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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



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FORM 10Q



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|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

|      |                                                                                         
|----- | ----------------------------------------------------------------------------------------
|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

COMMISSION FILE NUMBER: 023928

PDS GAMING CORPORATION
(exact name of Registrant as specified in its charter)

|                                                                        |  |                                                  
|----------------------------------------------------------------------- |  | -------------------------------------------------
|Minnesota(State or other Jurisdiction of
Incorporation or Organization) |  | 411605970(I.R.S. Employer
Identification Number)
|                                                                       

6171 McLeod Drive, Las Vegas, Nevada 89120
(Address of Principal Executive Offices)

(702) 7360700
(Issuers Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.           [X] Yes [   ] No

Indicate the number of shares outstanding of each of the issuers classes of common stock,
as of the last practicable date:

|                             |  |                                   
|---------------------------- |  | ----------------------------------
|Class                        |  | Outstanding as of October 28, 2002
|Common Stock, $.01 par value |  | 3,799,978                         





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---



# PDS GAMING CORPORATION
AND SUBSIDIARIES

# INDEX

# PART I      FINANCIAL
INFORMATION

|        |  |                                                                                       |  |                                                                                                            |    |      |   | 
|------- |  | ------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|        |  |                                                                                       |  |                                                                                                            |    | Page
|        |  |                                                                                       |  |                                                                                                            |    |     
|       
|Item 1. |  | Financial Statements                                                                  |  |                                                                                                            |    |     
|        |  |                                                                                       |  |                                                                                                            |    |      |   | 
|        |  |                                                                                       |  | Consolidated Balance Sheets  September 30, 2002 (Unaudited) and December 31, 2001                         |    |      | 3 | 
|        |  |                                                                                       |  |                                                                                                            |    |      |   | 
|        |  |                                                                                       |  | Consolidated Statements of Income  Three Months Ended September 30, 2002 and 2001 (Unaudited)             |    |      | 4 | 
|        |  |                                                                                       |  |                                                                                                            |    |      |   | 
|        |  |                                                                                       |  | Consolidated Statements of Income  Nine Months Ended September 30, 2002 and 2001 (Unaudited)              |    |      | 5 | 
|        |  |                                                                                       |  |                                                                                                            |    |      |   | 
|        |  |                                                                                       |  | Consolidated Statements of Cash Flows  Nine Months Ended
         September 30, 2002 and 2001 (Unaudited) |    |      | 6 | 
|        |  |                                                                                       |  |                                                                                                            |    |      |   | 
|        |  |                                                                                       |  | Notes to Consolidated Financial Statements                                                                 |    | 78  |  
|        |  |                                                                                       |  |                                                                                                            |    |      |   | 
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 912                                                                                                       |   
|        |  |                                                                                       |  |                                                                                                            |    |      |   | 
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                            | 13 |     
|        |  |                                                                                       |  |                                                                                                            |    |      |   | 
|Item 4. |  | Controls and Procedures                                                               |  |                                                                                                            | 13 |     

# PART II      OTHER
INFORMATION

|Item 1. |  | Legal Proceedings                                   |  |  | 14 | 
|------- |  | --------------------------------------------------- |  |  | -- | 
|        |  |                                                     |  |  |    | 
|Item 2. |  | Changes in Securities and Use of Proceeds           |  |  | 14 | 
|        |  |                                                     |  |  |    | 
|Item 3. |  | Defaults Upon Senior Securities                     |  |  | 14 | 
|        |  |                                                     |  |  |    | 
|Item 4. |  | Submission of Matters to a Vote of Security Holders |  |  | 14 | 
|        |  |                                                     |  |  |    | 
|Item 5. |  | Other Information                                   |  |  | 14 | 
|        |  |                                                     |  |  |    | 
|Item 6. |  | Exhibits and Reports on Form 8-K                    |  |  | 14 | 

2

---

# PDS GAMING CORPORATION
AND SUBSIDIARIESCONSOLIDATED BALANCE
SHEETS

|                                                            | SEPTEMBER 30, |  | DECEMBER 31, |           
|----------------------------------------------------------- | ------------- |  | ------------ | ----------
|
|                                                            |               |  |              |           
|
|ASSETS:                                                     |               |  |              |           
|                                                            |               |  |              |           
|Cash and cash equivalents                                   |               |  | $            | 3,226,000 
|Restricted cash                                             |               |  |              | 481,000   
|Notes, accounts and leases receivable, net of allowances    |               |  |              | 48,506,000
|Equipment under operating leases, net                       |               |  |              | 32,562,000
|Equipment held for sale or lease                            |               |  |              | 3,641,000 
|Other assets, net                                           |               |  |              | 10,271,000
|                                                            |               |  |              |           
|                                                            |               |  | $            | 98,687,000
|                                                            |               |  |              |           
|LIABILITIES AND STOCKHOLDERS EQUITY:                       |               | 
|                                                            |               |  |              |           
|Accounts payable                                            |               |  | $            | 18,653,000
|Accrued expenses and other                                  |               |  |              | 3,297,000 
|Customer deposits                                           |               |  |              | 2,645,000 
|Notes payable                                               |               |  |              | 54,979,000
|Subordinated debt                                           |               |  |              | 9,295,000 
|                                                            |               |  |              |           
|                                                            |               |  |              | 88,869,000
|                                                            |               |  |              |           
|Stockholders' equity:                                       |               | 
|Common stock, $.01 par value, 20,000,000 shares authorized, |               | 
|3,797,901and 3,745,872 shares issued and outstanding        |               |  |              | 38,000    
|Additional paid-in capital                                  |               |  |              | 11,811,000
|Retained earnings (deficit)                                 |               |  |              | (2,031,000
|                                                            |               |  |              |           
|                                                            |               |  |              | 9,818,000 
|                                                            |               |  |              |           
|                                                            |               |  | $            | 98,687,000
|                                                            |               |  |              |           

