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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

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

OR

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

Commission File No. 0-23928

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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 No.)


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

(702) 736-0700(Issuer's Telephone Number, Including Area Code)

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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. Yes /x/  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 August 7, 2001Common Stock, $.01 par value

3,726,149


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PDS GAMING CORPORATION AND SUBSIDIARIES  INDEX

|PART I  FINANCIAL INFORMATION |  |                                                                                          
|----------------------------- |  | -----------------------------------------------------------------------------------------
|Item 1.                       |  | Financial Statements:                                                                    
|                              |  | Consolidated Balance SheetsJune 30, 2001 (Unaudited) and December 31, 2000              
|                              |  | Consolidated Statements of IncomeThree Months Ended June 30, 2001 and 2000 (Unaudited)  
|                              |  | Consolidated Statements of IncomeSix Months Ended June 30, 2001 and 2000 (Unaudited)    
|                              |  | Consolidated Statements of Cash FlowsSix Months Ended June 30, 2001 and 2000 (Unaudited)
|                              |  | Notes to Consolidated Financial Statements (Unaudited)                                   
|Item 2.                       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations    
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                               
|PART II  OTHER INFORMATION    |  |                                                                                          
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                         

2

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PDS GAMING CORPORATION AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS

|                                                         |                                                                                                                                                                        | June 30,
2001 |             | December 31,
2000 |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ----------- | ----------------- | -
|
|ASSETS:                                                  |                                                                                                                                                                        |               |             |                   |  
|Cash and cash equivalents                                |                                                                                                                                                                        | $             | 4,521,000   |                   | $
|Notes, accounts and leases receivable, net of allowances |                                                                                                                                                                        |               | 63,640,000  |                   |  
|Equipment under operating leases, net                    |                                                                                                                                                                        |               | 25,367,000  |                   |  
|Equipment held for sale or lease                         |                                                                                                                                                                        |               | 5,605,000   |                   |  
|Deferred income taxes                                    |                                                                                                                                                                        |               |             |                   |  
|Other assets, net                                        |                                                                                                                                                                        |               | 9,500,000   |                   |  
|                                                         |                                                                                                                                                                        |               |             |                   |  
|                                                         |                                                                                                                                                                        | $             | 108,633,000 |                   | $
|                                                         |                                                                                                                                                                        |               |             |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY:                    |                                                                                                                                                                        |               |             |                   |  
|Accounts payable:                                        |                                                                                                                                                                        |               |             |                   |  
|                                                         | Equipment vendors                                                                                                                                                      |               | $           | 10,484,000        |  
|                                                         | Other                                                                                                                                                                  |               |             | 644,000           |  
|Customer deposits                                        |                                                                                                                                                                        |               | 6,466,000   |                   |  
|Accrued expenses and other                               |                                                                                                                                                                        |               | 4,324,000   |                   |  
|Notes payable                                            |                                                                                                                                                                        |               | 63,470,000  |                   |  
|Subordinated debt                                        |                                                                                                                                                                        |               | 11,398,000  |                   |  
|                                                         |                                                                                                                                                                        |               |             |                   |  
|                                                         |                                                                                                                                                                        |               | 96,786,000  |                   |  
|                                                         |                                                                                                                                                                        |               |             |                   |  
|Stockholders' equity:                                    |                                                                                                                                                                        |               |             |                   |  
|                                                         | Common stock, $.01 par value, 20,000,000 shares authorized, 3,720,238 and 3,714,485 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively |               |             | 37,000            |  
|                                                         | Additional paid-in capital                                                                                                                                             |               |             | 11,569,000        |  
|                                                         | Retained earnings (deficit)                                                                                                                                            |               |             | 241,000           |  
|                                                         |                                                                                                                                                                        |               |             |                   |  
|                                                         |                                                                                                                                                                        |               | 11,847,000  |                   |  
|                                                         |                                                                                                                                                                        |               |             |                   |  
|                                                         |                                                                                                                                                                        | $             | 108,633,000 |                   | $
|                                                         |                                                                                                                                                                        |               |             |                   |  

See
notes to consolidated financial statements.

