timing and(or) method of settlement of a conditional asset retirement obligation shouldbe factored into the measurement of the liability when sufficient informationexists. FIN 47 was effective for fiscal years ending after December 15,2005. The adoption did not result in a material impact to our results ofoperations, financial position or cash flows.

In May 2005,the FASB issued SFAS No. 154, (“SFAS 154”), “Accounting Changes and ErrorCorrections.” This statement replaces APB Opinion No. 20 and SFAS No. 3and changes the requirements for the accounting for and reporting of a changein accounting principle. APB No. 20 previously required that mostvoluntary changes in accounting principle be recognized by including in netincome of the period of the change the cumulative effect of changing to theaccounting principle. SFAS 154 requires retrospective application to priorperiods’ financial statements of voluntary changes in accounting principles. SFAS154 is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. The adoption of SFAS 154will have a significant impact on the results of operations, financial positionor cash flows.

**Note 2.**   MarketableSecurities

Marketablesecurities consist of investments in securities offered by French banks,primarily bond portfolios, that are designated by these banks as “risk free orminimum risk instruments.”  As of December 31,marketable securities consisted of the following (in thousands):

| ** **                                     | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **Cost**                        | ** ** | **Gross  Unrealized  Gain**     | ** ** | **Fair  Value**                 | ** ** | **Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Fair  Value** | ** ** | **Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Fair  Value** | ** ** |
| Available for sale marketable securities  |       | $                               | 9,066      |                            |       | $                               | 9          |   |   | $ | 9,075 |   | $ | 4,970 |   |   | $ | 1 |   |   | $ | 4,971 |   | $ | 2,579 |   |   | $ | 1 |   |   | $ | 2,580 |   |
|                                                |            |                                 |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 3.**   Inventories

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

| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 5,773      |     | $          | 4,503 |   |
| Work in process |       | 2,292    |       | 1,449    |       |
| Finished goods  |       | 1,830    |       | 1,406    |       |
| Total           |       | $        | 9,895      |     | $          | 7,358 |   |

 

**Note 4.   OtherCurrent Assets**

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

| ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Refundable value  added tax |       | $        | 533        |     | $          | 435 |   |
| Current deposits            |       | 732      |       | 168      |       |
| Other assets                |       | 23       |       | 135      |       |
| Other current assets        |       | $        | 1,288      |     | $          | 738 |   |

 

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

**Note5.**   Property and Equipment

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

| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Land                            |       | $        | 1,645      |     | $          | 853 |   |
| Buildings and improvements      |       | 5,790    |       | 5,439    |       |
| Furniture and  equipment        |       | 13,104   |       | 12,286   |       |
| Vehicles                        |       | 656      |       | 473      |       |
|                            |       | 21,195   |       | 19,051   |       |
| Less: accumulated  depreciation |       | (9,983   | )          | (9,582   | )          |
| Property and equipment,  net    |       | $        | 11,212     |     | $          | 9,469 |   |

 

Depreciation expense, forthe years ended December 31, 2005, 2004 and 2003 was $1,558,000,$1,673,000 and $1,796,000, respectively.

**Note 6.**   Goodwill and Other Intangible Assets (inthousands):

| ** **             | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** | ** **                | ** ** |                        |
|------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------|------------|-----------------------------|
| ** **             | ** ** | **Gross  Carrying  Amount**     | ** ** | **Accum.  Amortization**        | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accum.  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Estimated  Useful Life  (Years)** | ** ** |   |
| Goodwill(1)            |       |                            | $          | 1,450                           |       |                      |       | $                           | (64 | ) |   |   | $ | 1,386 |   |   |   | $ | 1,637 |   |   |   | $ | (68 | ) |   |   | $ | 1,569 |   |   | Indefinite |   |
| Trademarks             |       |                            | 620        |                            |       |                      | (37        | )                           |   |   | 583 |   |   |   | 620 |   |   |   | (37 | ) |   |   | 583 |   |   | Indefinite |   |
| Patents                |       |                            | 1,242      |                            |       |                      | (628       | )                           |   |   | 614 |   |   |   | 1,007 |   |   |   | (530 | ) |   |   | 477 |   |   | 8 to  14 |   |
| Customer relationships |       |                            | 432        |                            |       |                      | (296       | )                           |   |   | 136 |   |   |   | 432 |   |   |   | (233 | ) |   |   | 199 |   |   | 7 |   |
| Non-compete agreements |       |                            | 730        |                            |       |                      | (534       | )                           |   |   | 196 |   |   |   | 730 |   |   |   | (409 | ) |   |   | 321 |   |   | 5 to  6 |   |
| Total                  |       |                            | $          | 4,474                           |       |                      |       | $                           | (1,559 | ) |   |   | $ | 2,915 |   |   |   | $ | 4,426 |   |   |   | $ | (1,277 | ) |   |   | $ | 3,149 |   |   |   |   |

----

(1)          Theamount of goodwill related to GPI-SAS for 2005 and 2004 above, includedthe net effect of foreign currency exchange of $12,000, and $195,000, respectively.