See notes to consolidated financial
statements.

3

---

# PDS GAMING CORPORATION
AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF INCOMETHREE MONTHS ENDED
SEPTEMBER 30,(Unaudited)

|                                                      | 2002 |  | 2001 |          
|----------------------------------------------------- | ---- |  | ---- | ---------
|                                                      |      |  |      |          
|REVENUES:                                             |      |  |      |          
|Equipment sales and sales-type leases                 |      |  | $    | 672,000  
|Operating lease rentals                               |      |  |      | 4,033,000
|Finance income                                        |      |  |      | 1,292,000
|Fee income                                            |      |  |      | 760,000  
|Casino                                                |      |  |      | 591,000  
|                                                      |      |  |      |          
|                                                      |      |  |      | 7,348,000
|                                                      |      |  |      |          
|COSTS AND EXPENSES:                                   |      | 
|Equipment sales and sales-type leases                 |      |  |      | 652,000  
|Depreciation on leased equipment                      |      |  |      | 2,757,000
|Interest                                              |      |  |      | 1,969,000
|Casino                                                |      |  |      | 657,000  
|Selling, general and administrative                   |      |  |      | 1,089,000
|Depreciation and amortization on other property       |      |  |      | 184,000  
|Collection and asset impairment provisions            |      |  |      |          
|                                                      |      |  |      |          
|                                                      |      |  |      | 7,308,000
|                                                      |      |  |      |          
|Income from continuing operations before income taxes |      |  |      | 40,000   
|Income taxes                                          |      |  |      | 16,000   
|                                                      |      |  |      |          
|Income from continuing operations                     |      |  |      | 24,000   
|Discontinued operations                               |      |  |      | (348,000 
|                                                      |      |  |      |          
|Net income (loss)                                     |      |  | $    | (324,000 
|                                                      |      |  |      |          
|                                                      |      |  |      |          
|Earnings (loss) per share:                            |      | 
|Continuing operations:                                |      | 
|Basic                                                 |      |  | $    | 0.01     
|Diluted                                               |      |  |      | 0.01     
|Discontinued operations - basic and diluted           |      |  |      | (0.10    
|Net income (loss) - basic and diluted                 |      |  |      | (0.09    
|                                                      |      |  |      |          
|Weighted average shares outstanding:                  |      | 
|Basic                                                 |      |  |      | 3,798,000
|Diluted                                               |      |  |      | 3,798,000

See
notes to consolidated financial statements.

4

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# PDS GAMING CORPORATION
AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF INCOMENINE MONTHS ENDED
SEPTEMBER 30,(Unaudited)

|                                                                       | 2002 |          | 2001 |           
|---------------------------------------------------------------------- | ---- | -------- | ---- | ----------
|                                                                       |      |          |      |           
|REVENUES:                                                              |      |          |      |           
|Equipment sales and sales-type leases                                  |      |          | $    | 9,714,000 
|Operating lease rentals                                                |      |          |      | 9,603,000 
|Finance income                                                         |      |          |      | 3,677,000 
|Fee income                                                             |      |          |      | 1,143,000 
|Casino                                                                 |      |          |      | 1,427,000 
|                                                                       |      |          |      |           
|                                                                       |      |          |      | 25,564,000
|                                                                       |      |          |      |           
|COSTS AND EXPENSES:                                                    |      |         
|Equipment sales and sales-type leases                                  |      |          |      | 8,395,000 
|Depreciation on leased equipment                                       |      |          |      | 6,430,000 
|Interest                                                               |      |          |      | 5,655,000 
|Casino                                                                 |      |          |      | 1,819,000 
|Selling, general and administrative                                    |      |          |      | 3,223,000 
|Depreciation and amortization on other property                        |      |          |      | 584,000   
|Pre-opening expenses                                                   |      |          |      | 238,000   
|Collection and asset impairment provisions                             |      |          |      | 59,000    
|                                                                       |      |          |      |           
|                                                                       |      |          |      | 26,403,000
|                                                                       |      |          |      |           
|Income (loss) from continuing operations before income taxes (benefit) |      | (839,000 | )    |           
|Income taxes (benefit)                                                 |      |          |      | (353,000  
|                                                                       |      |          |      |           
|Income (loss) from continuing operations                               |      |          |      | (486,000  
|Discontinued operations                                                |      |          |      | (2,224,000
|                                                                       |      |          |      |           
|Net income (loss)                                                      |      |          | $    | (2,710,000
|                                                                       |      |          |      |           
|                                                                       |      |          |      |           
|Earnings (loss) per share:                                             |      |         
|Continuing operations:                                                 |      |         
|Basic                                                                  |      |          | $    | (0.13     
|Diluted                                                                |      |          |      | (0.13     
|Discontinued operations - basic and diluted                            |      |          |      | (0.59     
|Net income (loss):                                                     |      |         
|Basic                                                                  |      |          |      | (0.72     
|Diluted                                                                |      |          |      | (0.72     
|                                                                       |      |          |      |           
|Weighted average shares outstanding:                                   |      |         
|Basic                                                                  |      |          |      | 3,792,000 
|Diluted                                                                |      |          |      | 3,792,000 