3

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PDS GAMING CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME  THREE MONTHS ENDED JUNE 30,  (Unaudited)

|                                     |                                            | 2001 |            | 2000     
|------------------------------------ | ------------------------------------------ | ---- | ---------- | ---------
|REVENUES:                            |                                            |      |            |          
|                                     | Equipment sales and sales-type leases      |      | $          | 5,119,000
|                                     | Finance income                             |      |            | 6,134,000
|                                     | Operating lease rentals                    |      |            | 2,271,000
|                                     | Gaming revenue                             |      |            | 454,000  
|                                     | Fee income (loss)                          |      |            | (87,000  
|                                     |                                            |      |            |          
|                                     |                                            |      | 13,891,000 |          
|                                     |                                            |      |            |          
|COSTS AND EXPENSES:                  |                                            |      |            |          
|                                     | Equipment sales and sales-type leases      |      |            | 4,988,000
|                                     | Interest                                   |      |            | 2,264,000
|                                     | Depreciation on leased equipment           |      |            | 1,722,000
|                                     | Gaming costs                               |      |            | 363,000  
|                                     | Selling, general and administrative        |      |            | 2,325,000
|                                     | Collection and asset impairment provisions |      |            | 1,350,000
|                                     |                                            |      |            |          
|                                     |                                            |      | 13,012,000 |          
|                                     |                                            |      |            |          
|Income before income taxes           |                                            |      | 879,000    |          
|Income taxes                         |                                            |      | 351,000    |          
|                                     |                                            |      |            |          
|Net income                           |                                            | $    | 528,000    |          
|                                     |                                            |      |            |          
|Net income per share:                |                                            |      |            |          
|                                     | Basic and diluted                          |      | $          | 0.14     
|                                     |                                            |      |            |          
|Weighted average shares outstanding: |                                            |      |            |          
|                                     | Basic                                      |      |            | 3,721,000
|                                     |                                            |      |            |          
|                                     | Diluted                                    |      |            | 3,910,000
|                                     |                                            |      |            |          

See
notes to consolidated financial statements.

4

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PDS GAMING CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME  SIX MONTHS ENDED JUNE 30,  (Unaudited)

|                                     |                                            | 2001 |            | 2000     
|------------------------------------ | ------------------------------------------ | ---- | ---------- | ---------
|REVENUES:                            |                                            |      |            |          
|                                     | Equipment sales and sales-type leases      |      | $          | 8,602,000
|                                     | Finance income                             |      |            | 7,412,000
|                                     | Operating lease rentals                    |      |            | 4,061,000
|                                     | Gaming revenue                             |      |            | 788,000  
|                                     | Fee income                                 |      |            | 2,385,000
|                                     |                                            |      |            |          
|                                     |                                            |      | 23,248,000 |          
|                                     |                                            |      |            |          
|COSTS AND EXPENSES:                  |                                            |      |            |          
|                                     | Equipment sales and sales-type leases      |      |            | 8,276,000
|                                     | Interest                                   |      |            | 4,325,000
|                                     | Depreciation on leased equipment           |      |            | 3,105,000
|                                     | Gaming costs                               |      |            | 682,000  
|                                     | Selling, general and administrative        |      |            | 3,827,000
|                                     | Collection and asset impairment provisions |      |            | 1,380,000
|                                     |                                            |      |            |          
|                                     |                                            |      | 21,595,000 |          
|                                     |                                            |      |            |          
|Income before income taxes           |                                            |      | 1,653,000  |          
|Income taxes                         |                                            |      | 661,000    |          
|                                     |                                            |      |            |          
|Net income                           |                                            | $    | 992,000    |          
|                                     |                                            |      |            |          
|Net income per share:                |                                            |      |            |          
|                                     | Basic                                      |      | $          | 0.27     
|                                     |                                            |      |            |          
|                                     | Diluted                                    |      | $          | 0.25     
|                                     |                                            |      |            |          
|Weighted average shares outstanding: |                                            |      |            |          
|                                     | Basic                                      |      |            | 3,719,000
|                                     |                                            |      |            |          
|                                     | Diluted                                    |      |            | 3,937,000
|                                     |                                            |      |            |          

See
notes to consolidated financial statements.