Amortization expense forthe years ended December 31, 2005, 2004 and 2003 was $282,000, $324,000and $326,000, respectively:

| **Estimated Amortization Expense for the  Years Ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **(in thousands)**                                                                                  | ** ** | ** ** | ** ** |
| 2006                                                                                                     |       | $          | 281        |   |
| 2007                                                                                                     |       | 232        |       |
| 2008                                                                                                     |       | 121        |       |
| 2009                                                                                                     |       | 78         |       |
| Thereafter                                                                                               |       | 234        |       |
| Total                                                                                                    |       | $          | 946        |   |

 

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

**Note 7.** AccruedExpenses

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

| ** **                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Wages and related  costs   |       | $        | 977        |     | $          | 752 |   |
| Accrued vacation           |       | 1,846    |       | 1,263    |       |
| Accrued interest           |       | 9        |       | 15       |       |
| Accrued sales  taxes       |       | 157      |       | 160      |       |
| Other accrued  expenses    |       | 450      |       | 370      |       |
| Accrued sales  commissions |       | 148      |       | 145      |       |
| Accrued expenses           |       | $        | 3,587      |     | $          | 2,705 |   |

 

**Note 8.**   Long-Term Debt andPledged Assets

Long-termdebt consists of the following at December 31 (in thousands):

| ** **                                                                                                                                                                                                                                                                                                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Note payable due  to a commercial bank in quarterly installments of $131 including a fixed  interest rate of 5.10% through February 2008. This note is guaranteed by  the majority stockholder                                                                                                                                                               |       | $        | 1,103      |     | $          | 1,795 |   |
| Note payable to  bank in monthly installments of approximately $7 including variable interest  (approximately 8.0% at December 31, 2005 and 2004) commencing  April 1, 2002 with a maturity date of March 1, 2012 and an  approximate $871 balloon payment. The note is secured by a first deed of  trust on our headquarters in Las Vegas, Nevada |       | 959      |       | 969      |       |
| Capital lease  obligation payable for equipment, fixed interest rate of 7.77% payable in  monthly installments of approximately $8 through December 7, 2005                                                                                                                                                                                                  |       | —   |       | 95       |       |
| Capital lease  obligation payable for equipment, fixed interest rate of 8.309% payable in  monthly installments of approximately $11 through March 4, 2006                                                                                                                                                                                                   |       | 37       |       | 177      |       |
| Other capital  lease obligations with varying fixed rates and maturities                                                                                                                                                                                                                                                                                          |       | 152      |       | 356      |       |
| Note payable to  commercial bank, at a fixed rate of 3.6%, payable in monthly installments of  approximately $6 through May 2011, collateralized by office and  production buildings in France                                                                                                                                                               |       | 328      |       | 441      |       |
| 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       |       | 144      |       |
| Principal balance                                                                                                                                                                                                                                                                                                                                                 |       | 2,608    |       | 3,977    |       |
| Less: current  portion                                                                                                                                                                                                                                                                                                                                            |       | (716     | )          | (1,121   | )          |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                    |       | $        | 1,892      |     | $          | 2,856 |   |

 

GPI-USA entered into a $995,000 loan transaction(“Loan”) with Jackson Federal Bank, a federal savings bank (“Jackson”), on March 5,2002. The interest rate equals the greater of 8% per annum (“Floor Rate”) or362.5 basis points over the average of the London Interbank Offered Rates forsix month dollar deposit in the London market based on quotations of major banks(“LIBOR”). The interest rate shall not be less than the Floor Rate or more than12% per annum, nor shall the interest rate increase or decrease by more thantwo percentage points per annum during any twelve month period or one-halfpercentage point per annum during any three month period. The maturity date is March 1,2012. The Loan is payable 

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

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

in arrears in equalmonthly installments of principal and interest of approximately $7,300 (basedupon a thirty year amortization schedule) beginning April 1, 2002 andcontinuing on the first day of each month through and including March 1,2012, at which time the entire remaining principal balance of $871,000 will bedue and payable. The Loan is secured by a Deed of Trust, Security Agreement,Assignment of Rents and Fixture Filing (“Deed of Trust”) encumbering theCompany’s Las Vegas, Nevada headquarters. We executed a Guaranty in favor ofJackson by which we guaranteed the obligations of GPI-USA under the Loanand Deed of Trust and the related loan documents executed in connection withthe Loan. The Loan may now be prepaid in part or in whole at any time without aprepayment premium. The Deed of Trust restricts GPI-USA from encumberingor transferring (1) the Company’s Las Vegas, Nevada headquarters; and (2) ownershipinterests in GPI-USA. Further, the Deed of Trust also grants to Jackson asecurity interest in GPI-USA’s personal property, including, but notlimited to, machinery, furniture, fixtures, licenses and income.

In February 2001, GPI-SAS borrowedapproximately $2.2 million from an unaffiliated party. Principal andinterest payments are due quarterly in the original approximate amount of$116,000 until February 2008, varying with the fluctuation in the Euro toU.S. Dollar rate. 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 withcertain financial covenants that are calculated annually based on the financialstatements of GPI-SAS. Specifically, GPI-SAS’ ratio of total loansand similar debt (inclusive of capital lease obligations) to operating cashflow (defined under French GAAP as operating income before depreciation andprovisions) must not exceed 1.7, and the ratio of total loans and similar debt(inclusive of capital lease obligations) to stockholders’ equity must notexceed 0.5. GPI-SAS’ actual ratio of total loans and similar debt(inclusive of capital lease obligations) to operating cash flow and ratio oftotal loans and similar debt (inclusive of capital lease obligations) tostockholders’ equity were 0.25 and 0.12, respectively, as of December 31,2005.

On January 9,2004, GPI-SAS entered into a 350,000 Euro (approximately$447,000 U.S. at the January 9, 2004 exchange rate) loan transaction,with Banque Nationale de Paris (B.N.P.), a French bank, for the purposes ofbuilding expansion in France. The general terms of this loan are as follows:

·       *Interest Rate*. 3.6% fixed.

·       *Maturity Date*. The maturity date is January 2010.

·       *Security.*The loan is secured by amortgage on the building premises.

·       *Monthly Payment:*  4,720 Euros; no balloon payment.