See
notes to consolidated financial statements.

5

---

# PDS GAMING CORPORATION
AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF CASH FLOWSNINE MONTHS ENDED
SEPTEMBER 30,(Unaudited)

|                                                       | 2002 |  | 2001 |            
|------------------------------------------------------ | ---- |  | ---- | -----------
|                                                       |      |  |      |            
|OPERATING ACTIVITIES:                                  |      |  |      |            
|Net cash provided by continuing operating activities   |      |  | $    | 10,999,000 
|Net cash used in discontinued operating activities     |      |  |      | (1,071,000 
|                                                       |      |  |      |            
|Net cash provided by operating activities              |      |  |      | 9,928,000  
|                                                       |      |  |      |            
|INVESTING ACTIVITIES:                                  |      | 
|Purchase of equipment for leasing                      |      |  |      | (8,619,000 
|Proceeds from sale of equipment under operating leases |      |  |      | 464,000    
|Purchase of fixed assets                               |      |  |      | (1,221,000 
|Other                                                  |      |  |      | (499,000   
|                                                       |      |  |      |            
|Net cash used in investing activities                  |      |  |      | (9,875,000 
|                                                       |      |  |      |            
|FINANCING ACTIVITIES:                                  |      | 
|Proceeds from borrowings                               |      |  |      | 25,128,000 
|Repayment of borrowings                                |      |  |      | (22,976,000
|Reduction (increase) in restricted cash                |      |  |      | (481,000   
|Repayment of subordinated debt                         |      |  |      | (2,684,000 
|Proceeds from issuance of common stock                 |      |  |      | 100,000    
|                                                       |      |  |      |            
|Net cash provided by (used) in financing activities    |      |  |      | (913,000   
|                                                       |      |  |      |            
|CHANGE IN CASH AND CASH EQUIVALENTS:                   |      | 
|Net decrease in cash and cash equivalents              |      |  |      | (860,000   
|Cash and cash equivalents at beginning of period       |      |  |      | 4,086,000  
|                                                       |      |  |      |            
|Cash and cash equivalents at end of period             |      |  | $    | 3,226,000  
|                                                       |      |  |      |            

See
notes to consolidated financial statements.

6

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# PDS GAMING CORPORATION
AND SUBSIDIARIESNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Unaudited)

# 1. BASIS OF PRESENTATION

| | The
accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and disclosures required by
generally accepted accounting principles for annual financial statements. In the opinion
of management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results of operations
for any interim period are not necessarily indicative of results for the full year. For
further information, please refer to the consolidated financial statements of PDS Gaming
Corporation (the Company), and the related notes, included within the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (the
2001 Form 10-K), previously filed with the Securities and Exchange Commission.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance sheet at December 31, 2001 was derived from the audited financial statements
included in the Companys 2001 Form 10-K and reclassifications to conform with the
current quarter presentation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Casino Operations division does not meet the criteria requiring recognition as an
operating segment under Statement of Financial Accounting Standards No. 131,Disclosures about Segments of an Enterprise and Related Information.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 2. NOTES PAYABLE

Notes
payable consist of the following:

|                                                                                   | September 30, |  | December 31, |           
|---------------------------------------------------------------------------------- | ------------- |  | ------------ | ----------
|
|                                                                                   |               |  |              |           
|Recourse lines of credit with a maximum aggregate balance of $19,930,000 bearing   |               |  |              |           
|interest at rates from 5.75% to 10.50%, secured by related investment in leases    |               | 
|and equipment held for sale or lease                                               |               | 
|                                                                                   |               |  | $            | 13,563,000
|Equipment notes bearing interest at rates from 6.75% to 15.08%, secured by related |               | 
|investment in leases:                                                              |               | 
|Recourse                                                                           |               |  |              | 17,644,000
|Non-recourse                                                                       |               |  |              | 24,243,000
|                                                                                   |               |  |              |           
|                                                                                   |               |  |              | 55,450,000
|Unamortized loan discounts                                                         |               |  |              | (471,000  
|                                                                                   |               |  |              |           
|                                                                                   |               |  | $            | 54,979,000
|                                                                                   |               |  |              |           