5

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PDS GAMING CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  SIX MONTHS ENDED JUNE 30,  (Unaudited)

|                                     |                                                        | 2001 |   | 2000        |  
|------------------------------------ | ------------------------------------------------------ | ---- | - | ----------- | -
|OPERATING ACTIVITIES:                |                                                        |      |   |             |  
|                                     | Net cash provided by operating activities              |      | $ | 7,989,000   |  
|                                     |                                                        |      |   |             |  
|INVESTING ACTIVITIES:                |                                                        |      |   |             |  
|                                     | Purchase of equipment for leasing                      |      |   | (5,996,000  | )
|                                     | Proceeds from sale of equipment under operating leases |      |   | 2,697,000   |  
|                                     |                                                        |      |   |             |  
|                                     | Net cash provided by (used in) investing activities    |      |   | (3,299,000  | )
|                                     |                                                        |      |   |             |  
|FINANCING ACTIVITIES:                |                                                        |      |   |             |  
|                                     | Proceeds from borrowings                               |      |   | 10,121,000  |  
|                                     | Reduction in restricted cash                           |      |   | 2,831,000   |  
|                                     | Repayment of subordinated debt                         |      |   | (70,000     | )
|                                     | Repayment of borrowings                                |      |   | (12,266,000 | )
|                                     | Proceeds from issuance of common stock                 |      |   | 13,000      |  
|                                     |                                                        |      |   |             |  
|                                     | Net cash used in financing activities                  |      |   | (2,202,000  | )
|                                     |                                                        |      |   |             |  
|CHANGE IN CASH AND CASH EQUIVALENTS: |                                                        |      |   |             |  
|                                     | Net increase (decrease) in cash and cash equivalents   |      |   | 2,488,000   |  
|                                     | Cash and cash equivalents at beginning of period       |      |   | 2,033,000   |  
|                                     |                                                        |      |   |             |  
|                                     | Cash and cash equivalents at end of period             |      | $ | 4,521,000   |  
|                                     |                                                        |      |   |             |  

See
notes to consolidated financial statements.

6

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PDS GAMING CORPORATION AND SUBSIDIARIES  NOTES 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 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, 2000 (the "2000 Form 10-K"), previously filed with the Securities and Exchange Commission.

The
balance sheet at December 31, 2000 was derived from the audited financial statements included in the Company's 2000 Form 10-K.

2.  NOTES PAYABLE AND SUBORDINATED DEBT

Notes payable consist of the following:

June 30,
2001

December 31,
2000Lines of credit with a maximum aggregate balance of $43,500,000 bearing interest at rates from 7.13% to 11.31%, secured by related investment in leases and equipment held for sale or lease:Recourse

$
7,248,000

$
12,919,000Non-recourse


9,341,000


4,616,000Equipment notes bearing interest at rates from 8.75% to 14.00%, secured by related investment in leases:Recourse


16,393,000


16,403,000Non-recourse


16,275,000


15,952,000Other recourse notes payable bearing interest at rates from 9.00% to 10.50%, secured by related investments in leases


14,877,00064,134,000


49,890,000Unamortized loan discounts


(664,000
)

(912,000
)$
63,470,000

$
48,978,000


During
the second quarter 2001, the Company incurred $13.5 million in debt in a non-cash transaction for the purpose of originating a $16.9 million direct finance lease.

Also
during the second quarter 2001, the Company satisfied a required principal payment on its subordinated debt through the issuance of new subordinated debt with similar terms and
conditions. Subordinated debt is carried at cost less the unamortized value of detachable stock warrants.

7

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3.  EARNINGS PER SHARE

The Company calculated basic and diluted earnings per share as follows:

Three Months Ended
June 30

Six Months Ended
June 302001

2000

2001

2000Net income

$
528,000

$
230,000

$
992,000

$
405,000Weighted average shares outstanding:Basic


3,721,000


3,711,000


3,719,000


3,710,000Effect of dilutive options


189,000


1,000


218,000


3,000Diluted


3,910,000


3,712,000


3,937,000


3,713,000Net income (loss) per share:Basic

$
0.14

$
0.06

$
0.27

$
0.11Effect of dilutive options








(0.02
)Diluted

$
0.14

$
0.06

$
0.25

$
0.11


Common
stock warrants and certain common stock options were not included in the computation of diluted earnings per share for the quarters ended June 30, 2001 and 2000 because the
weighted average
exercise prices of the warrants and options was greater than average market prices of the common stock.

4.  SEGMENT INFORMATION

The Company conducts business through the operations of its Finance and Lease ("Finance") and Casino Slot Exchange ("CSE") segments. The Table Games and Casino
Operations divisions do not yet meet the criteria requiring recognition as operating segments under Statement of Financial Accounting Standards No. 131,Disclosures about
Segments of an Enterprise and Related Information.Other than selling, general and administrative costs specifically identifiable to the Finance and CSE segments, other
employees of the Company provide certain legal, accounting and compliance, personnel and other administrative support services on behalf of the Finance and CSE segments. The costs associated with
these activities ("SG&A") are not separately allocated to each business segment. The accounting policies of each business segment are the same as those described in Note 1 of Notes to Consolidated
Financial Statements included in the Company's 2000 Form 10-K. The Company evaluates the performance of its operating segments based on earnings before income taxes. Financial performance
measurements for the Finance and CSE segments are set forth below with SG&A for the three months and sixth months ended June 30, 2001 and 2000.