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**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, 2005 are as follows (in thousands):

| ** **                                             | ** ** | **Capital  Leases** | ** ** | **Long-Term  Debt** | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| 2006                                                   |       |                | $          | 154                 |       |   |   | $ | 571 |   |   |
| 2007                                                   |       |                | 39         |                |       |   | 570 |   |   |
| 2008                                                   |       |                | 10         |                |       |   | 202 |   |   |
| 2009                                                   |       |                | —     |                |       |   | 77 |   |   |
| 2010                                                   |       |                | —     |                |       |   | 80 |   |   |
| Thereafter                                             |       |                | —     |                |       |   | 919 |   |   |
| Total                                                  |       |                | $          | 203                 |       |   |   | $ | 2,419 |   |   |
| Less: amount  representing interest                    |       |                | (14        | )                   |       |   |   |   |   |
| Present value of  minimum lease payments               |       |                | 189        |                |       |   |   |   |   |
| Less: current  portion                                 |       |                | (145       | )                   |       |   |   |   |   |
| Long term portion of  obligations under capital leases |       |                | $          | 44                  |       |   |   |   |   |   |

 

**Note 9.**   Commitments andContingencies

*Operating LeaseObligations*

Thefollowing is a schedule by years of future minimum lease payments underoperating leases as of December 31, 2005 (in thousands):

| 2006                          |   | $      | 308    |   |
|-------------------------------|--------|--------|--------|--------|
| 2007                          |   | 295    |   |
| 2008                          |   | 266    |   |
| 2009                          |   | 124    |   |
| 2010                          |   | 21     |   |
| Thereafter                    |   | — |   |
| Total minimum lease  payments |   | $      | 1,014  |   |

 

Rent expense, totaled$267,000, $285,000 and $319,000 for the years ended December 31, 2005,2004 and 2003, respectively.

***Legal Proceedings***

We are engaged in disputesand claims arising in the normal course of business. We believe the ultimateoutcome of these proceedings will not have a material adverse impact on theconsolidated financial position or results of operations.

***Commitments***

On October 25, 2001,GPI-SAS entered into an exclusive patent license agreement with Enpat, Inc.The subject patents were subsequently sold by Enpat, Inc. to ShuffleMaster Inc. in the fourth quarter of 2004. Thereafter, in the second quarter of2005, Shuffle Master Inc. sold 50% of its rights in the subject 

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

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

patentsto International Game Technology. The agreement grants GPI-SAS (and itsaffiliated GPIC companies) the exclusive rights to manufacture and distribute agaming chip tracking system and method, in the U.S.A., which utilizes gamingchips with embedded electronic circuits scanned by antennas in gaming chipplacement areas (gaming tables and casino cage), or RFID technology. Theduration of the exclusive agreement is for the life of the patents, the last ofwhich expire in 2015. Minimum annual royalty payments of $125,000 are requiredto be made by GPI-SAS over the remaining life of the exclusive patent licenseagreement.

**Note10.**   Income Tax Matters

TheCompany accounts for income taxes using the asset and liability approachrequired by SFAS No. 109. The asset and liability approach requires therecognition of deferred income tax liabilities and assets for the expectedfuture tax consequences of temporary differences between the carrying amountsof and the tax basis of the Company’s assets and liabilities. Future income taxbenefits attributable to temporary differences are recognized to the extentthat realization of such benefits is more likely than not. These future taxbenefits are measured by applying currently enacted tax rates. The followingtable provides an analysis of the Company’s provision for income taxes for theyears ended December 31 (in thousands):

| ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                    |       |     |       |     |       |     |       |
| U.S. Federal                |       | $        | 50         |     | $          | (274     | )          | $ | 420 |   |
| U.S. State                  |       | (5       | )          | 36       |       | 74       |       |
| France                      |       | 2,794    |       | 1,609    |       | 62       |       |
| Total Current               |       | 2,839    |       | 1,371    |       | 556      |       |
| Deferred:                   |       |     |       |     |       |     |       |
| U.S. Federal                |       | (1,036   | )          | 41       |       | (431     | )          |
| U.S. State                  |       | 32       |       | 4        |       | (4       | )          |
| France                      |       | (79      | )          | (264     | )          | (20      | )          |
| Total Deferred              |       | (1,083   | )          | (219     | )          | (455     | )          |
| Provision for  income taxes |       | $        | 1,756      |     | $          | 1,152    |       | $ | 101 |   |

 

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

| ** **     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|----------|------------|
| U.S.A.         |       | $        | (5         | )        | $          | (266     | )          | $ | 266 |   |
| France         |       | 6,089    |       | 4,032    |       | 1,068    |       |
| Pre-tax income |       | $        | 6,084      |     | $          | 3,766    |       | $ | 1,334 |   |

 

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

**Note10.**   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:

| ** **                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed expected  income tax expense                                           |       | 34.0     | %          | 34.0     | %          | 34.3     | %          |
| *Adjustments:*                                                                  |       |     |       |     |       |     |       |
| Foreign dividends  and IRC Sec 78 and 956 inclusions net of foreign tax credits |       | 31.9     | %          | 16.6     | %          | 19.6     | %          |
| State taxes                                                                     |       | 0.4      | %          | 0.7      | %          | 3.3      | %          |
| Change in  valuation allowance                                                  |       | (35.9    | )%         | (16.0    | )%         | (26.1    | )%         |
| French gain  (loss) on U.S. note receivable                                     |       | 4.2      | %          | (3.1     | )%         | (25.7    | )%         |
| Subpart F income adjustment                                                     |       | (6.8     | )%         | —   |       | —   |       |
| Other, net                                                                      |       | 1.1      | %          | (1.6     | )%         | 1.9      | %          |
| Income tax expense                                                              |       | 28.9     | %          | 30.6     | %          | 7.3      | %          |

 

The valuation allowance for the year ended December 31,2004 was established due to accumulated losses in the U.S. and the uncertaintyof future taxable income necessary to utilize deferred tax assets. In 2005,GPI-USA received a non-cash dividend from GPI-SAS. In addition, managementintends to distribute additional future non-cash dividends from GPI-SAS toGPI-USA. Management believes that the taxable income resulting from thesedividends will result in full utilization of prior accumulated losses in theU.S., accordingly, the valuation allowance related to U.S. operating losses andother deferred tax assets, exclusive of foreign tax credits, has been reduced. Theaforementioned dividends generate foreign tax credits which expire if notutilized within 10 years. The Company has established a valuation allowancerelated to these foreign tax credits for amounts which are estimated to expirebefore usage. The Company also continues to record a full valuation allowanceon state deferred assets due to the uncertainty of future state taxable income.The Company’s net operating loss carryforwards expire between the years 2022and 2024, and foreign tax credits expire in 2015.