7

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# PDS GAMING CORPORATION
AND SUBSIDIARIESNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Unaudited)

# 3. DISCONTINUED
OPERATIONS

At
the end of the first quarter 2002, the Company discontinued operations of its Table Games
division and certain components of its Casino Slot Exchange® division, due
to unacceptable operating results resulting from, among other things, slower than
anticipated customer installations, inadequate profit margins and the continuing costs of
maintaining exclusive rights to certain intellectual property. Accordingly, the Company
has reclassified these activities as discontinued operations in accordance with Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. As a result of these decisions, the Company recognized a disposal
loss of $993,000 in the three months ended March 31, 2002 primarily related to the
write-off of certain intangibles in the Table Games and Casino Slot
Exchange® divisions. In addition, due to the decision to forego further
reconditioning activities, the Company provided a reserve for its related parts inventory
of $300,000 in the three months ended March 31, 2002 solely to liquidate the inventory
quickly and reduce the associated on-going carrying costs.

Results
from discontinued operations are as follows:

|                                          | Three Months Ended |  | Nine Months Ended |         
|----------------------------------------- | ------------------ |  | ----------------- | --------
|
|                                          |                    |  |                   |         
|
|                                          |                    |  |                   |         
|Loss from discontinued operations, net of |                    |  |                   |         
|income tax benefits:                      |                    | 
|Loss on disposal                          |                    |  |                   |        
|Operating loss                            |                    |  | $                 | (348,000
|                                          |                    |  |                   |         
|                                          |                    |  | $                 | (348,000
|                                          |                    |  |                   |         
|Loss per share (diluted):                 |                    | 
|Loss on disposal                          |                    |  |                   |        
|Operating loss                            |                    |  | $                 | (0.10   
|                                          |                    |  |                   |         
|                                          |                    |  | $                 | (0.10   
|                                          |                    |  |                   |         

As
of September 30, 2002, the assets associated with discontinued operations consisted
primarily of the Companys inventory of certain slot machines and table games and its
investment in DigiDeal Corporation, with a carrying value of $2.6 million and $696,000,
respectively.

# 4. CONTINGENCIES

In
May 2002, the Company received notification that Tekbilt, Inc. (Claimant) had
submitted a Demand for Arbitration to the American Arbitration Association alleging breach
of a Distributor Agreement (the Agreement) with Claimant in connection with
the Companys discontinued operations. In the notification, Claimant alleged that
such breach has caused Claimant to sustain substantial damages. The monetary damages
sought by claimant are unspecified. The Company timely filed its Answering Statement and
has asserted a Counterclaim against Claimant. The Company seeks the dismissal of
Claimants claims in their entirety, an award of monetary damages and reimbursement
of all costs and expenses incurred by the Company as a result of the case, including
attorneys fees. Neither party has specified its alleged damages. The case is in a
preliminary stage, and the hearing before the American Arbitration Association panel is
expected to occur in early 2003.

Although
unable to predict the outcome of this matter, management believes the Claimants
claim to be without merit and will vigorously pursue all legal defenses available to it.
Management, further, does not believe that the outcome of such arbitration is likely to
have a material adverse effect on the Company. Accordingly, no accounting recognition has
been provided for losses, if any.

8

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# ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
Company is engaged in the business of financing and leasing gaming equipment to the gaming
industry. The gaming equipment financed by the Company consists mainly of slot machines,
video gaming machines and other gaming devices. In addition, the Company finances
furniture, fixtures and other gaming-related equipment, including gaming tables and
chairs, restaurant and hotel furniture, vehicles, security and surveillance equipment,
computers and other office equipment. The Company believes it is currently the only
independent leasing company licensed by gaming regulatory agencies in all of the states of
Nevada, New Jersey, Colorado, Illinois, Iowa, Indiana, Minnesota, Mississippi, New Mexico
and Washington to provide this financing alternative. In early 2001, the Company received
a non-restricted gaming license to operate The Gambler casino, now known as Rockys
Sports Pub and Grill (Rockys), in Reno, Nevada.

In
addition to its leasing activities, the Company also originates note transactions which it
generally sells to third parties for fee income. In some of its transactions, the Company
holds the leases or notes for a period of time after origination, or retains a partial
ownership interest in the leases or notes. The Company believes its ability to distribute
used gaming devices (which its gaming licenses in the above-referenced states permit it to
do) enhances the gaming devices values at the end of an operating lease and
facilitates additional financing transactions.

The
Companys quarterly operating results, including net income, have historically
fluctuated due to non-recurring large financing transactions,
as well as the timing of recognition of the resulting fee income upon subsequent sale.
These transactions can be in the negotiation and documentation stage for several months,
and recognition of the resulting fee income by the Company may vary significantly from
quarter to quarter with no seasonal pattern. Thus, the results of any quarter are not
necessarily indicative of the results which may be expected for any other period.

The
amount and number of financing transactions that can be originated by the Company are
directly dependent upon and limited by its ability to fund such transactions, either
through the sale of such transactions to institutional investors or through the
Companys working capital, lines of credit and other financing sources. The majority
of its originations each year are financed with a network of approximately ten lenders. A
reduction in the number of available lenders, the number or size of transactions or the
type of transactions that the lenders are willing to finance could adversely affect future
operations.