8

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Finance revenues for the second quarter of 2001 include $3.5 million due to the acceleration of collateralized residual profit.

Three months ended June 30,2001

2000Revenues:Finance

$
11,235,000

$
13,230,000CSE


2,161,000


790,000Other


495,000$
13,891,000

$
14,020,000Income (loss) before income taxes:Finance

$
3,542,000

$
2,315,000CSE


(882,000
)

(732,000
)SG&A


(1,781,000
)

(1,224,000
)$
879,000

$
359,000Identifiable assets:Finance

$
95,120,000

$
82,077,000CSE


6,091,000


8,766,000Other


7,422,000


4,034,000$
108,633,000

$
94,877,000


Six months ended June 30,2001

2000Revenues:Finance

$
17,237,000

$
28,790,000CSE


5,176,000


3,245,000Other


835,000$
23,248,000

$
32,035,000Income (loss) before income taxes:Finance

$
5,706,000

$
3,911,000CSE


(1,108,000
)

(674,000
)SG&A


(2,945,000
)

(2,604,000
)$
1,653,000

$
633,000Identifiable assets:Finance

$
95,120,000

$
82,077,000CSE


6,091,000


8,766,000Other


7,422,000


4,034,000$
108,633,000

$
94,877,000


9

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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 and supplying reconditioned gaming devices to casino operators. 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 in the states of Nevada, New Jersey, Colorado, Illinois, Iowa, Indiana, Minnesota, Mississippi, New Mexico and Washington to provide this financing
alternative. The Company also reconditions, sells and distributes used and other gaming devices and products through Casino Slot Exchange to complement its financing and leasing activities and to
generate equipment sales. During 1999, the Company expanded its focus beyond providing reconditioned slot and video gaming devices to include new types of table games on its proprietary
DCS platform. During 2000, the Company formed its Table Games Division. In early 2001, the Company received a non-restricted gaming license to operate The Gambler casino in
Reno, Nevada and formed its Casino Operations division.

The
Company's strategy is to increase recurring revenues and cash flows through its operating divisions and by acquiring and operating casinos. In addition to its leasing activities,
the Company also originates financing transactions and receives notes 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 recondition and distribute used gaming devices enhances the gaming
devices' values at the end of an operating lease and facilitates additional financing transactions. The Company's access to lower cost financing and equipment, industry knowledge and presence in
multiple jurisdictions provide advantages in identifying casino ownership opportunities.

Results Of Operations

The Company's quarterly operating results, including net income, have historically fluctuated due to the timing of completion of 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 fluctuate greatly from quarter to quarter. Thus, the results of any quarter are not necessarily indicative of the results which may be expected for any other
period.

Factors
that cause significant quarterly fluctuations in the Company's operating results include, but are 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 reconditioned gaming devices sold by the Company's Casino Slot Exchange
division, and (iii) 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.

Three months ended June 30, 2001 and 2000

Revenues in the second quarter 2001 totaled $13.9 million compared to $14.0 million in the year-earlier quarter. The decrease in revenues is
primarily attributable to lower sales of equipment formerly out on operating leases partially offset by higher finance income. Gross originations of financing transactions were $31.9 million in the
second quarter 2001, compared with $3.3 million in the year-earlier quarter.

10

---

Revenues from equipment sales and sales-type leases totaled $5.1 million in the second quarter of 2001, a 43% decrease as compared to $9.0 million in the
year-earlier quarter. Such revenues include sales of both equipment under operating leases and financed through the Finance and Lease division and used gaming devices reconditioned by the
Company's Casino Slot Exchange division. Sales-type lease revenue from equipment previously under operating lease was approximately $8.0 million in the prior year quarter. No such
transactions occurred in the quarter ended June 30, 2001. Conversely, revenue from sales of equipment previously under operating lease was $2.9 million in the quarter ended June 30, 2001. There were
no such transactions during the prior-year quarter. Revenue from equipment sales and sales-type leases through the Casino Slot Exchange division totaled $2.2 million during the
second quarter of 2001 compared to $800,000 in the prior year quarter. Costs of such sales totaled $2.1 million and $800,000 in the quarters ended June 30, 2001 and 2000, respectively. The increase in
Casino Slot Exchange revenues is due to increased shipments of gaming devices in the quarter ended June 30, 2001 compared to the prior-year quarter. Shipments of gaming devices increased
to 1,270 in the second quarter 2001 from 472 in the year-earlier quarter. These differences result from normal variations in significant transactions.