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**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):

| ** **                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| **Deferred tax assets:**                |       |     |       |     |       |
| Operating loss  carryforwards           |       | $        | 988        |     | $          | 2,526 |   |
| Bad debt reserves  and inventory        |       | 609      |       | 209      |       |
| French deferred  assets                 |       | 479      |       | 247      |       |
| Stock  compensation                     |       | 284      |       | —   |       |
| Intangibles                             |       | 357      |       | 310      |       |
| Tax credits                             |       | 2,432    |       | —   |       |
| Foreign Currency  Translation           |       | 203      |       | 469      |       |
| Other                                   |       | 78       |       | —   |       |
| Total gross  deferred tax assets        |       | 5,430    |       | 3,761    |       |
| Less: valuation  allowance              |       | (1,664   | )          | (2,772   | )          |
| Total net  deferred tax assets          |       | 3,766    |       | 989      |       |
| **Deferred  tax liabilities:**          |       |     |       |     |       |
| Excess book basis  in shares of GPI-SAS |       | 1,693    |       | —   |       |
| Fixed assets                            |       | 101      |       | 618      |       |
| French deferred  liabilities            |       | 394      |       | 4        |       |
| Other                                   |       | 32       |       | 124      |       |
| Total deferred  tax liabilities         |       | 2,220    |       | 746      |       |
| Deferred tax  asset (liability), net    |       | $        | 1,546      |     | $          | 243 |   |

 

Deferred income taxes werepreviously not provided on the excess book basis in the shares of GPI-SASbecause this basis difference was not expected to reverse in the foreseeablefuture as we did not intend to remit the earnings of GPI-SAS to GPI-USA.Effective in the first quarter of 2005, we provided deferred taxes on theexcess book basis in the shares of GPI-SAS, as we now intend to distributenon-cash dividends from our French subsidiary in 2005 and 2006.

**Note 11.**   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 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 grant vesting at the end ofeach year, however, the vesting schedule for individual participants may vary. Theoptions granted under the Incentive Plan expire 10 years after the date ofgrant.

The Directors’ Plan, as amended in September 2002,provides that each non-employee director, upon joining the Board of Directors,will receive an option to purchase 6,000 shares of common stock. In October 2003,the Board of Directors amended and the stockholders subsequently approved an 

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

**Note 11.**   Stock Option Programs and Warrants (Continued)

amendment to the Directors’Plan to: (i) increase the number of shares of our common stock for whichoptions may be granted to 150,000, an increase of 75,000, and (ii) extendthe expiration date of the plan to January 31, 2009 from January 31,2004, an increase of five years. The initial option grant vests over a 3-yearperiod, with one-third of the option grant vesting at the end of each year. Atthe beginning of the fourth year of service on the Board of Directors, and eachyear thereafter, each non-employee director receives an annual grant topurchase 2,000 shares of common stock. In addition, each year each non-employeedirector receives options to purchase 1,500 shares of common stock for servingon the following committees of the Board of Directors for at least six monthsprior to the date of grant: the Audit Committee; the Compensation Committee;and the Compliance Committee. No option is exercisable sooner than six monthsand one day after the date of the grant. The options expire on the tenthanniversary of the date of grant, nine months after retirement or two yearsafter death. Options covering 28,500 shares were granted to non-employeedirectors during the period of January 1, 2005 through December 31,2005, at a weighted-average exercise price of $14.28 per share.

Thefollowing is a summary of option activity for the years ended December 31,2003, 2004 and 2005:  

| ** **                             | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|----------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|
| Outstanding at  December 31, 2002 |       |                     | 649,500    |                                       |       |   | $ | 5.77 |   |   |
| Granted                                |       |                     | 12,500     |                                       |       |   | 4.94 |   |   |
| Canceled                               |       |                     | (104,000   | )                                          |       |   | 8.40 |   |   |
| Exercised                              |       |                     | —     |                                       |       |   | — |   |   |
| 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 |   |   |

----

(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.

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

**Note 11.**   StockOption Programs and Warrants (Continued)

Thefollowing table summarizes information concerning currently outstanding andexercisable options:

| ** **        | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **        | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Range of** | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Exercise**      | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| ** **        | **Prices** | ** **                   | ** ** | **Outstanding**              | ** ** | **Life** | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $1.69 to $3.99    |       |                         | 329,500    |                         |       |   | 3.57 |   |   |   | $ | 3.36 |   |   |   | 129,500 |   |   |   | $ | 3.29 |   |   |
| $4.00 to $7.99    |       |                         | 16,500     |                         |       |   | 5.02 |   |   |   | 4.48 |   |   |   | 16,500 |   |   |   | 4.48 |   |   |
| $8.00 to $11.99   |       |                         | 48,134     |                         |       |   | 1.97 |   |   |   | 8.91 |   |   |   | 48,134 |   |   |   | 8.91 |   |   |
| $12.00 to $15.99  |       |                         | 25,000     |                         |       |   | 6.47 |   |   |   | 13.94 |   |   |   | 19,000 |   |   |   | 14.30 |   |   |
| $16.00 to $19.99  |       |                         | 8,500      |                         |       |   | 9.19 |   |   |   | 18.65 |   |   |   | 8,500 |   |   |   | 18.65 |   |   |
| Total             |       |                         | 427,634    |                         |       |   | 5.24 |   |   |   | $ | 4.95 |   |   |   | 221,634 |   |   |   | $ | 6.13 |   |   |
|                   |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31, 2005 and 2004, a maximum of1,000,000 and 150,000 shares, of common stock have been reserved for issuanceunder the Incentive Plan and the Directors’ Plan, respectively. The IncentivePlan expired on January 30, 2004, except as to the stock options outstanding onthat date. None of the options can be granted at less than the fair marketvalue of our common stock on the date of grant.