Historically,
the Company has earned a substantial portion of its revenues from relatively few customers
and has experienced significant nonrecurring revenues and fee income in connection with
its business activities. A reduction in the number of these significant customers or
volume of the transactions, or failure to replace the sources of the nonrecurring revenues
and fee income, could also have an adverse affect on future operations.

The
Companys operating results are subject to quarterly fluctuations resulting also from
a variety of other factors, including, but not limited to, (i) variations in the mix of
financing transactions between operating leases, direct finance leases and notes
receivable, (ii) changes in the gaming industry which affect the demand for gaming devices
sold by the Company at lease termination, and (iii) changes in interest rates and other
economic conditions, in which a detrimental change can cause customers to delay new
investments and increase the Companys bad debt exposure, and reduce the level of fee
income obtained through the sale of leases or financing transactions.

# Results Of Operations

The
Company reported a net loss of $324,000 or $0.09 per share diluted in the third quarter
2002 compared to net income of $386,000 or $0.10 per share diluted in the third quarter
2001. The third quarter 2002 results include income from continuing operations of $24,000
and a loss from discontinued operations of $348,000, net of applicable income taxes
benefits. The third quarter results of 2001 include income from continuing operations of
$650,000 and a loss from discontinued operations of $264,000, also net of income tax
benefits. Gross originations of financing transactions were $7.5 million in the third
quarter 2002, compared with $4.0 million in the year-earlier quarter. Shipments of gaming
devices decreased to 549 in the third quarter 2002 from 1,497 in the year-earlier quarter.

9

---

The
Company reported a net loss of $2,710,000 or $0.72 per share diluted for the nine months
ended September 30, 2002 compared to net income of $1,378,000 or $0.36 per share diluted
for the nine months ended September 30, 2001. The results for the nine months ended
September 30, 2002 include a loss from continuing operations of $486,000 and a loss from
discontinued operations of $2,224,000, net of income tax benefits. The results for the
nine months ended September 30, 2001 include income from continuing operations of
$2,519,000 and a loss from discontinued operations of $1,141,000. Gross originations of
financing transactions were $37.4 million for the nine months ended September 30, 2002,
compared with $42.3 million in the year-earlier period (the year-earlier period
included the purchase of a lease transaction from a third party for $17.0 million).
Shipments of gaming devices were 2,623 and 4,855 for the nine months ended September 30,
2002 and 2001, respectively.

# Three Months ended
September 30, 2002 and 2001

Revenues
in the third quarter 2002 totaled $7.4 million compared to $11.5 million in the
year-earlier quarter. The decrease in revenues of $4.1 million primarily consists of a
decrease in equipment sales and sales-type leases of $2.0 million and a decrease in fee
income of $1.6 million.

Revenues
from equipment sales and sales-type leases totaled $672,000 in the third quarter
of 2002 compared to $2.7 million in the year-earlier quarter, a decrease of $2.0 million.
Such revenues include sales of used gaming devices previously under lease and sales of
equipment at the inception of a lease in which a dealers profit or loss on the
subject equipment is recognized. Differences in these revenues result from normal
variations in the volume of significant transactions among accounting periods. Costs of
such sales totaled $652,000 and $2.3 million in the quarters ended September 30, 2002 and
2001, respectively. Gross margin decreased from $343,000 in the prior year quarter to
$20,000 in the current year quarter. This decrease relates primarily to sales transactions
of games from inventory.

Rental
revenues from operating leases decreased by $435,000, or 10%, to $4.0 million in the third
quarter 2002 compared to $4.5 million in the year-earlier quarter, primarily as a result
of a reduced average portfolio of operating leases outstanding during the respective
quarters. Related depreciation was $2.8 million and $2.7 million for the quarters ended
September 30, 2002 and 2001, respectively. Depreciation on operating leases as a
percentage of rental revenues increased from 61% in the prior year quarter to 68% in the
third quarter 2002. This increase is due primarily to lower depreciation charges recorded
in the prior year quarter on a significant customers lease. This lease was
terminated in 2001.

Finance
income decreased to $1.3 million in the third quarter 2002 compared to $1.6 million in the
year-earlier quarter, mostly due to a smaller average portfolio of notes and capital
leases during the 2002 quarter.

Fee
income decreased to $760,000 in the third quarter 2002 compared to $2.3 million in the
year earlier quarter. Substantially all of the fee income in the year-earlier period was a
nonrecurring fee from a significant customer.

Casino
revenues increased to $591,000 in the third quarter 2002 from $367,000. This $224,000
increase reflects revenue from additional gaming devices placed in service in 2002. Casino
expenses increased to $657,000 in the current year quarter compared to $325,000 in the
third quarter 2001. The increased expenses are due to expansion of the casino in the first
quarter 2002, and are primarily comprised of increased payroll and related costs and
advertising. The Reno market has been impacted negatively by the economic downturn in the
Silicon Valley region, decreased air travel and new Native American casinos in Northern
California.