Finance
income increased to $6.1 million in the second quarter 2001 compared to $2.0 million in the year-earlier quarter. The increase reflects $3.5 million resulting from
the acceleration of collateralized residual profits related to defaulted leases and an increase in recurring finance income due to the growth in the portfolio.

The
Company's average operating lease portfolio was $20.2 million during the second quarter 2001, a 19% decrease from $24.8 million during the year-earlier quarter. The
decline in the average operating lease portfolio reflects equipment sold to original lessees at lease termination and the early termination
of certain operating leases. Rental revenues from operating leases decreased to $2.3 million in the second quarter 2001 compared to $2.7 million in the year-earlier quarter. Related
depreciation was $1.7 million and $2.3 million for the quarters ended June 30, 2001 and 2000, respectively. Depreciation on operating leases as a percentage of rental revenues decreased from 83% in
the prior-year quarter to 76% in the second quarter 2001. This decrease is due to our portfolio review that resulted in acceleration of depreciation on certain leases in the
prior-year quarter.

Gaming
revenues of $454,000 and gaming costs of $363,000 in the second quarter 2001 represent the operations of The Gambler casino in Reno, Nevada. This casino was acquired in a
purchase transaction during the fourth quarter 2000, and therefore is not reflected in operations for the prior year.

Interest
expense totaled approximately $2.3 million in the second quarters of both 2001 and 2000.

Selling,
general and administrative expenses totaled $2.3 million in the second quarter 2001 and $1.6 million in the year-earlier quarter. The increase of $700,000
primarily reflects increased payroll and related costs related to the Table Games Division, which was created during the third quarter of 2000, the expenses of the Company's exchange offering on its
subordinated debt, which were incurred in the second quarter 2001, and increased depreciation and amortization related to gaming operations and licensing.

A
collection and asset impairment provision in the amount of $1.3 million was recorded in the second quarter 2001 for doubtful accounts and obsolete inventory. During the second
quarter of 2001, the Company changed its collection strategy as it related to one significant customer and provided for a possible loss contingency. In addition, the Company adjusted carrying values
on certain equipment held in our inventory to estimated net realizable value to reflect a decline in demand for such products.

The
estimated effective income tax rate increased to 40% in the second quarter 2001 compared to 36% in the year-earlier quarter. The increase and the reason the effective
rate was higher than the

11

---

federal statutory tax rate of 34% was due primarily to state income taxes and permanent tax differences.

Six months ended June 30, 2001 and 2000

Revenues in the six months ended June 30, 2001 totaled $23.2 million compared to $32.0 million in the year-earlier period. The decrease in revenues
of $8.8 million is primarily attributable to a decrease in sales-type lease revenue associated with the early termination of certain equipment under operating leases and financing of such
equipment as sales-type leases. This decrease was partially offset by an increase in finance income.

Revenues
from equipment sales and sales-type leases totaled $8.6 million in the six months ended June 30, 2001 from $21.3 million in the year-earlier period.
Revenue from sales-type leases totaled $300,000 in the current year compared to $18.2 million in the prior year period. Equipment sales and sales-type lease revenue includes
both sales of Casino Slot Exchange reconditioned gaming devices as well as revenue from the sale and financing of equipment previously under operating lease. Revenue from the sale and financing
activities totaled $16.7 million in the previous-year period. There were no such transactions in the period ended June 30, 2001. Sales of equipment previously under operating leases
totaled $3.5 million in the current year period compared to $1.4 million in the year-earlier period. The cost of such sales totaled $3.3 million and $1.3 million, respectively. Revenue
from sales and sales-type leases of Casino Slot Exchange reconditioned gaming devices totaled $5.1 million during the six months ended June 30, 2001 compared to $3.2 million in the
year-earlier period. The cost of such sales totaled $4.9 million in the current period, compared to $3.1 million in the year-earlier period. Approximately 3,400 and 1,600
gaming devices were shipped to customers in the six-month periods ended June 30, 2001 and 2000, respectively. These differences result from the acquisition of Casino Slot Exchange and
normal variations in significant transactions.