Pursuant to the terms of his employment agreement, ourChief Executive Officer was granted 100,000 stock options in 2002 under ourIncentive Plan, which vest if and when we report the audited net profit aftertax of at least $2.0 million. These performance-based options are thereforesubject to variable accounting. Compensation expense of $778,000 was recordedin the fourth quarter of 2005 when we assessed that it was probable that theperformance vesting condition would be met. The compensation expense wasmeasured 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, antidilutive warrants to purchase that number ofshares of GPIC common stock which equals the total number of shares of GPICcommon stock issuable pursuant those options, warrants, or other convertiblesecurities or rights to purchase GPIC common stock which were outstandingimmediately prior to the closing. The former stockholders of GPI-SAS can onlyexercise those antidilutive warrants, however, if, when and to the extent thatGPIC issues common stock upon exercise or conversion of any of those options,warrants, securities or rights. The antidilutive warrants will expire30 days after the date on which GPIC notifies the antidilutive warrantholder that the last of those options, warrants, securities or rights has beenexercised, canceled or terminated. The purpose of the warrants is to provideantidilutive protection to the former stockholders of GPI-SAS in the event anyof those options; warrants, securities or rights are exercised after theclosing.

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. In addition, 149,000 warrants werecancelled or terminated on November 17, 2005, leaving a balance of 91,500warrants exercisable at December 31, 2005. In the fourth quarter of 2005,21,366 designated stock options were exercised, of which 21,366 antidiluted warrantsmay be exercised in 2006 at $0.01 per share.

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

**Note 12.**   Allowance forDoubtful Accounts

**We record, based on periodicreviews of our accounts receivables, allowances for estimated uncollectibletrade accounts receivable. A summary of provisions for estimated bad debts andthe related write-offs related to the allowance for doubtful accounts are asfollows (in thousands):**

| **Years Ended December 31,** | ** ** | ** ** | ** ** | **Beginning  of Year  Balance** | ** ** | **Provisions** | ** ** | **Write-offs,  Net of  Recoveries** | ** ** | **End  of Year  Balance** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------------------|------------|----------------|------------|------------------------------------------|------------|--------------------------------|------------|
| 2005                                        |       |       | $          | 296                                  |       |           |       | $                                        | 189        |                           |       |   | $ | (87 | ) |   |   | $ | 398 |   |   |
| 2004                                        |       |       | $          | 382                                  |       |           |       | $                                        | 37         |                           |       |   | $ | (123 | ) |   |   | $ | 296 |   |   |
| 2003                                        |       |       | $          | 390                                  |       |           |       | $                                        | 48         |                           |       |   | $ | (56 | ) |   |   | $ | 382 |   |   |

 

**Note 13.**   Related PartyTransactions

Ron-Lyn Enterprises, a company co-owned by Ron Coiro,former employee and East Coast Sales Manager of GPI-USA, providedmiscellaneous table game plastic accessories to GPI-SAS, includingdealing shoes, money paddles and discard holders. Since December 31, 2004,we have not purchased any products from Ron-Lyn Enterprises. For the fiscalyears ended December 31, 2005, 2004 and 2003, GPI-USA paid Mr. Coiro,through Ron-Lyn Enterprises, approximately $0, $186,000 and $113,300,respectively.

We lease our main 34,000 square foot manufacturingfacility located in San Luis Rio Colorado, Mexico from an entity controlled bythe family of Frank Moreno, General Manager of GPI-Mexico. The currentlease was extended in April 2004, for an additional five years at the samemonthly rent amount of approximately $0.35 per square foot, or $12,000. If weelect, at our discretion, to use more or less square footage, our rent will beincreased or decreased accordingly. On March 1, 2006, we amended ourcurrent lease for an additional 17,500 square feet. This extension has the samefive term period at the same monthly rent amount of approximately $0.35 persquare feet, or $6,100. We also own an approximately 66,000 square footfacility used for the manufacture of playing cards, tables, and layoutsproducts that is adjacent to the leased building.

Neither Mr. Coiro norMr. Moreno is a director or executive officer. The charter of the Board ofDirectors requires the Audit Committee to review related party transactionsinvolving our directors and executive officers.

**Note 14.**   Business Segments

SFAS No. 131, “Disclosures About Segments of anEnterprise and Related Information” requires public business enterprises toreport selected reporting information about operating segments in annualfinancial statements and requires public business enterprises to reportselected information about operating segments in interim and annual financialreports. We manufacture and sell casino table game equipment and have determinedthat we operate in one operating segment, which is casino game equipmentproducts. The segment is comprised of the following product lines: casinochips, table layouts, playing cards, gaming furniture, dice, and tableaccessories and other products. Although the Company derives its revenues froma number of different product lines, the Company does not allocate resourcesbased on the operating results from the individual product lines nor does itmanage each individual product line as a separate business unit.