Interest
expense totaled $2.0 million in the quarter ended September 30, 2002, compared to $3.1
million in the third quarter of 2001. The decrease of $1.1 million reflects a general
decline in interest rates and lower levels of outstanding debt.

Selling,
general and administrative expenses totaled $1.1 million in the third quarter 2002 and
$1.6 million in the year-earlier quarter. The decrease consists primarily of lower payroll
and related costs, due to head count reductions, and nonrecurring legal fees incurred in
2001, partially offset by increased expenses relating to non-allocated manufacturing overhead.

Loss
from discontinued operations was $348,000 in the third quarter 2002 compared to $264,000
in the prior years quarter. The increase of $84,000 is due primarily to costs
associated with headcount reductions.

10

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See
Note 3 to the Consolidated Financial Statements for description of the Companys
Discontinued Operations.

The
estimated effective income tax rate was 42% in the third quarter 2002 and 40% in the third
quarter 2001. In both periods, the effective rate was higher than the federal statutory
tax rate of 34% due primarily to state income taxes and permanent tax differences.

# Nine Months Ended
September 30, 2002 and 2001

Revenues in
the nine months ended September 30, 2002 totaled $25.6 million compared to $32.3 million
in the year-earlier period. The decrease in revenues of $6.7 million primarily consists of
a decrease in finance income of $5.3 million and a decrease in fee income of $3.6 million,
partially offset by an increase in operating lease revenues of $1.1 million and an
increase in equipment sales and sales-type leases of $800,000.

Revenues
from equipment sales and sales-type leases totaled $9.7 million in the nine months ended
September 30, 2002, compared to $8.9 million in the year-earlier period, an increase of
$800,000. Such revenues include sales of used gaming devices previously under lease and
sales of equipment at the inception of a lease in which a dealers profit or loss on
the subject equipment is recognized. Differences in these revenues result from normal
variations in the volume of significant transactions among accounting periods. Costs of
such sales totaled $8.4 million in the nine months ended September 30, 2002, compared to
$8.2 million in the year-earlier period, an increase of $200,000. Gross margin increased
from 9% in the prior year to 14% in the current year. This increase primarily reflects
more favorable pricing in the markets served by the Company.

Rental
revenues from operating leases increased to $9.6 million for the nine months ended
September 30, 2002 compared to $8.5 million in the year-earlier period. This $1.1 million
increase reflects the increase in the size of the Companys portfolio of operating
leases that occurred in the nine month period. Related depreciation was $6.4 million and
$5.8 million for the nine months ended September 30, 2002 and 2001, respectively.

Finance
income declined $5.3 million for the nine months ended September 30, 2002 compared to the
year- earlier period. This decline primarily reflects a one-time transaction in the
quarter ended June 30, 2001 in which the Company recognized $4.8 million of finance
income.

Fee
income totaled $1.1 million in the nine months ended September 30, 2002 compared to $4.7
million in the year-earlier period, a decrease of $3.6 million. Substantially all of the
fee income in the year-earlier period was a nonrecurring fee from a significant customer.

Casino
revenues totaled $1.4 million in the nine months ended September 30, 2002 compared to $1.1
million in the year-earlier period, an increase of $365,000. Related casino costs were
$1.8 million and $914,000 in the nine months ended September 30, 2002 and 2001,
respectively. In addition, the Company recorded one-time pre-opening expenses of $238,000
in the nine months ended September 30, 2002. The increase in casino revenues reflects the
increased traffic due to additional machines installed as part of the expansion of the
casino at the beginning of 2002. The increase in expenses reflects delays in construction,
higher payroll and related costs and advertising associated with the expansion.

Interest
expense totaled $5.7 million in the nine months ended September 30, 2002 compared to $7.4
million in the year-earlier period. The decrease reflects the general decline in interest
rates and lower levels of outstanding debt.

Selling,
general and administrative expenses totaled $3.2 million in the nine months ended
September 30, 2002 compared to $4.2 million in the year-earlier period. The reduced
expenses are primarily due to increased overhead capitalized as initial direct costs,
reduced payroll and related costs and nonrecurring legal fees incurred in 2001,
partially offset by increased expenses relating
to non-allocated manufacturing overhead.

Loss
from discontinued operations was $2.2 million in the nine months ended September 30, 2002
compared to $1.1 million in the prior year period. The increase of $1.1 million is due
primarily to the write-off of certain intangible assets.

11

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See
Note 3 to the Consolidated Financial Statements for description of the Companys
Discontinued Operations.

The
estimated effective income tax rate was 42% in the nine months ended September 30, 2002
and 40% in the year-earlier period. The increase and the reason the effective rate was
higher than the federal statutory tax rate of 34% was due primarily to state income taxes
and permanent tax differences.

# Liquidity and Capital
Resources

The
Companys activities are principally funded by proceeds from sales-type, direct
finance and operating leases, equipment sales, fee income and proceeds from various forms
of non-recourse and recourse debt. Although the availability of debt financing can
significantly affect the Companys ability to enter into new transactions, management
believes the Companys ability to generate cash from operations is sufficient to fund
operations.