Finance
income totaled $7.4 million for the six months ended June 30, 2001 compared to $3.4 million in the year-earlier period. The increase primarily reflects the
acceleration of collateralized residual profits related to defaulted leases of $3.5 million and an increase in recurring finance income related to the growth in our portfolio.

Rental
revenues from operating leases decreased to $4.1 million in the six months ended June 30, 2001 compared to $6.6 million in the year-earlier period. This decrease
reflects the lower average operating lease portfolio of $19.9 million during the six months ended June 30, 2001 compared to $30.8 million during the year-earlier period. Related
depreciation was $3.1 million and $5.1 million for the six months ended June 30, 2001 and 2000, respectively.

Fee
income totaled $2.4 million in the six months ended June 30, 2001 compared to $657,000 in the year-earlier period. The current year fee income was comprised of a fee
for financial advisory services, compared to the year-earlier period which consisted of fees generated from the sale of direct finance leases.

Gaming
revenues of $788,000 and gaming costs of $682,000 in the six months ended June 30, 2001 represent the operations of The Gambler casino in Reno, Nevada. This casino was acquired
in a
purchase transaction during the fourth quarter 2000, and therefore is not reflected in operations for the prior year.

Interest
expense totaled $4.3 million in the six months ended June 30, 2001 compared to $4.4 million in the year-earlier period. The average outstanding borrowings were
$67.6 million in the six months ended June 30, 2001 compared to $76.8 in the year-earlier period. The effective interest rate increased due to non-recurring charges during the
six months ended June 30, 2001.

Selling,
general and administrative expenses totaled $3.8 million in the six months ended June 30, 2001 compared to $2.9 million in the year-earlier period. The increase
primarily reflects increased

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payroll and related costs related to the Table Games division, which was created during the third quarter of 2000, expenses related to the Company's exchange offering of its subordinated debt and
depreciation and amortization related to gaming operations and licensing which were incurred in the six months ended June 30, 2001.

The
estimated effective income tax rate was 40% in the six months ended June 30, 2001 and 36% 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. Management believes the Company's ability to generate cash from operations is sufficient to fund operations.

Cash
and cash equivalents totaled approximately $4.5 million at June 30, 2001 and $2.0 million at December 31, 2000. During the six months ended June 30, 2001, cash provided by
operating activities totaled $8.0 million compared to $1.9 million in the year-earlier period. The higher level of cash provided by operating activities during the first half of 2001
primarily results from proceeds from the sales of direct financing leases and the timing of payments to equipment vendors. The $10.5 million accounts payable to equipment vendors at
June 30, 2001 was paid in July 2001, financed primarily with non-recourse debt. Cash used in investing activities totaled $3.3 million in the first half 2001 compared to cash provided by
investing activities of $1.6 million in the year-earlier period. The increased cash used was due primarily to increased purchases of equipment for leasing. The net cash used in financing
activities of $2.2 million in the six months ended June 30, 2001 primarily reflects repayment of borrowings that were in excess of proceeds from new borrowings.

At
June 30, 2001, total borrowings were $74.9 million, compared to $60.4 million at December 31, 2000. At June 30, 2001, the Company's revolving credit and working capital facilities
aggregated approximately $43.5 million at interest rates ranging from 7.1% to 11.3%. Advances under these agreements aggregated approximately $16.6 million at June 30, 2001. On June 26, 2001, the
Company issued $2,205,000 aggregate principal amount of 12% Senior Subordinated Notes due 2007 in exchange for a like principal amount of 10% Senior Subordinated Notes due 2004 in connection with the
closing of an exchange offer. The Company's current financial resources, including estimated cash flows from operations and the revolving 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 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
has not had a significant impact on the Company's operations.

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. Therefore, consistent with the Company's strategy and intention to hold most of its originations to maturity, the Company does not have a significant
exposure to interest rate changes.

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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; uncertainty of market acceptance of the Company's Table Games Division,
operating lease program or Casino Slot Exchange; 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; the ability of the Company to recover its investment in gaming equipment leased under operating leases as well as its investment
in used gaming machines purchased for refurbishment and resale to customers; 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.

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PART IIOther Information

ITEM 6. Exhibits and Reports on Form 8-K



Exhibit Number

Description10.1

Promissory Note dated May 14, 2001 between U.S. Bank National Association, as lender, and PDS Gaming Corporation, et. al., as borrower




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: August 10, 2001 |  | By: /s/ Martha VlcekChief Financial Officer and Treasurer
(a duly authorized officer)

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