61

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

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

The following tablespresent certain data by geographic area as of and for the periods ended December 31(in thousands):

| ** **                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales to external  customers:                   |       |     |       |     |       |     |       |
| U.S.A.                                              |       | $        | 28,675     |     | $          | 23,609   |       | $ | 23,505 |   |
| Europe                                              |       | 4,802    |       | 4,921    |       | 4,146    |       |
| Asia                                                |       | 20,523   |       | 12,513   |       | 6,134    |       |
| Other(1)                                            |       | 3,121    |       | 3,542    |       | 2,386    |       |
| Total consolidated net  sales to external customers |       | $        | 57,121     |     | $          | 44,585   |       | $ | 36,171 |   |

----

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

| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Property and  equipment, net: |       |     |       |     |       |
| United States                 |       | $        | 6,311      |     | $          | 5,140 |   |
| Europe                        |       | 3,547    |       | 2,960    |       |
| Mexico                        |       | 1,354    |       | 1,369    |       |
| Total                         |       | $        | 11,212     |     | $          | 9,469 |   |

 

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

**Note 15.**   Pension Plan

GPI-SASsponsors 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’s defined benefitpension plan (in thousands):

| ** **                                                                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Change in benefit  obligation:                                                             |       |                  |       |   |   |   |   |
| Benefit obligation at beginning of year                                                    |       | $                     | 219        |   | $ | 139 |   | $ | 90 |   |
| Service cost                                                                               |       | 20                    |       | 63 |   | 28 |   |
| Interest cost                                                                              |       | 9                     |       | — |   | — |   |
| Actuarial loss                                                                             |       | 7                     |       | — |   | — |   |
| Benefits paid                                                                              |       | —                |       | — |   | — |   |
| Effect of foreign exchange rate changes                                                    |       | (31                   | )          | 17 |   | 21 |   |
| Benefit obligation at end of year                                                          |       | 224                   |       | 219 |   | 139 |   |
| Change in plan assets:                                                                     |       |                  |       |   |   |   |   |
| Fair value of plan assets at beginning of year                                             |       | 468                   |       | 419 |   | 334 |   |
| Actual return on plan assets                                                               |       | 15                    |       | 15 |   | 13 |   |
| Benefits paid                                                                              |       | —                |       | — |   | — |   |
| Effect of foreign exchange rate changes                                                    |       | (64                   | )          | 34 |   | 72 |   |
| Fair value of plan assets at end of year (1)                                               |       | 419                   |       | 468 |   | 419 |   |
| Funded status                                                                              |       | 195                   |       | 249 |   | 280 |   |
| Unrecognized transition asset as of April 1998,  being recognized over 15 years  |       | (110                  | )          | (146 | ) | (152 | ) |
| Prepaid benefit  cost                                                                      |       | $                     | 85         |   | $ | 103 |   | $ | 128 |   |

----

(1)          Comprisedof equity securities.

| Weighted-average  assumptions: |   |   |   |   |   |   |   |
|--------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Discount rate                  |   | 4.25   | %      | 4.5    | %      | 4.5    | %      |
| Expected return on plan assets |   | 3.5    | %      | 3.5    | %      | 3.5    | %      |
| Rate of  compensation increase |   | 2.0    | %      | 2.0    | %      | 1.5    | %      |

 

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

| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost-benefits  earned during the period |       | $        | 20         |     | $          | 18       |       | $ | 17 |   |
| Interest expense  on benefit obligation         |       | 9        |       | 8        |       | 8        |       |
| Expected return  on plan assets                 |       | (15      | )          | (14      | )          | (13      | )          |
| Actuarial loss                                  |       | 7        |       | 37       |       | 3        |       |
| Amortization of  unrecognized transition asset  |       | (16      | )          | (18      | )          | (15      | )          |
| Total                                           |       | $        | 5          |     | $          | 31       |       | $ | — |   |

 

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

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

In accordance with MexicanLabor Law, we provide seniority premium benefits to our employees under certaincircumstances. These benefits consist of a one-time payment equivalent to 12days wages for each year of service (at the employee’s most recent salary, butnot to exceed twice the legal minimum wage), payable to all employees who areinvoluntarily terminated, with 15 or more years of service. At December 31,2005, 2004 and 2003, we had seniority premium benefits accrued of approximately$134,000 for all three years.

We maintain a 401(k) planfor employees in the United States who work over one year and are 21 years ofage or older. During 2003, the former Paul-Son Gaming Supplies, Inc. planand the former Bud Jones Company plan were combined into one plan. Contributionsto the plan were based on the amounts contributed by the eligible employees.Eligible employees could elect to contribute up to the lesser of the IRS limitor fifteen percent of their earnings into the plan. We contribute $0.50 foreach $1.00 contributed by a participant in the plan up to four percent of theparticipant’s wages. The 401(k) employer contributions in the U.S. madeduring the period ending December 31, 2005 and 2004 under the combinedplan were $48,000 and $36,000 respectively for the GPI-USA plan. The 401(k) employeecontributions in the U.S made during the year ended December 31, 2003under the former Paul-Son Gaming Supplies, Inc. plan was $19,000.

**SelectedQuarterly Financial Information**

| ** **                           | ** ** | **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                         |       | 4,833                                                              |       | 6,917 |   | 4,926 |   | 6,305 |   | 22,981 |   |
| Operating income                     |       | 1,082                                                              |       | 2,820 |   | 455 |   | 1,482 |   | 5,839 |   |
| Net income                           |       | $                                                                  | 502        |   | $ | 1,482 |   | $ | 246 |   | $ | 2,098 |   | $ | 4,328 |   |
| Basic net income  per common share   |       | $                                                                  | 0.06       |   | $ | 0.19 |   | $ | 0.03 |   | $ | 0.27 |   | $ | 0.55 |   |
| Diluted net income per  common share |       | $                                                                  | 0.06       |   | $ | 0.18 |   | $ | 0.03 |   | $ | 0.26 |   | $ | 0.53 |   |