Cash
and cash equivalents totaled $3.2 million at September 30, 2002 and $4.1 million at
December 31, 2001. During the nine months ended September 30, 2002, operating activities
provided cash of $9.9 million compared to $8.7 million in the year-earlier period. For the
nine months ended September 30, 2002, investing activities, consisting primarily of
equipment purchased for leasing, utilized cash of $9.9 million, compared to $14.8 million
in the year-earlier period. The decrease in cash utilized was due to, in part, a $8.4
million decrease in equipment purchased for leasing partially offset by a $2.5 million decrease in
proceeds from equipment sold. For the nine months ended September 30, 2002, $913,000 was
utilized in financing activities, compared to $5.2 million provided by financing
activities in the year-earlier period. The decrease in cash provided by financing
activities was due to, in part, a $2.2 million increase in restricted cash, a $2.0 million
decrease in proceeds from borrowings, a $1.5 million increase in repayment of borrowings
and a $474,000 increase in repayment of subordinated debt. Restricted cash represents
amounts advanced by lenders to the Company to be used for funding future leasing
transactions.

Included
in accounts payable at September 30, 2002 is $18.1 million payable to vendors of equipment
presently under lease with customers. Amounts due equipment vendors are generally settled
with the proceeds of borrowings utilizing the underlying leases and related equipment as
security. In October 2002, $12.1 million of the balance outstanding at September 30, 2002
was paid with the proceeds of debt financing.

Effective
March 31, 2002, the Company amended a line of credit, reducing the maximum borrowings
under the line from $3.5 million to $2 million, and changed the expiration date to
December 31, 2002. The line of credit is utilized to finance games in inventory.
Borrowings under the line averaged approximately $340,000 during the nine months ended
September 30, 2002. The reduction in credit available under the line is not expected to
have an impact on the Companys on-going operations because the Company has
discontinued the operation of its Table Games division and certain components of its
Casino Slot Exchange® division, and consequently, the number of games in
inventory has declined and is expected to continue to decline.

At
September 30, 2002, total borrowings were $64.3 million, compared to $64.8 million at
December 31, 2001. At September 30, 2002, the Companys credit and working capital
facilities aggregated $19.9 million at interest rates ranging from 5.75% to 10.50%.
Advances under these agreements aggregated $13.6 million at September 30, 2002. The
Companys current financial resources, including estimated cash flows from operations
and the credit facilities, are expected to be sufficient to fund the Companys
anticipated working capital needs. The Company is, from time to time, dependent upon the
need to liquidate or externally finance transactions originated and held in its investment
portfolio. The Companys total investment portfolio was $81.1 million at September
30, 2002, compared to $67.4 million at December 31, 2001. The Company continues to explore
other possible sources of capital; however, there is no assurance that additional capital,
if required, can be obtained or will be available on terms acceptable to the Company.

Inflation
is not expected to have a significant impact on the Companys operations.

12

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ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Substantially
all of the Companys borrowings are under fixed interest rates, and maturities are
matched with the cash flows of leased assets and notes receivables. A changing interest
rate environment will not significantly impact the Companys margins since the
effects of higher or lower borrowing costs would be reflected in the rates for newly
originated leases or collateralized loans, although higher interest rates could cause
customers to defer lease or loan originations. Therefore, consistent with the
Companys strategy and intention to hold most of its lease and loan originations to
maturity, the Company does not have a significant exposure to interest rate changes.

Currency Risk

The
Company does not have any exposure to foreign currency risk because all of its sales to
customers in foreign countries are transacted in United States dollars.

Forward-Looking Statements

Certain
statements contained herein constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may be identified by the use of terminology such as believe,
may, will, expect, anticipate,
intend, designed, estimate, should or
continue or the negatives thereof or other variations thereon or comparable
terminology. Such forward-looking statements involve known or unknown risks, uncertainties
and other factors which may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, the following: strict regulation and changes in
regulations imposed by gaming authorities; the limitation, conditioning, suspension or
revocation of gaming licenses and entitlements held by the Company; competition the
Company faces or may face in the future; the continued acceptance of the Companys
products and services; the inability to complete currently anticipated finance and lease
transactions; worse than expected results from the Companys casino operations; a
decline in the public acceptance of gaming; unfavorable public referendums or legislation,
particularly as they relate to gaming; the ability of the Company to continue to obtain
adequate financing on acceptable terms; changes in interest rates; the ability of the
Company to recover its investment in gaming equipment leased under operating leases; the
risk of default by the Companys customers with respect to its financing
transactions; the Companys dependence on key employees; potential fluctuations in
the Companys quarterly results; general economic and business conditions; and other
factors detailed from time to time in the Companys reports filed with the Securities
and Exchange Commission.