 

| ** **                                  | ** ** | **Year Ended December 31, 2004**               | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **First**                                                          | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **(in thousands, except per share data)** | ** ** |
| Net revenues                                |       | $                                                                  | 7,326      |   | $ | 14,843 |   | $ | 9,250 |   | $ | 13,166 |   | $ | 44,585 |   |
| Gross profit                                |       | 2,678                                                              |       | 6,648 |   | 3,122 |   | 4,888 |   | 17,336 |   |
| Operating income  (loss)                    |       | (434                                                               | )          | 3,055 |   | (351 | ) | 1,806 |   | 4,076 |   |
| Net income (loss)                           |       | $                                                                  | (470       | ) | $ | 1,940 |   | $ | (111 | ) | $ | 1,255 |   | $ | 2,614 |   |
| Basic net income  (loss) per common share   |       | $                                                                  | (0.06      | ) | $ | 0.26 |   | $ | (0.01 | ) | $ | 0.16 |   | $ | 0.34 |   |
| Diluted net income  (loss) per common share |       | $                                                                  | (0.06      | ) | $ | 0.25 |   | $ | (0.01 | ) | $ | 0.16 |   | $ | 0.34 |   |

 

In the second and fourth quarters of 2004 and 2005,the increases in net revenues were primarily due to the new larger casinoopenings in the United States and in Asia.

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**Item 9.**                        *Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure.*

None.

**Item 9A.**                *Controls and Procedures.*

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to be disclosedin our reports under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time period specified in the SEC’s rules andforms and that such information is accumulated and communicated to ourmanagement, including the Chief Executive Officer and the Chief FinancialOfficer.

Company management, including the Chief ExecutiveOfficer and the Chief Financial Officer, has conducted an evaluation of theeffectiveness of disclosure controls and procedures pursuant to Exchange ActRule 13a-15(c) as of December 31, 2005. Based on that evaluation, the ChiefExecutive Officer and the Chief Financial Officer concluded that the disclosurecontrols and procedures are not effective in ensuring that all materialinformation required to be filed in this annual report has been made known tothem in a timely fashion, due to the following matter. 

In March 2006, in connection with the Company’spreparation of this Form 10-K, the Company became aware of a material weaknessrelating to the Company’s internal controls over its financial reportinginvolving the design and operation of controls over share-based paymentaccounting. Specifically, the controls in place were not adequate to ensurethat the correct accounting treatment was used for stock options conditioned onthe Company attaining a specific performance target, which were granted to theChief Executive Officer in September 2002 (see Item 12). Prior to filingthis Form 10-K, the Company has determined that variable accounting is requiredwith respect to these particular stock options in order to comply withgenerally accepted accounting principles in the United States of America. TheCompany recorded the resulting compensation expense in the fourth quarter of2005, which was the proper period. Therefore, the Company has appropriatelyrecognized the expense in the financial statements included in this Form 10-K.

The Company has not granted any other suchperformance-based stock options or similar securities that have unknown vestingdates to any other employee or person and the chances of this reoccurring inthe future is remote. Nonetheless, the Company intends to implement proceduresto remediate the ineffective disclosure controls to assure that the financialreporting for all share-based compensation is in compliance with generallyaccepted accounting principles in the United States of America.

There were no changes ininternal controls over financial reporting during the fourth fiscal quarter of2005 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

**Item 9B.**               *Other Information*.

None.

**PART III**

**Item 10.**                 *Directors and Executive Officers of the Registrant.*

The sections labeled “Nominees for Election ofDirectors,” “Board of Directors and Committees of the Board,” “Compliance with Section 16(a) ofthe Securities and Exchange Act of 1934” and “Executive Officers” of ourdefinitive Proxy Statement to be filed within 120 days after our fiscal yearend of December 31, 2005, are incorporated herein by reference.

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We have adopted a Code ofEthics that applies to our Chief Executive Officer, Chief Financial Officer,Corporate Controller and other finance organization 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. Our Corporate Governance charters for the Audit andNominating and Governance Committees of the Board of Directors can also befound on our website.

**Item 11.**                 *Executive Compensation.*

The sections labeled “Compensationof Directors,” “Executive Compensation,” “Employment Contracts andChange-in-Control Arrangements,” “Aggregated Option Exercises in 2005 andOption Value at December 31, 2005,” “Pension Plan” and “CompensationCommittee Interlocks and Insider Participation” of our definitive ProxyStatement to be filed within 120 days after our fiscal year end of December 31,2005, are incorporated herein by reference.

**Item 12.**                 *Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.*

**EquityCompensation Plan Information**

Thefollowing table sets forth certain information as of December 31, 2005about 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** | ** ** | **Weighed-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     |       |       | 519,133    | (1)                                                                                                                                              |       |                                                                                                       | $          | 4.08 |   |   |   | 32,500 | (2) |   |
| Equity  compensation plans not approved by security holders |       |       | None       |                                                                                                                                             |       |                                                                                                       | None       |   |   |   | None |   |   |
| **Total**                                                   |       |       | 519,133    |                                                                                                                                             |       |                                                                                                       | $          | 4.08 |   |   |   | 32,500 |   |   |
|                                                             |            |            |            |                                                                                                                                                  |            |                                                                                                            |            |  |  |  |  |  |  |  |  |  |

----

(1)          Reflects theweighted-average outstanding stock options to purchase 335,634 shares of commonstock under our 1994 Long-Term Incentive Plan, and stock options to purchase92,000 shares of common stock under our 1994 Directors’ Stock Option Plan, andfor an aggregate of 427,634 shares. The antidilution warrants, issued inconnection with the Combination, are not included in this table, as they do notrepresent compensation.

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

See Note 11 of the Notes to the ConsolidatedFinancial Statements for additional information about our equity-basedcompensation plans.

*Vestingof Stock Options.*   Pursuant to the terms of anEmployment Agreement dated September 12, 2002, between us and Gerard P.Charlier, we granted Mr. Charlier stock options under our 1994 Long-TermIncentive Plan to purchase an aggregate of 300,000 shares of our common stock,each at an exercise price of $3.40 per share. We reported in a Report on Form 8K filed on May 6, 2005 that the stock options as to 100,000 shares vested onMarch 31, 2005, and, as such, became exercisable during the five year periodfollowing such vesting date, or April 1, 2005 through March 31, 2010. TheEmployment Agreement 

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provides that the stockoptions as to 100,000 shares vested if and when our audited annual consolidatedfinancial statements showed net income meeting the designated threshold per theagreement. Upon additional review of the matter, we have determined that thestock options did not vest, because if vested, the compensation expenseassociated with the vesting would have caused our net profit after tax to beless than the designated threshold. The terms of the stock options do notexclude the effect of such compensation expense in determining whether the netprofit threshold was satisfied. Accordingly, the beneficial ownership tableincluded in the Form 8-K filed on May 6, 2005 which gives effect to the vestingwas not accurate, but the beneficial ownership table included in our 2005 proxystatement was accurate as of the date reflected in that table.

Mr. Charlier’s stock options as to 100,000shares, vested during the fourth quarter of 2005. The information in ourdefinitive Proxy Statement, to the extent applicable, will reflect the vestingof such shares.

The sub-section labeled “Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters” of ourdefinitive Proxy to be filed within 120 days after our fiscal year end ofDecember 31, 2005, is incorporated herein by reference.

**Item 13.**                 *Certain Relationships and Related Transactions.*

The section labeled “CertainRelationships and Related Transactions” of our definitive Proxy Statement to befiled within 120 days after our fiscal year end of December 31, 2005, isincorporated herein by reference.

**Item 14.**                 *Principal Accountant Fees and Services.*

The sub-section labeled “PrincipalAccountant Fees and Services” of our definitive Proxy Statement to be filedwithin 120 days after our fiscal year end of December 31, 2005, isincorporated herein by reference.

**PART IV**

**Item 15.**                 *Exhibits, Financial Statement Schedules.*

(a)(1)   ** *Financial Statements***

Included in Part II of this report:

Consolidated Balance Sheets at December 31, 2005and 2004.

Consolidated Statements of Income for the Years Ended December 31,2005, 2004 and 2003.

Consolidated Statements of Stockholders’ Equity andOther Compre­hensive Income for the Years Ended December 31, 2005, 2004and 2003.

Consolidated Statements of Cash Flows for the YearsEnded December 31, 2005, 2004 and 2003.

Notes to Consolidated Financial Statements

(a)(2)   ** *Financial Statement Schedules***

All required schedules are omitted because of theabsence of conditions under which they are required or because the requiredinformation is given in the financial statements or notes thereto.

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(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  | Amended and Restated  Bylaws of Paul-Son Gaming Corporation, incorporated herein by reference to  Annex C to the Proxy Statement.                                                                                                                                                                                                                                                                                                                                                                                |
| 4.01  | Specimen Common Stock  Certificate for the Common Stock of Paul-Son Gaming Corporation incorporated  herein by reference from our registration statement on Form S-1 (SEC  No. 33-74758), Part II, Item 16, Exhibit 4.01.                                                                                                                                                                                                                                                                    |
| 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. |
| 10.05 | Employment Agreement  dated September 12, 2002 between Gerard 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 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  Paribes, 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  Paribes, 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.                                                                                                                                                                                                                                                                 |

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| 10.10 | Second Amendment to  Lease Agreement dated March 1, 2006 between Copropledad Arte y Diseno, as  lessor, and Paul-Son Mexicana, S.A. de C.V., as lessee.                             |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 21.01 | List of subsidiaries.                                                                                                                                                               |
| 23.01 | 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. |

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

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**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 |
|---------------------|-------------------------------------------|
| March 31, 2006 | By:                                       | /s/  GÉRARD CHARLIER |
|                |                                      | Gérard 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.

| March 31, 2006 | By:    | /s/ GÉRARD CHARLIER                                                                            |
|---------------------|--------|-----------------------------------------------------------------------------------------------------|
|                |   | Gérard Charlier*Director, President and Chief Executive Officer (Principal Executive Officer)* |
| March 31, 2006 | By:    | /s/  MELODY SULLIVAN                                                                                |
|                |   | Melody Sullivan*Chief Financial Officer (Principal Financial and Accounting Officer)*               |
| March 31, 2006 | By:    | /s/  ERIC P. ENDY                                                                                   |
|                |   | Eric P. Endy*Director*                                                                              |
| March 31, 2006 | By:    | /s/  PAUL S. DENNIS                                                                                 |
|                |   | Paul S. Dennis*Director*                                                                            |
| March 31, 2006 | By:    | /s/  ALAIN THIEFFRY                                                                                 |
|                |   | Alain Thieffry*Director*                                                                            |
| March 31, 2006 | By:    | /s/  BENOIT AUCOUTURIER                                                                             |
|                |   | Benoit  Aucouturier*Director*                                                                       |
| March 31, 2006 | By:    | /s/  ROBERT KELLY                                                                                   |
|                |   | Robert Kelly*Director*                                                                              |
| March 31, 2006 | By:    | /s/  ELISABETH CARRETTÉ                                                                        |
|                |   | Elisabeth  Carretté*Director*                                                                  |

 

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**EXHIBIT INDEX**

| EXHIBIT NO. | ** ** | **DESCRIPTION** | ** ** |
|------------------|------------|-----------------|------------|
|             | 10.10      |            |       | Second Amendment  to Lease Agreement dated March 1, 2006 between Copropledad Arte y  Diseno, as lessor, and Paul-Son Mexicana, S.A. de C.V., as lessee. |   |
|             | 21.01      |            |       | List of  subsidiaries. |   |
|             | 23.01      |            |       | 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. |   |

 

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