ITEM 4.  CONTROLS AND PROCEDURES

Within 90 days prior to
the filing date of this report, the Companys management conducted an
evaluation, under the supervision and with the participation of the
Companys Chief Executive Officer and Interim Chief Financial Officer, of
the effectiveness of the design and operation of the Companys disclosure
controls and procedures. Based on this evaluation, the Chief Executive Officer
and Interim Chief Financial Officer concluded that the Companys disclosure
controls and procedures are effective in alerting them in a timely manner to
material information required to be included in the Companys SEC reports.
In addition, the Companys management, including the Chief Executive
Officer and Interim Chief Financial Officer, reviewed our internal controls, and
there have been no significant changes in the Companys internal controls
or in other factors that could significantly affect those controls subsequent to
the date of our last evaluation.

13

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# PART II  OTHER
INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

In
May 2002, the Company received notification that Tekbilt, Inc. (Claimant) had
submitted a Demand for Arbitration to the American Arbitration Association alleging breach
of a Distributor Agreement (the Agreement) with Claimant in connection with
the Companys discontinued operations. In the notification, Claimant alleged that
such breach has caused Claimant to sustain substantial damages. The monetary damages
sought by claimant are unspecified.

Although
unable to predict the outcome of this matter, management believes the Claimants
claim to be without merit and will vigorously pursue all legal defenses available to it.
Management, further, does not believe that the outcome of such arbitration is likely to
have a material adverse effect on the Company.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

Not
applicable.

ITEM 3.  DEFAULTS UPON
SENIOR SECURITIES.

Not
applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

ITEM 5.  OTHER
INFORMATION.

On
August 14, 2002, the Company entered into an agreement with DigiDeal Corporation
(DigiDeal) for the purpose of amending and/or terminating various existing
agreements between the parties. In this agreement, among other things, DigiDeal granted
the Company a geographically-limited, exclusive license and the ability for DigiDeal to
buy out the exclusive license. This agreement is included as Exhibit 10.1 with this
quarterly report on Form 10-Q.

On October 1, 2002, Joe S. Rolston IV, the Company's Executive Vice President,  General Counsel and Secretary,  resigned from the Company.  Mr. Rolston was succeeded as
Secretary by Lona M.B. Finley.

On
October 16, 2002, the Company announced that it had engaged Libra Securities, LLC, a Los
Angeles, California based investment banking firm, to assist in its previously announced
efforts to explore a full range of strategic alternatives to maximize value for all
shareholders, including, but not limited to, the sale of all or part of the Company,
partnering or merging with another business, seeking significant investors or financing
partners or other strategies designed to increase the amount of capital available for
finance and lease origination. The engagement runs through December 31, 2002, after which
it may be terminated by either party upon ten days notice.

ITEM 6.   EXHIBITS AND
REPORTS ON FORM 8-K

|a) |  | The following exhibits are included with this quarterly report on Form 10-Q as
          required by Item 601 of Regulation S-K. | 
|-- |  | -------------------------------------------------------------------------------------------------------------------------------- | 

| |                |  |                                                                                                                                                                                                                     | 
| | -------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | Exhibit Number |  | Description                                                                                                                                                                                                         | 
| |                |  |                                                                                                                                                                                                                    
| | 10.1           |  | * First Amended and Restated Amendment and Termination Agreement, made on August
14, 2002 with an effective date of May 3, 2002, by and between PDS Gaming
Corporation and DigiDeal Corporation.                    | 
| |                |  |                                                                                                                                                                                                                    
| | 99.1           |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                                                                                                                   
| |                |  |                                                                                                                                                                                                                    
| | 99.2           |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                                                                                                                   
| |                |  |                                                                                                                                                                                                                    
| | 99.3           |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                                                                                                                   
| |                |  |                                                                                                                                                                                                                     | 
| |                |  | * Confidential treatment has been requested with respect to certain portions of this agreement, of which
      certain portions have been omitted and filed separately with the Securities and Exchange Commission. | 
| |                |  |                                                                                                                                                                                                                     | 
| |                |  |                                                                                                                                                                                                                    

|b) |  | Reports on Form 8-K. A Form 8-K was filed in July 2002 to report the termination
               of Johan P. Finleys (the Companys Chief Executive Officer) Rule
               10b5-1 Stock Sales Plan effective July 11, 2002. A Form 8-K was filed in August
               2002 to report the submission to the Securities and Exchange Commission
                of the certification required by its chief executive
               officer and chief financial officer pursuant to 18 U.S.C. Section 1350, as
               adopted pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002
                with respect to the Form 10-Q
               for the quarterly period ended June 30, 2002. There were no other reports on
               Form 8-K during the quarter ended September 30, 2002 or during the period from
               September 30, 2002 to the filing date of this Quarterly Report on Form 10-Q. | 
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

14

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# Signature

In accordance with the requirements
of the Securities Exchange Act of 1934, the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

|                          |  |                                                                                                                                                                              | 
|------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                          |  | PDS GAMING CORPORATION                                                                                                                                                       | 
|                          |  |                                                                                                                                                                              | 
|Dated:  November 12, 2002 |  | By:/s/  Peter D. Cleary                                                                                                                                                      | 
|                          |  | President, Chief Operating Officer and Interim Chief Financial Officer and Treasurer
                                                            (a duly authorized officer) | 

15

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